The total population in 1986 was estimated to be 55 million and had been growing at an average of 2. % per annum since 1970. An overwhelming 93% of its population was Roman Catholic. Almost 70% of the inhabitants lived in rural areas; 85% were literate. Population density, averaging 458 per square mile, was high on Luzon Island (which includes metropolitan Manila), whereas Mindanao, Negroes, and the other southern islands were sparsely populated. After nearly 20 years of uninterrupted rule, the country sitting president, Ferdinand Marco’s, called for a snap election in 1 986, which he subsequently claimed to have won.
Crayon 1 A distributor served the function of a wholesaler – selling or distributing reduces to a retailer, called a dealer. The dealer in turn sold or distributed products to the ultimate user, such as a homeowner or contractor. Although San F-Fabian considered itself a distributor, it was actually a distributor-dealer. As a distributor it sold construction products to building supply dealers, and as a dealer it also sold directly to contractors, homeowners, and the government. Research Assistant Neil Harrison prepared this case under the supervision of Professor Celandine B.
Malone as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The case is based on materials originally prepared by Research Assistant Edward L Belton under the direction of Ralph Z. Sorenson, director of the Harvard Advisory Group in the Philippines. All names, financial data, and other figures in this case have been disguised. This version was prepared by Professors Benson p. Shapiro and V. Stature Range. Copyright 1 982 by the President and Fellows of Harvard College.
To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http:// www. Hubs. Arvada. Du. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means-?electronic, mechanical, photocopying, recording, or otherwise-?without the permission of Harvard Business School. 1 This document is authorized for use only by soil Castro (zeal. [email protected] Com). Copying or posting is an infringement of copyright. Please contact customers. [email protected] Org or 800-988-0886 for additional copies. 582-104 Aquinas, his chief opponent and wife of slain opposition leader Benign Aquinas, challenged the result which was widely thought to be rigged. In a bloodless revolution, joined by the church and the military, the Filipino people elevated Crayon Aquinas to be their next President in February 1987. Marco’s sought asylum in Hawaii, leaving a shattered economy with 30% inflation and a GNP decline (see Exhibit 2). The economy had shrunk from a high Of -? IPPP billion in 1983 to – IPPP billion (530 billion) by 1986. ($1 U. S. – POP in 1986. Unemployment was running at 10% and underemployment at 35%. In addition, the Marco’s’ crony system of granting massive privileges to individuals whose main qualifications were their closeness and devotion to the interests of Marco’s family and friends, left the political and economic system reeking with corruption at all levels. Crayon Aquinas promised a clean government, and economic growth. Her government’s projections are shown in the last two columns of Exhibit 2. The construction industry under Marco’s, which had grown from P billion in 1972 to POI billion by 1980 (in 1 972 prices), had slumped to P billion by 1 986 (see Exhibit 3).
For the immediate future, economists predicted only a moderate increase in construction and housing. Only after the inflation rate had been brought under control would it be possible to expect the construction industry to boom again. The San Fabian Supply Company The San Fabian Supply Company was founded in 1958 by Paul Change to supply building materials to the Philippine construction industry. Early in 1940, Paul Changes parents who were originally from mainland China emigrated to the Philippines along with hundreds of other Chinese to escape the ravages of war.
Paul Change had just turned 10. After several years as a shop assistant at a building supply dealership, Paul Change started his own cuisines by supplying building materials to a builder (and a close family friend) who had bagged several lucrative government contracts. Slowly as the company grew, it acquired a reputation for quality materials. The company built its image using the slogan, “If it’s quality you seek, seek San Fabian. ” San Fabian was appointed by McDowell as its exclusive distributor for the Philippines in 1969.
It had grown from a small company with sales of less than one-half million pesos in 1 959 to one of the largest suppliers of building materials in the Philippines. San Fabian 1986 sales volume was almost P 320 million. Exhibit 4 shows historical sales performance, and Exhibit 5 provides the operating performance for 1986. Paul Change and his family, as sole proprietors of the San Fabian Company, were considered quite wealthy. Paul Changes teenage son was studying Structural Engineering at a U. S. University and his daughter was married to a wealthy businessman in Hong Kong.
Because of Paul Changes other business interests (restaurants), he could not attend all management meetings. But his very capable team usually met him for dinner almost every month. Paul Change took an active role at those dieting, especially in guiding his team on supplier relationships. During its initial years, San Fabian depended almost entirely on imported products. In 1959 over 95% of its sales came from imports. Gradually, however-?in response to the improved quality of locally manufactured goods and government controls on imports-?San Fabian major activity became distribution of products made in the Philippines.
In 1 986 more than 90% of the company’s sales came from locally made goods. Since its beginning, San Fabian had handled products on an exclusive-only basis. At the beginning of 1 987 it was the sole representative in the Philippines of products manufactured by 67 firms, 54 of which were locally owned. Exhibit 6 indicates the range of products San Fabian carried and shows sales by major product group. 2 Please contact [email protected] Org or 800-988-0886 for San Fabian had three branches-?the headquarters in Manila, a branch opened in 1973 in Cube to serve the southern area, and a branch opened in 1978 in Dave.
