Loctite Hbr Case – Executive Summary Essay
Fifty years of business has been good to Loctite, a manufacturer and marketer of adhesives, sealants, and other related products. Most recently, the company has started thinking about its international distribution strategy in Hong Kong; Loctite has turned to its already-established and successful ventures in other foreign countries to explore its potential strategies and find a model for success in Hong Kong and ultimately greater China.
Currently, Loctite’s distribution strategy is composed of different levels, all building up to the eventual acquisition of equity in the international distributor in order to set its core brand and marketing mix. The first stage of expanding its distribution is research into which markets would be profitable for Loctite. Once a potential market has been identified, distributor selection begins. Selection is very stringent, and Loctite hand-selects a distributor that it feels it will work well with.
Often the selection is based on recommendations from other distributors in neighboring geographic regions, other product lines carried by the distributor that may complement Loctite products (as opposed to compete with Loctite products), and the willingness and availability of the new distributor to adopt a Loctite brand identity. After selection, Loctite works to support its new distributor by sending sale representatives and engineers to jump start new market growth and internal knowledge of Loctite products within the new distributor.
After finding success with a distributor through Loctite brand establishment as a main industrial adhesive, Loctite generally begins acquiring equity in its distributor until it owns the distributor outright. By owning its distribution channels, Loctite can ensure that its products and its brands continue to grow and gain market share, and it can also ensure that Loctite’s marketing and business plans are executed. In all new markets, Loctite introduces its industrial product lines and competes in industrial sales, and only after it is successful in that arena does it expand to offering its consumer products.
When Loctite acquires a new distributor, it starts off by offering just a few core products and then eventually moving to direct sales of all Loctite products (depending on the market potential), and some distributors are limited to the amount of products sold in a given distribution area. Loctite has followed this strategy throughout its international ventures, and it currently holds 100% equity in all countries except Norway, Indonesia, Peoples’ Republic of China, Taiwan, Thailand, and Venezuela (all countries that are not allowed to have privately held companies).
Loctite’s different distribution strategies are: direct sales, independent distribution, captive distribution, and agents. The “Direct sales” strategy is used when a manufacturer sells product directly to consumers. An example of this would be if Loctite sold directly to Airbus for its adhesive needs without going through a French distributor. Loctite sells 40% of its products this way, but even when it sells directly to its customers, Loctite gives 10% of its sales profits to the distributor in that region in order to keep a good relationship for future endeavors or other products. Independent distribution” uses a distributor separate from then manufacturer/supplier, with that manufacturer/supplier having no equity in the distributor. In those cases, the distributor is free to set its own business plan and market growth strategies apart from what the manufacturer thinks should be done. Of course, it is in the independent distributor’s best interest to comply with its manufacturers’ business strategies in order to continue selling that manufacturer’s product. “Captive distribution” is the name of the distribution model when a supplying manufacturer owns parts of or the entire distributor.
In those cases, the manufacturer dictates the distribution strategies and marketing mix for its products and brands. “Agents” for core products is when a manufacturer has one employee allocated to only one product; this person is a subject matter expert on that product, and he or she focuses on expanding sales and providing support to the distributor for that particular product. Loctite’s channel strategies do not differ significantly around the world, and thus its North American strategy and its international strategies are similar.
However, there are some key differences, mainly because Loctite cannot own 100% of the dealership business in six countries because these countries’ laws don’t allow 100% ownership by private enterprise. Instead, Loctite has formed joint ventures with companies in Norway, Indonesia, The People’s Republic of China, Taiwan, Thailand, and Venezuela. It should be noted that in all other countries, Loctite owns 100% equity in the distributors. In North America, Loctite’s distribution strategy is selective, only allowing its products to be carried by two to three distributors in the same market.
