The research flowchart is shown as figure 1.1. First settle down the subject; motivated by literature review and experience of marketing strategies establishment, and make sure of research goal, scope, and target. Then, build the research framework through literature review, and through second-hand data, find the key to success and the practical operational strategies for future development of the multi-level direct-selling industry.
Figure 1-1 Research Flowchart Resource: Organized by This Research
II.LITERATURE REVIEW
Section 1 of this chapter is going to explain the features of the direct-selling industry:
Multi-level direct-selling industry and direct-selling industry companies, the relationship between distributors and direct-selling companies, the channel types of multi-level direct-selling industry and direct-selling companies. Section 2 is going to discuss key successful factors (KSF) and externalities.
The last section is going to discuss literature relate to competition strategies.
2.1 Characteristics of Direct-selling Industry 2.1.1 Industry and Firms
According to traditional principle of marketing, previous marketing channels sold products to customers through retailers, and retailers sold products and service through other mediators. As the consumer purchasing behavior has changed, the way of “non-retail store selling” occurs. 【Sung (2006)】 thinks that “non-retail store selling” is divided into three types, including direct-selling, vending machine selling and mail-order. This method is a little different from the category of
“non-retail store selling” raised by 【Kolter & Armstrong (2000)】. 【Kolter & Armstrong (2000)】
separated “non-retail store selling” into four kinds, inclusive of mail-order, direct-marketing, vending machine selling and direct-selling. Direct-selling, which actually one of the “non-retail store selling”, has been a trend recently, is a way that sales representatives selling products to customers face to face.
Direct Selling Education Foundation define direct-selling as “Direct selling is the sale of a consumer product or service, person-to-person, away from a fixed retail location, marketed through independent sales representatives who are sometimes also referred to as consultants, distributors or other titles.” Therefore, there are two critical features of direct-selling, which are face-to-face selling and not in the stable retail stores.
One of the most common marketing ways in the direct-selling is multi-level direct-selling, which is one of the “marketing channels”, belonging to interview selling of non-retail store selling.
Multi-level means that “The term "multi-l1evel sales" as used in this Law means the promotion or
sales plan or organization pursuant to which the participants pay a certain consideration to obtain the right to promote or sell goods or services and the right to introduce other persons to participate in the plan or organization, thereby receiving a commission, bonus, or other economic benefit.” (Article 8, Fair Trade Act). Participants (Sales representatives) of multi-level direct-selling business have been increasing. The numbers of participants in Taiwan in 2008 are 5400 thousand (approximately 3800-4000 thousand participants excluding repeatedly count numbers), accounting for 18.54% of 22880 thousand total population. (Fair Trade Commission, Executive Yuan, R.O.C, 2009). It appears that multi-level direst-selling business has been fairly important in Taiwan. Because sales representatives have a significant role in multi-level direct-selling channels, the top priority of the company is to establish more closed ties with independent sales representatives.
The recent rapid development in the multi-level direct-selling industry makes the industry have the following special features:
1. Implement the “acquaintance” factor. Direct-selling activities normally run in the acquaintance group, and multi-level direct-selling includes more “acquaintance” factors. Because downsides in the multi-level direct-selling need to engage in the acquaintance group, that is to say, multi-level direct-selling takes advantages of original social relations, building business network in the social network. In economical aspect, most of times people use social network to consume, and multi-level direct-selling also takes advantage of social network to manage, even manage in scale.
Multi-level direct-selling puts social network into institution.
2. Salespeople engage in selling or servicing, including “the sales of business opportunities”.
During the “direct-selling” process, salespeople normally introduce two things to customers; one is the product or service; the other is the compensation plan for the business opportunity. Through selling products and offering service, and/ or attracting not only customers but also others as their downlines to engage in direct-selling business, salespeople can acquire reflective compensation. The downlines need to pay for the “business opportunity”. Downlines who purchase the business
“opportunities” have similar rights to their uplines do. Therefore, business “opportunities” actually have become “objects” to be sold.
