Chapter 6: Marketing Feed Flavours in a Dynamic Market

6.1 Introduction

In Chapter 4, I have discussed how Lucta China had arrived with the business strategy of "focused differentiation", i.e. to develop areas of uniqueness in our products which can be considered as added values or benefit by the customer of our target market segments. The implementation of this business strategy was carried out in two parallel levels: one, to create and communicate differentiation in corporate and product image, as reported in Chapter 5; two, to create differentiation in our products and communicate it at sales operations. The latter is described in this chapter in greater details. I will recall the process of how we actually marketed the product Luctarom, the core product of Lucta China business. Areas of marketing, such as market segmentation and sales channels, are also discussed.

6.2 The feed flavour market in 1999

Flavours for animal feed were introduced to Chinese market in early 1990s. Agrimerica (from USA ) entered China indirectly through its distributor in Hong Kong and started off the concept of adding flavours to feeds. However, in 1999, feed flavour products available in the market were practically of local brands. There was few imported brands or no foreign suppliers directly manufacturing in China . Local manufacturers included: Harse (Guangzhou of Guangdong Province), Dadi (Chengdu of Sichuan Province), Hongda (Zhaoqin of Guangdong Province), Jiamei ( Chongqing ), Lixiang (Guangzhou of Guangdong Province), Mudan (Xiamen of Fujian Province), Mingtai ( Chongqing ). Some other smaller manufacturers are not listed here. Among those named above, Harse and Dadi had the biggest market shares at the time.

Harse was the earliest manufacturer to produce feed flavour in China . After Agrimerica had introduced to China the concept of using feed flavour, Harse imported part of their flavour nucleus from Agrimerica to make the final products. In their marketing campaign, Harse always branded their products as an achievement of "technical collaboration with Agrimerica in USA ". Harse's peak time was in 1990s, with a market share greater than 50%. However, because of problem of internal management leading to loss of several key staff members to become their own competitors (e.g. Tiandi of Beijing, Jiamei of Chongqing, were formed from Harse's staff), and because of the instability of their products leading to loss of customers, its Market share shrunk significantly. Harse in 1999 was already a company whose business was sliding. By 2002, Harse had practically disappeared from the market.

Dadi however was a steadily growing company. Its products could be considered as the highest in quality among the local products at the time. Quality stability was also good. Dadi company was started up in mid 1990s by a then MSc student who was experimenting the use of a flavour for a feed manufacturer for his MSc project. When he finished the project, the time was the fastest growing period for the feed and animal industry and the demand for raw materials was greater than supply. So he started, at the right time, to market his feed flavour product to the industry. The company grew rapidly. By 1999, Dadi had already had distributors in most provinces of China . Dadi had two flavour products at that time which were being sold well, at the unit price of 28 and 35 RMB/kg.

In order to understand the competitive products in the market, we collected samples of 12 typical products from the market and sent them to our HQ laboratory in Lucta Spain . Based on gas chromatographic analysis and expert panel test, the results showed that all products were rooted from one product called "Piglet Milky Flavour" originally introduced to China by Agrimerica Inc. of USA, and all other products were derivatives of the Piglet Milky Flavour by addition of some top notes such as fruity (e.g. bananas) or more commonly woody and spicy notes. The analytical results also showed that all products were low in concentration of essence and thus required high dosage when applied to feed (typically 1-2 kg/ton feed).

With some initial knowledge about the products in the market, it was considered Lucta product should be able to compete in the market with quality and even price advantages.