The industrial distributors are narrowed into 12 regions overseen by President of the company. This structure allowed Loctite to focus on its distributors and their strategies while giving the customer a choice of three distributors to purchase from. Using this structure, Loctite can focus more of its attention on providing a superior level of service to its customers, adding more value to its products. Although this structure limits Loctite’s presence in market outlets, by using two or three distributors, Loctite was able to gain adequate market coverage with more control and less cost than if it had used intensive distribution.
This deal has been very lucrative not only for Loctite but for its distributors as well, allowing them to obtain margins between 30% – 35%. In contrast to the North American selective distribution strategy, Loctite uses an exclusive distribution strategy overseas. Exclusive distribution is a situation in which only certain dealers are authorized to sell a specific product within a particular territory. By participating in exclusive distribution, again Loctite is able to maintain more control over the level of service provided.
By granting exclusive distribution, Loctite maintains control over how its products are merchandized, marketed, and branded. In other words, Loctite is able to more tightly control its brand image. Unlike the 12 region structure in North America, overseas distributorships are structured into three regions—Europe, Latin America, and Asia/Pacific—each overseen by a region manager. The North American region is run by the president of Loctite, and he along with the other regional managers report directly to the COO. Overseas, Loctite operates in each country differently.
In Taiwan the distributor is a large conglomerate operating in many businesses besides industrial adhesives. The opposite is true in Indonesia, where the distributor is a small family owned business. Loctite grants exclusive rights in a territory and then provides as much support as needed. In order to keep a handle on its overseas image and product distribution, monthly visits by heads of the company were not out of the norm. Checking in on its foreign distributors periodically gave Loctite an insight on how these distributors were operated and managed.
If certain distributors were charging too little for the product or some procedures were not cost efficient, Loctite management had boots on the ground to make the necessary changes. These visits and the exclusive distributorship made the distributors feel like they were really important to Loctite, improving its international relationships and thus its ability to rely on its foreign partners. Loctite always moved towards acquisition of its partners, however, because of the increased control over strategy, product pricing, and product value shown to consumers.
Loctite felt that once a distributor established a core business, generally the distributor would just sit on higher margins instead of spending the time and reinvesting profits to grow the business. By gaining an equity stake in the distribution channel, Loctite was able to execute a complex sales approach for its products while having a say in how the distributor ran the business. Owning distribution channels meant that Loctite could also control the marketing message sent to its consumers, and this was always advantageous for Loctite.
Loctite products have never been the cheapest, but that was never the goal; Loctite has always been able to gain consumer trust and loyalty despite the premium price because the company’s marketing and positioning can demonstrate its product value. Historically, if Loctite owned their distributors (fully or at least partly), sales growth accelerated in that area. Looking to its past for examples, Loctite should be able to draw a recommendation for action in Hong Kong. Our analysis points to a 100% buyout of the Hong Kong business and an attempt to build a greater China subsidiary.
The current Hong Kong distributor seems resistant to all offers of help from Loctite; most if not all of Loctite’s other successful distributors welcomed sales and engineering training that likely became instrumental to its success. Also, the Hong Kong distributor did not seem to have the drive necessary to push its business forward; this being the case, it is not likely that the owner will easily share a majority stake without creating issues down the line. Buying 100% would give Loctite the ability to start fresh with new management, instilling its own training and employees there to ensure success.
The base business with a 50% margin is too good to walk away from if Loctite were to try to find a new distribution partner, especially because customer loyalty may remain with the distributor (the reputation of the distributor, not so much the specific owner). If Loctite removes its products from one distributor only to push them through a different distributor (one that likely competes with the first distributor), the first business partner may take offense and a price war or excessive competition could ensue.
There is no need for Loctite to offend its base business, especially because this distributor has the biggest share of the Hong Kong market. A 100% buyout will also give Loctite an edge in the Chinese market as well; Loctite’s joint venture in China already competes with its Hong Kong distributor, and thus buying out that distributor would eliminate that competition and give Loctite an even stronger market position than before in all three nearby markets: PRC, Taiwan, and Hong Kong.