3. Multi-level direct-selling companies take multi-level compensation institution. There are two
common sources of “direct-selling” people’s income: one is through directly selling products or service to “end” customers; the other is through developing downlines (direct or indirect introduced new direct salespeople). Uplines will contribute their energy and knowledge to train their downlines, and sell products directly to “end” customers through their downlines, and then gain reflective compensation from their downlines’ revenue based on the compensation institution and rule of their companies. Generally speaking, the latter resource of income is from the income of the person you recommended, namely, if he or she does not have any sales revenue, you can not get the second part of revenue.
4. The legal relation between direct-selling companies and salespeople is “labor service agreement” instead of “employment agreement”. In other words, salespeople are not employees of companies but independent sales subject. This relation help direct-selling companies save huge amount of personnel expense.
5. Salespeople are sellers as well as consumers of products, and in some companies, more than 80% of products are bought by salespeople. Because the two contradict identities, salespeople may face embarrassing conditions.
The quality and feature of products are critical because they are the key factors which drive customers to purchase products. In addition to that, through making purchasers experience the products and service and then promoting to others, companies can achieve sales target. The products sold by direct-selling companies must satisfy customers’ needs, and match with the characteristics of direct-selling channels, so that can differentiate from traditional marketing channels 【Tseng (2007)】.
2.1.2DISTRIBUTORS (SALES REPRESENTATIVES) AND FIRMS
Although there are no specific contracts between multi-level direct-selling companies and sales representatives, base on the article 12 of Supervisory Regulation Governing Multi-Level Sales under the Fair Trade Act, “A multi-level sales enterprise shall enter into a participation contract in writings with that who intends to take part in the sales organization or plan as a participant”. In other words, the relation between sales representatives and multi-level direct-selling companies is similar to sales agent relation and restricted by the above-mentioned regulation.
【Chang (2004)】 pointed out that “sales representatives” act as “customers” and “sellers”
(suppliers) at the same time. That combines the both characters, traditionally contradicted, into one peacefully to resolve the conflict between consumers and suppliers. Direct-selling companies transform traditional marketing expense into retail revenue, commission and bonus as deserved feedback to encourage sales representatives to work hard promoting products to new customers.
【Chen & Li (2006)】 also said that sales representatives are resources of direct-selling companies and play a role as supporters for activities, organizational learning, development of business strategic vision, and production of enterprise synergy held by companies. How a direct-selling company regards its sales representatives will directly impact the relation and benefit of the company and sales representatives.
【Palmatier et al.(2007)】 ever raised an issue on customer’s loyalty either to a company’s brand or to a sales representative. The core value of direct-selling companies is sales representatives.
Under the multi-level direct-selling surrounding, customer’s loyalty may be to sales representatives.
If direct-selling companies enhance ties with sales representatives, the customer’s loyalty will increase in the meanwhile 【Yu & Li (2007)】. Most sales representatives have high satisfaction with their products, but direct-selling companies still need to provide them with many related service, such as training programs, motivate packages, order, pick-up and return, software and hardware equipment update and image enhancement, to show dedication of companies and achieve the key successful factors of making differentiation, increase sales representatives’ loyalty and continuously develop their volumes 【Lin (2001)】.
Generally speaking, there are two types of sales representatives in the multi-level direct-selling industry: business sales representatives and consuming sales representatives (product lovers). Both types of them are business partners with companies in contract as well as the basic customers of companies. This kind of relation has become essential for companies to sustainably operate. Thus, if direct-selling companies want to run and expand in the long run, they have to own sales representatives with extremely high loyalty. How to maintain sales representatives’ loyalty, which impacts their attitude and behavior, becomes a critical issue to companies 【Lin (2001)】.
From the above literature review, sales representatives are one of important marketing channels
of multi-level direct-selling companies, and the completed mechanism of abundant commission and bonus is the key to maintaining the relation between sales representatives and companies.