6.3 Initial setting of market strategy

Before launching our flavour products, "Luctarom", we conducted a good market study. Collection and analysis of competitor products were one way. We also studied their prices and performance: price ratio. The price range for competitors' products was 25-35 RMB/kg with a dosage of 800-1000 g/ton feed. We decided to launch products in the range of 50-60 RMB/kg. Luctarom 1806 (a milky vanilla flavour) was introduced at 58 RMB/kg and Luctarom 37661 (a fruity-milky flavour) at 50 RMB/kg. Why did we launch the products at that price range? At the time, there were already too many companies actively promoting flavours to feed mills so that many technical managers refused to receive visits of salesmen from flavour companies. But we wanted to be seen different and not as "another flavour company". We intended to use the striking difference in price to make people stop and think: perhaps this company's product is different! Of course the dosage of our product was lower, at approximately 50% of the dosage of competitor products, so the cost per ton feed treated was rather similar to competitor products and thus we should be still competing with quality. The "high unit price and low dosage" approach was useful to us in two aspects: 1) low dosage and thus high essence concentration would give the products a high-technology selling point. Luctarom used multi-pore silica as absorbent giving not only good physical appearance and flow-ability but also high absorption capacity. All exiting products however used corn-cob meal as the absorbent, resulting in poor physical appearance and limitation of absorption capacity. 2) At a low dosage, it was a cost-saving for us since the freight cost from Spain to China could be reduced. Anyway, the pricing tactics was part of our focused differentiation strategy: high quality product and hence high price, as discussed in an earlier chapter.

Of course, a high price per se was not a selling point, we must tell our customers how our products were different from the competitors. When we studied the market at the time, we observed the view of many users on existing products in the market, which can be summarized as: 1) poor resistant to high temperature required for making the mixed feed into pellets; 2) short duration of flavour intensity: most flavour only lasted for typically 20-30 days after application; 3) there was little knowledge about flavours. After several rounds of brain storming among our sales team, logically we decided to highlight the technical and performance advantages of Luctarom as its quality differentiation points. That was: 1) technology of slow release used in Luctarom; 2) heat resistant and long lasting flavour persistence feature of the product (able to remain 70% of its original intensity at 70 days after pelleting); 3) the system developed by Lucta for flavour design and the assessment of flavour performance. In supporting this marketing strategy, a two-page colour advertisement was placed in Guangdong Feed (a regional industrial magazine published quarterly). A technical article entitled "A system for the characterization and evaluation of feed flavours" was also published in the journal. The paper described the Flavour Information System developed by Lucta, which covered topics such as the profiling of aromatic structure, standards to assess resistance to time and temperature, sensory evaluation and animal feeding trials to determine animal's preference. Several technical seminars were also arranged to convey message of Luctarom's technically advanced features. Sales activities were directed to persuade prospective customers to conduct comparison trials in their feed mills, to benchmark Luctarom against their existing products.

How successful was this marketing strategy? After about one year's practice in 2000, we found that the quality differentiation strategy was overall a correct one, however, the tactics of using technical attributes as quality differentiation point for Luctarom did not give good result in sales, and thus could be regarded as a failure. I remembered receiving a phone called from a salesman who was working very hard to convince a customer to try our product, "According to the technical datasheet, I recommended the customer to carry out a pelleting trial at a dose of 250 g/ton feed. There was barely any flavour smell from the pelleted feed produced.". Despite of large effort made, we did not succeed with that customer because our product had failed. There were many similar cases where our products did not live up to expectation. It was very frustrating to our sales staff.

The possible reasons for failure can be summarized as follows:

1) We did not really understand our products, particularly the performance and particularity of individual products. This was partly because we had little experience and partly due to the fact that, the information given by Lucta Spain was too simple and was not explicit to the detailed differences between products. Technical and marketing data were incomplete. It was half a year after product launch that only we were given information that Luctarom 1806 contained 20% sweetener thus customers would not need to add sweetener any more. Some of the recommendations were not applicable to the Chinese market, for example, 250 g/ton dose appeared sufficient for customers in Europe but not in China .

Although in general the claims (about heat resistance and lower dosage) we made about our products were true, there was indeed large differences between individual products. Luctarom 1806 had a high resistance to heat and thus good durability, but it had a low head note and thus the flavour intensity was low. Particularly when recommended to use at 250 g/ton, the intensity would be inadequate for most Chinese customers, who wanted the flavour to powerfully strong. On the contrary, Luctarom 37661 had a very powerful head note, but it was not really heat resistant. One of our customers in Guangxi made complaint about the product being unstable since the flavour intensity was lower at one time than before. Although the real cause was that their temperature controller of the pelleting machine was out of order giving an unobserved higher temperature and thus greater loss of flavour essence during the pelleting process, the customer's confidence in our products was affected.

2) Later we discovered that, because we placed a lot of emphasis on the technical features, such as heat resistance and low dosage, we had raised customer's expectation on our products. Once a product was not that excellent in one aspect or another, it easily failed the customers' expectation. That product then became "not as good as claimed, and not worth the high price".

