Case 1, Frunze Plant, Kharkiv (Food Processing Equipment study tour, 2000)
Established 1885, 155 employees, Kharkiv, Kharkiv Oblast
Founded by a Belgian industrialist, the factory manufactured perforated sieves used by food producers for different stages of grain processing: cleaning, crushing, sorting, de-husking, and drying. The enterprise served the agricultural sector after the revolution and nationalization, growing to become the largest producer of perforated materials in the USSR. Before 1992, it employed 350 people. In 1996 the enterprise was reorganized as a joint stock company.
Frunze is now the largest producer of perforated metal sheets in the CIS. Products include perforated metal sheets for grain processing machines, milling machines, and formula feed machines; brass sieves for centrifuges at sugar plants; trays for bread baking, pasta drying; and bread baking molds.
Company progress since completion of study tour
The tour had a profound impact on the company, especially in their marketing activities.
In the last 10 years they have done a great deal of reconstruction work on food processing equipment.
They have almost doubled their number of product lines in the past year and sales are up 250%.
Their sales materials have been completely revised and their new company sales brochure is of very high quality, is multi-language, and is very effective.
They now have two new dealers and have received several orders from them.
Irina Pesina presentation
Our study tour took place a year ago, last July. We visited about 25 U.S. companies that manufacture equipment for the food industry, and also some food processing companies and a farm.
I wish to talk about our study tour from the point of view of marketing and situational analysis. Any company that is developing can be successful only if it has a strategic plan. Situational analysis is the first stage of strategic planning. Before making any plans, you should find, metaphorically speaking, where you are today. What is the place of your company in the market? Do you have any competitors and customers? Who are your customers? How dangerous are your competitors? Where is our business technologically? What are our opportunities? Are we going out of business tomorrow? Will we be able to develop over many years and maybe centuries?
Because I manage the marketing and sales department at the Frunze Plant, I focused my attention, in the companies we toured, on how they promote their products, how they fight or cooperate with their competitors, and how they find new customers.
Somebody mentioned that it’s a snap to manufacture products because distributors will buy everything. I am not going to start a discussion now, but manufacturers know that they can manufacture all kinds of products, fill up their warehouses and end up belly up. A lot of our former state-owned companies have gone through this.
Marketing in general is, if we use a short definition, manufacturing whatever will be bought, as opposed to selling whatever has been manufactured. Before starting production we should analyze all eventualities and analyze our product.
I am not going to get into theory. I am sure that everybody here is advanced marketing-wise or familiar with marketing basics from Kotler’s book. I’d like to mention some outstanding examples gleaned from our study tour in America from the point of view of customer research. It is a component of the situational research I mentioned. Who are our customers? What do they want? Which of the products we make do they want to buy? Where are they prepared to buy our products, say, in supermarkets or at open market sites.
I was flabbergasted in my visit at the Borden Co. We saw their Innovation Center. This corporation has a lot of plants manufacturing food products. I was shocked by something I’d have never been able to see anywhere here in Ukraine. I think that many of you have never seen that either.
The food they make is nothing special: spaghetti, sauces, instant microwaveable pasta, powdered soups, bouillon cubes, etc. But they are number one in this area in the U.S. The competition there is tremendous. Even in our stores we can see a lot of competition among different brands of bouillon cubes. And over there, it is just huge.
To survive, they invite their customers to the Innovation Center. They place them around a table and pay them $40-50 – an hour! – for participating in a focus group. They offer their products for tasting. Everything is done in the presence of a psychologist, who stays behind a one-way mirror, like what they show in American thrillers. Everything is being videotaped, with the tasters’ permission. They observe their customers tear the packaging. Suppose the company suggests that the packaging should be torn in the top right corner, and the customers start ripping it at the opposite end. Or maybe they will try to use their teeth because the package wouldn’t yield. We all have been there. They also watch their customers pour out the contents of a container. There are special kitchens where they are asked to mix spaghetti with the sauces. They observe, for example homemakers and students. They specifically select representatives from the social strata targeted for this particular product. And they videotape it all. Later specialists study all that “under a microscope.” They also conduct interviews. Customers are supposed not just to praise or criticize a product. The researchers study the words the testers are using while discussing the product. These words will be used in commercials or advertising slogans.