2.1.3CHANNEL FORM OF DIRECT-SELLING INDUSTRY AND FIRMS
Direct Selling Education Foundation in 1992 defined direct-selling as “Direct selling is the sale of a consumer product or service, person-to-person, away from a fixed retail location, marketed through independent sales representatives who are sometimes also referred to as consultants, distributors or other titles.” 【Peterson &Wotruba（1996）】from three perspectives to analyze activities of direct-selling companies. From Operational perspective, direct-selling can be seen as a selling way through interpersonal communication or individuals; from tactical perspective, direct-selling can be seen as a way or function of selling activities of organizations; from strategic perspective, direct-selling can be seen as a channel or distribution model, a method or media to acquire or get close to the market, or a way to do business.
Direct-selling is a marketing channel because it has the function of delivering product or service from manufacturer to end users. In the channel framework shown on the figure2-1, channel A and channel B are traditional retail channels with fixed place; channel C and channel D are common form of direct-selling channels. Direct-selling channels replace traditional agencies, wholesalers and retailers, with sales representatives, but the implementation of channel functions of direct-selling channels are similar to those of traditional channels.
Direct-selling is one of the marketing channels of multi-level direct-selling companies. The biggest difference between multi-level direct-selling channel and other types of channel without retail stores is its selling network promoted by “human power”. No matter how advanced technology is nowadays, and even if there are many selling ways through technological products such as the Internet, telephone, and television, the basic spirit of multi-level direct-selling is passing away a belief, system and products by “people”, and integration of the entire marketing channels as well
【Sung (2005)】.
According to the explanation of modern economics, multi-level direct-selling is a operational type which transforms part of product revenue from agencies, distributors, advertisers to sales
representatives. The main difference between multi-level direct-selling and traditional sales is that the former substitutes sales representatives for wholesalers and retailers to concise selling process and lower product price, and motivate consumption 【Sung (2005)】.
Figure 2-1 Original Marketing Channel Resource: Organized by This Research
The design for multi-level direct-selling system is different from the design for traditional selling channels because it reduces product flow among layers of intermediates. Instead, through the process that products distributed from manufactures to sales representatives and then customers, it builds countless customers, and finally becomes a huge consumer group through quick growth on a multiplier basis 【Lin (2001)】.
More and more direct-selling companies take more than one channel to segment market, for example, taking both direct-selling and distribution. The multi-channel system can expand selling opportunities, but it may cause channel conflict and control problems if not integrated well.
2.2 Competitive StrATEGIES
2.2.1DIAMOND MODEL
The diamond model is an economical model developed by Michael Porter in 1991.The approach looks at clusters of industries, where the competitiveness of one company is related to the performance of other companies and other factors tied together in the value-added chain, in customer-client relation, or in a local or regional context. Although this model at the beginning focused on impact of country competitive advantages, it covered industry competitive advantages.
When companies build operational strategies, they first must apply this diamond model to analyzing the advantages of the industry, and then exercise compare advantages in this industry during operational process to win advantages in the market. While using the diamond model to analyze industrial competitive advantages, companies have to incorporate four key factors, which are factor conditions, demand condition, related and supporting industries, firm strategy, structure and rivalry, into the diamond model, and need to add another subsidiary factors, chance events and government.
Figure 2-2 Diamond Model Resource: Michael Porter (1990) 2.2.1.1 Production Condition:
Production conditions are resources that companies invest to produce products. “Non-key”
factors (or general use factors), such as unskilled labor, and raw materials can be obtained by any companies, hence, do not generate sustained competitive advantages. On the other hand,
“Key” factors of production (or specialized factors) are created, not inherited, and often specific for an industry and important for its competitiveness. Specialized factors of production are skilled labor, knowledge resources, capital and infrastructure, and involve heavy, sustained investment. In the global environment, “Non-key” factors can be obtained from external and their influence on business operation has been decreasing except for the farming industry.