San Fabian sales in 1 986 were divided as follows: IPPP million to contractors and other nongovernmental direct consumers (called = retail customers) 2. =114 million to independent dealers (called wholesale customers). P 3. P 71 million direct to government contractors and agencies (called government = customers). San Fabian reached its 489 independent retail dealers through its wholesale sales force. Most of the dealers were hardware and construction supply stores. Every major city and town in the country had at least one San Fabian dealer.
The sales division of the San Fabian Supply Company was headed by Carols Valued, a dynamic executive who had been vice president of sales for three years. As Exhibit 7 indicates, San Fabian had three separate sales forces: a retail sales force which called on architects, engineers, contractors of misgovernment projects, homeowners, and industrial firms; a wholesale sales force which called on the independent retail dealers; and a government sales force which called on government contractors, departments, and agencies. Selling to Retail Customers According to Mr..
Luis Rabat, assistant sales manager in charge of the retail sales force at the Manila office: You’ve got to know two people in the retail selling of building and construction supplies-?the person who does the designing and the person who does the buying. My representatives spend a good 75% of their time with Hess decision makers. They visit them. They talk about our products. They discuss design and solve construction problems. All this pays dividends. Nine times out often these people determine what products are used In a building. The designer specifies the products to be used, and the contractor does the buying.
I’d say that in this business who you know is just as important as the quality of the product you’re selling. Each of my representatives has a list of architects and contractors to be contacted at least twice each month. These calls are responsible for about 80% of our retail sales. The other 20% come from homeowners and others who are remodeling or building. They’ve seen our ads or heard about us from friends. They either come to the office or phone us and we send someone to see them. Selling to Wholesale Customers Traveling representatives called regularly on the independent dealers.
There were approximately 1 ,OHO independent dealers in the Philippines, the majority of whom were Chinese. They bought building and construction supplies on a wholesale basis from San Fabian and other distributors of building materials. These materials were resold primarily to local owners, small businesses, and small contractors. 3 Most of these hardware and building supply dealers had low overhead expenses. They generally carried limited inventories and relied on their families for all labor. Each San Fabian wholesale salesperson was responsible for sales to the dealers in a geographic territory.
The salespeople urged dealers to carry more San Fabian products, distributed promotional information, encouraged dealers to display San Fabian products in prominent places, and were the primary source of technical advice for dealers and their customers. Selling to the Government In discussing government sales, Marcelo Madam, head of the government sales force in Manila, commented: Each of my salesperson is responsible for getting business from certain government departments and agencies. Personal relationships are the most important single factor in doing business with the government.
A good salesperson develops many relationships in a department-?with people on various levels and in different offices. Getting to know the people and what they expect is very important. Take, for example, Toni Salads. She’s responsible for our sales to the Department of Public Works (DIP). She used to work for them as a field auditor and later as an assistant comptroller. Just last week San Fabian delivered a big shipment of goods to the DIP. I bet before we won that contract that Toni had talked to at least 10 people in the department, ranging from designers to the people in the procurement office responsible for contract bidding.
And before we get paid, Toni will have to talk to people in auditing and accounting. But she knows all these people and can get the job done. Sales Force In the industry, San Fabian was noted for its well-trained and aggressive sales force. According to Mr.. Valued, Vice President of Sales: Eighty percent of our salespeople have at least two years of college, and 50% of them have bachelor’s degrees in engineering or architecture. But regardless of their background, they go through our formal training program. We have seminars as well as field training under our most experienced representatives.
Our people don’t rest on their laurels. They’re really hard workers. Just this morning I was looking over figures that show our retail salespeople average four calls per day, and our wholesale sales force averages four and one-half calls per day. This hard work is reflected in their salaries. We give our representatives a base salary of P per month plus a commission. One-third of our salespeople earn over per month, and 10% make over – P 10,000 a month. This is, of course, in addition to their transportation and per diem expenses. Our policy is that hard work deserves good pay.
And we’re able to keep our salespeople happy. Many of our top salespeople are generous enough to bring gifts to their key customers once or twice a year, and we are very good about that. We do not want them to take a hit, we reimburse them from a general fund. Only Paul Change and our chief accountant have access to that fund. 4 Relationship with McDowell Corporation The McDowell Corporation had its headquarters in Winnipeg, Manitoba, Canada. The company was founded in the mid-sass to produce a noncombustible, chemically-resistant material based on cement, called Priority.
Mackerel’s roofing and sheeting were well received by the Canadian market. In 1956 the company built its first overseas plant. By 1 986 it had plants in eight countries outside Canada, including the Philippines. Its organization is shown in Exhibit 8. McDowell Philippines (PM) had been incorporated in 1967. Forty percent of its capital came from the parent company. The remainder came from Philippine investors, one of whom was Paul Change, president of San F-Fabian. Mr.. Change still retained his 7% interest. McDowell Philippines expanded its plant in 1977 to produce Premarital pressure pipe.