This experience seemed both interesting and acceptable to us. Moreover, after coming back, we held a similar focus group for our products. Our plant has been manufacturing screens and sieves from perforated metal sheets for 116 years for grain cleaning (husking) machines in the food processing industry. Now we have started making some decorative things for constructors, for example, perforated trash cans. We invited customers to discuss how good and convenient these trash cans are. Of course, we are not doing everything like Americans. I think that it is a matter of the future.
Other interesting examples…. Going back to the issue of sales methods…. The question “how to sell” is the most important for me, and for our marketing and sales department.
We used to debate with our company administration (by the way, I am on the board of directors) whether to use dealers or representatives. We saw in America that everything depends on the market, on what customers want and the type of product you have. There are companies that have representatives or distributors in every state or in every country they are interested in. It is usually true for companies with large equipment and production lines. To sell American machines in a European country they use a distributor who has gone through technical training, to look for orders, explain the customers’ needs, and to act as an intermediary between a customer and the manufacturer. After an assembly line gets installed they provide technical support and supply spare parts. In contrast, many large companies, such giants of American business as Coca Cola, Pepsi Cola, Procter & Gamble, etc., more often than not use the services of intermediaries, as opposed to manufacturing companies.
Initially I was shocked when I learned that. Then I realized that they do it not because they have lots of money, but because the company that actually performs sales does not just get rid of their products and disappear, so to speak, submerge to the bottom. Instead, they perform maintenance and provide technical support. Later they might help, for example, Coca Cola modernize their original bottling line, which was manufactured and shipped from, say, Italy.
We are now trying to use this approach too. We are a machine-building company. We created a network of representatives. We set up a joint venture in Voronezh, Russia. For some reason, our governments, both Russian and Ukrainian, keep creating difficulties for us, such as VAT, additional taxes and custom dues when crossing borders, etc. We do not have another choice but to set up joint ventures like in Voronezh, since 50 percent of our products sell in the Russian market.
We also combine approaches. That is another American practice. Over there they use a combination of different promotion methods, such as a network of dealers. For example, it wouldn’t be profitable for us to ship our products to a bakery, or an animal food plant, or a sugar plant, in the Altai Province of Russia. That is why we look for dealers there, train them, and offer them advantageous sales arrangements. That is why our sales volume is constantly growing in these regions.
More on my American experience: I found interesting the practice of the U.S. company manufacturing cans. They sell their products in 20 countries of the world and on all the continents. The question arises: Should they be “hauling air,” flying empty cans overseas? Obviously, that would be ridiculous and not profitable. This company found a very smart, wise solution. They sell a license to manufacture cans and coatings. The company itself is located in the U.S. But they do not just sell a license and say good-bye. They try to acquire some stock, say, 5 or 10 percent. In this way they are able to keep track of the other company’s operations, its compliance with licensing rules, etc. Also in the future they would offer them additional technology, modernization, and other services.
We had another interesting experience in customer service. I work in the sales department. We have about 2,000 customers. We have customers that buy by rail car (for example, the Krasnoyarsk Combine Harvester Plant and the Rostov Agricultural Machinery Plant; and, on the other end, farmers who buy one screen. We used to apply the same approach to all customers. Today I implemented some of my observations in the U.S. on differential sales treatments and put them into practice at our corporate sales department.
We visited Hubert Co., which is involved in a type of business new for us, merchandising. This company has a warehouse to die for. What they do is provide equipment to different restaurants, stores, and cafes. They equip them with whatever their client desires. This is one of the most important marketing aspects we observed in the U.S. First of all, we have to discover the customer’s needs. What do they need? Instead of offering what you think they might need, we should find out what they want and provide that, at the place the customer wants, at the price the customer is prepared to pay and with the smile the customer wants to see. Although here I might be exaggerating somewhat.