However, “Key” factors must come from internal human resource and capital and generate through research and development. Thus, they are more difficult to duplicate.
2.2.1.2 Demand Condition:
Demand conditions in the home market can help companies create a competitive advantage, when sophisticated home market buyers pressure firms to innovate faster and to create more advanced products than those of competitors.
1. Nature of home market
Home market has great influence on perception from business itself and the ability to understand customers’ needs. In addition to the feedback from customers, home market also can offer business opportunities to get close to customers to fully know existing and potential customers and hold key information of them.
2. Scale and growth speed of home market
The predicted demand for home market may make one domestic industry grow fast, and market scale and the growth way have greater effect.
3. Ability to transform demand in home market to demand in global market
Porter raised two ways that can globalize home market, and naturally promote products and service abroad. One is bring products and service to international market through mobile cross-country domestic customers. The other is taking demonstration effects to help exportation.
2.2.1.3 Related and Supporting Business:
The range of related and supporting industries is broad, including complete development, coordination and intact of cooperation mechanism of related, upstream and downstream industries due to their interaction effect. In addition, Porter pointed that the appropriate integration of business internal resources and environment of country can bring about compare advantages in industrial management, but will lower down the growth speed of business. Hence, Porter raised the concept of industry cluster effect, that is, the abundant resource and production of upstream, downstream, related business, suppliers, and research and development can be gather together as a key site of industrial development, and those can become unique competitive advantages in regional or global area.
2.2.1.4 Firm Strategic Structure and Rivalry Competition:
Firm strategy, structure and rivalry constitute the fourth determinant of competitiveness.
The way in which companies are created, set goals and are managed is important for success but business’s goal, strategy and structure are often different depending on countries. In business strategy part, some focus on brand research and management; some are likely to avoid standardization and price war to differentiate and fulfill few picky customers. A company’s choice of strategy can reflect advantages of its home country.
The four factors of diamond model constitute competitive advantages and environment of industry. They need to be assessed individually because they have different influence on different industries. Diamond model is a dynamic system so any factor can be affected by the others. The more efficiently the diamond model works, the more effectively the business industrial strategy manages.
2.2.1.5 Chance:
Chance events are occurrences that are outside of control of a firm or government. They can promote adjustment of industries and provide opportunities for business in one country to surpass firms in other countries.
2.2.1.6 Government:
Government can influence each of the above four determinants of competitiveness. On the other hand, government can be affected by the four determines. Porter thinks government play a role as a simulator of forming a macro economics environment, keeping soundness of politics, improving the ability of micro economics in macro economics conditions, erecting regulation of whole micro economics, and being a supervisor. By doing so, industry can increase competitive ability through fair market environment.
2.2.2FIVE-FORCE MODEL
Porter thinks what a firm care about most is competitive intensity within the industry determined by basic competitive forces in the industry. The forces which drive competitiveness in the industry are the threat of entry, the threat of substitutes, the power of buyers, the power of
suppliers, and the competitive rivalry. In a high intensity of competitive industry, there are many competitors and substitutes, firms have less power than suppliers and buyers, thus any firm can enter it free. In the short run, these forces can limit a firm’s operation, but in the long run, a firm can make use of strategic choice to change more than one competitive force to gain advantages. The following are explanation for the five competitive forces:
2.2.2.1 Threat from New Entrants
Researches demonstrate that most firms do not pay enough attention to the threat of new entrants. In fact, many new entrants often carry huge number of resources and cause great negative influence on the current firms within the industry. At the result, the current firms have no choice but increase efficiency of production to expand to another new field.
As we know, there are two factors which determine the probability of a firm entering an industry: entry level and expectation of revenge on current firms. If it is difficult for a firm to enter an industry or if a firm will be in an inferior position after entering an industry, then we can say there is an entry barrier within the industry.
1. Obstacles to Entry
Firms within an industry do not welcome new entrants so they usually strive for creating entry
Firms within an industry do not welcome new entrants so they usually strive for creating entry