This pressure-resistant pipe, made of Priority, had been developed by the parent company in 1968 and was designed for water mains. San-Fabian opened its branch in Dave in 1978 to provide greater coverage for McDowell. In 1 982 PM enlarged its production facilities a second time, his time for all three products, in an attempt to increase its presence from the current 15% market share for pipes, 10% for corrugated sheets, and less than 5% for flat sheets. Soon after PM began operations in 1969, it signed a six-year agreement making San Fabian the exclusive distributor of McDowell products in the Philippines.
Referring to the agreement, Mr.. Change said: It was a natural. Here we were, an aggressive building supply outfit but we did not have a roofing line. We had been offered some lines, but the companies wouldn’t work on an exclusive basis. So our product line really needed McDowell. McDowell, on the other hand, needed someone like us. We were a growing company with a good, solid reputation. We were not carrying a competing line and could offer national coverage. McDowell knew we would pay within 60 days, and that’s important to a new company, especially when it’s a little short on cash.
This agreement worked out to the benefit of both of us. When it expired, we renewed it indefinitely, subject to termination by either party on 120 days’ notice. On September 1 Mr.. Change had been visited by Jean Brevet, the new president of McDowell Philippines. He informed San Fabian that at the end of December McDowell would be terminating their exclusive distributor agreement. McDowell would be taking upon itself the wholesale distribution role San Fabian had been filling. It would also participate directly in large commercial and government projects.
Mr.. Brevet, however, asked San Fabian to continue to carry McDowell products as a dealer under the new system. Before coming to the Philippines, Brevet had headed up Mackerel’s Australian operations, where he had successfully streamlined distribution operations to grow sales by 20% a year his last five ears there In a somewhat flat construction market. In commenting on the change in Mackerel’s distribution system, Mr.. Change said: McDowell is having its difficulties. It has a P =60 million plant here and last year it operated at only about 45% capacity.
The root of its problem dates back to five years ago, when there was a heavy demand for its product line. The plant was operating at full capacity, and the company became all excited about its increase in sales and decided to expand capacity. We at San Fabian did all we could to discourage this. We pointed out that there was unusually heavy demand, much of which came from the overspent, for 5 water pipes, siding, and roofing materials. This was a time of multiple government construction projects. We said that the demand would not continue.
However, Mackerel’s experts thought differently. David Leone, president of McDowell Philippines at the time, a very supportive man who understood the business, agreed with our conclusions. Ever since the company has been plagued by overcapacity. The McDowell Product Line McDowell Philippines manufactured Priority corrugated roofing, Priority flat sheets, and Premarital pressure pipe. Sales in 1 986 of these three products by San Fabian totaled P Exhibit 9). The size of individual orders varied considerably according to type of customer and product (Exhibit 10).
Twenty percent of these sales were made by the Cube and Dave branches. =21 Premarital pressure pipe was the most popular Pressure Pipes With sales of P McDowell product. It was used exclusively for water mains and had captured approximately 15% of this market. Premarital pipe was unaffected by atmospheric influences, chemical agents, and stray electrical currents. Furthermore, McDowell unconditionally guaranteed the pipe against deterioration during the purchaser’s lifetime. Because of its “push-on” joint, Premarital pipe could be installed three times faster than cast iron.
Care, however, had to be taken. When Premarital pipe became warm, it expanded longitudinally, so space had to be left in the joints. Otherwise, the pipeline would buckle, resulting in breaks or leaks. Seventy percent of San Fabian pipe sales were to national government agencies or bureaus. Of the remaining sales, approximately 5% were to provincial or municipal governments, 9% directly to contractors for nongovernmental projects, and 16% to dealers. Premarital pipe was manufactured in 1 3-Ft. Engages and in diameters ranging from 2 to 24 in. Six- in. Pipe accounted for 40% of the sales. Four-in. ND 8-in. Pipe accounted for an additional 30% and 15% respectively. Priority Corrugated Roofing Sheets Priority corrugated roofing sheets were responsible for sales totaling = POP, 138,000 in 1986. These sheets required no maintenance. They were advertised as ‘the coolest roofing on the market … So cool, you don’t need a ceiling! ” Another advertisement read, “Priority roofing is rot-proof, rust-proof, fire resistant, and permanent! ” Priority roofing was sold in sheets 381/2 in. Did and in lengths ranging from 3 Ft. To 10 Ft. Eighty percent of requests, however, were for 8-Ft. Sheets.
The sheets were manufactured in standard thicknesses of 3/1 6 and 1/4 in. , with sales almost evenly divided between the two. In installation of Priority roofing, the corrugated sheets overlapped one another. When correctly installed the sheets formed horizontally a pattern of parallel rows and vertically a stair-step pattern. Unless given specific instructions to the contrary, however, construction workers would install the sheets in a checkerboard pattern of parallel horizontal and vertical rows. This was the pattern used with gallivanted iron sheets (the roofing material with which construction laborers were most familiar).
The iron sheets were thin and, when hammered tightly together in a checkerboard pattern, formed a leak-proof roof. On the other hand, if the thicker Priority sheeting were installed in this pattern, the roof would tend to leak, especially during tropical storms accompanied by heavy winds. When the Priority sheets were staggered, however, they formed a stronger roof and would seal themselves more tightly, repelling water during storms. Because of the high humidity in he Philippines, the light-gray Priority roofing frequently became spotted with dark fungi growth.