The Hubert Co. has a mind-boggling array of goods. They are the top player in this area in the U.S. Their goods come from all countries in the world: China, Asia, etc. A simple example: They offer lots of chandeliers, lots of light stars, different parquet patterns, whatever. Understandably our society needs to learn a lot and grow a lot to meet such supply needs. One company might need glasses of a certain shape, while another will choose something very different. Or another example: drapes, curtains, fans, chicken and meat mock-ups, fake bread, and other furnishings. Like, you know, in stores that display ham mock-ups that look very real. All these products are available at this company.
How do they manage to sell all that all over America? We saw their sales department. It was in a hall approximately the same size as this one. Thirty employees work there, separated by partitions. It is a very pressing issue for me. I don’t know about you. I literally fell in love with this system. At a single time, these telephone operators can receive up to 1,400 calls. How can they do that? All the phone calls get recorded and arranged in order by a computer system. Those callers who did not get through at once are called back by the computer.
Once a year this company puts together a thick catalog. We all know wholesale, apparel and equipment catalogs. They have their own photo studio and make a very nice catalog with prices and specifications of every item. They do not only mail out those catalogs, but conduct presentations for potential distributors, and also for designers and decorators of restaurants and cafes. As a result, the company has achieved their present-day sales level. They supply all the U.S. from one warehouse. The ordered goods are delivered within 24 hours. It takes them 72 hours if the goods have to be shipped from Malaysia or Ukraine. Everything else is delivered within 24 hours. Their warehouse is completely automatic.
Of course, in Ukraine, we also have advanced Internet advertising. But over there they are several steps ahead. Companies promote themselves not only through catalogs and booklets or through Web sites. Some companies presented their CDs to us, sometimes of a regular, standard size, sometimes as small as a business card. After seeing that I persuaded our top management that we need at least one CD to promote our products in the construction market, which is new for us. We need another thematic CD to give away at agricultural shows. Today we discussed it and are now making arrangements with the Regional Business Assistance Center to make our CDs there for different trade shows.
What other ways do our American colleagues, equipment manufacturers, use to promote their products? Specialized trade shows. That was not new for us. But after getting a confirmation that this is the right track, we now invest the bulk of our marketing funds in trade shows. Last year we went to Hanover. It was our third time at that show. We found some potential buyers in Europe . This year we have sold to Portugal and Algeria and to Germany, where our product was bought by our competitors. We hope that these promotion strategies will help us.
And the other extremely important area is management. It has been mentioned, but it’s never mentioned enough. In very simple words, management is a way to make your people work better; so they won’t feel pressured but enjoy their work, to assist the company to increase its sales and modernize its equipment. We are working on this today. We have completed several restructuring stages and separated several of our business areas into separate entities. We have set up several branches outside Ukraine and in Ukraine. And job descriptions are necessary too. As well as computerization, not only of accounting and sales, but of other functions as well. Our customers in the nearest future will require that we serve them in a much more sophisticated way than today. We have to anticipate their desires, instead of waiting for them to run away to our competitors.
Now I would like to give you my impressions of America in terms of competition. Of course, competition is supported by know-how and innovation processes. I already mentioned the Borden Co. They create innovation centers at all their major plants to study new products and new projects. If a competitor provides new services, they will also establish new services.
Today we have introduced this practice at our company. We created work groups for each new product and each new area of operations. Now we start every new area of operation with market analysis. Not like before, when a top manager could have said, “It might be profitable to produce X.” So they would then dump lots of money into X. And later they discover that customers were not interested in this product because it should have looked or tasted different. Now we do market research first. We study the market and the market needs. Then we make a business plan, calculate all the financials, and determine what equipment is needed and the payback period. Only after that we start investing into this new business.
Recently after a comprehensive market study we decided to launch pretty much the same products as before, but of a higher quality. As a result we hope, within the free economic zone developing in Kharkiv today, to purchase new Italian and German perforation presses to satisfy the more demanding requests of our clients. That is something they taught us in the U.S.