In fact, we should not have placed the emphasis too much on the physical and technical attributes which can be immediately measured. These attributes are " tangible " traits. We should have placed the emphasis on those non-tangible traits which the customers can not see, touch or measure easily. Non-tangible traits could include: benefits to the animal and to the feed mills themselves. There is a general tendency for people to promote the non-tangible traits if the product is tangible, or vice versa. Typical examples are: car advertisers would emphasize the feeling of status and success that their cars would give the owner etc. Fashion clothing is using the similar tactics. On the other hand, hospitals would place emphasis on their tangible advanced facilities and profiles of their doctors, because their service is not tangible (the customers can not see the result before engaging the service). Understanding this principle, we later decided that we must explore more on marketing the benefits of our products, shifting from the technical and physical attributes.

Luctarom 1806 is a pure (genuine) milky flavour. The sensory intensity is not powerful, but the product is the best for attracting young piglets to start eating solid food, thus a good transition from liquid milk to solid food. "Intake boosting" is its strong point. The market at that time had changed as well. It was rather messy as local flavour suppliers multiplied by number and all were promoting products with a sensory intensity stronger and stronger, regardless whether they offered any benefit to animals. The result was that feed manufacturers started to develop a negative feeling against flavour use. Therefore, under these circumstances, it would be to our disadvantage if we continued to promote the "low dosage and heat resistance" feature, as this would lead the customers only to judge our products only using the intensity of smell, and this trait may be inferior to competitor products. Luctarom 1806Z did not sell at all in Guangxi province where the market was seeking strong and powerful flavours. Based on this analysis, we finally placed the selling point of Luctarom to its "feed boosting" benefit. We no longer painstakingly stressed the heat resistant advantages of our products ¡ª let the customers find out the feature themselves, and let this feature become a bonus. The benefit of intake boosting could not be seen right away (because most feed mills would not conduct animal experimentation on their feeds), and is a non-tangible feature.

6.4 Differentiation by product benefits

From the year 2000, our marketing tactics was shifted towards emphasising the "intake boosting" benefit of Luctarom as a differentiation point. Business strategy remained unchanged: to compete by focused differentiation of product quality and service. In accordance with this new market tactics, the content of our advertisements were also modified to deliver the message "Luctarom ¨C your solution for improving feed palatability". A new article entitled "Animal's feed selection behaviour and the use of flavours" as published in a well-known scientific journal. More importantly, 4-5 technical seminars or symposiums each year were delivered across the country educating customers how to apply the principle of animal's food selection behaviour to create good prestarter diets to achieve early feed intake by young pigs. The responses from seminar attendants were good, as judged from the business with the attendants. Even those who did not proceed to buy our products, they had formed a good perception of Lucta products.

Luctarom 1806 was the representative of the group of products featuring ¡®intake boosting' performance. For this product, we focused the advantage on the benefit of increasing feed intake. We warned customers that this product may not give strong sensory intensity, but was the best for the animal preference. In this way, we avoided customers forming high expectations on the flavour intensity of our product. In the end the product often performed better than expected and the customers were delighted.

The result of this change in marketing strategy was good. At the beginning, it took painstaking work to convince feed mills to choose a weak flavour albeit its benefit of improving animal intake, while at the time the majority of feed mills and feed buyers were used to strong flavours. However, the effort was in the end well-rewarded. Luctarom sales increased steadily for the coming years (see Figure 6.1). More importantly, many of the major feed or premix manufacturers were already among Lucta's customers. By 2002, Luctarom had become a well-known brand for high quality feed flavours of China . Association with good quality itself became a differentiation point. Many smaller feed or premix manufacturers bought Luctarom to create top quality products in their product range.

Figure 6.1: Sales evolution of Luctarom from 1999 to end of 2001

6.5 Developing products specifically for China

Creating products specific to the market requirement had been a key determinant of success or failure. Up to the year 2000, Lucta Spain sent to China several products (see Table 6.1) which were best sellers in Europe . The assumption was that these products may also sell equally well. The reality however was very disappointing. We found most products did not suit the Chinese market. The sensory profile (i.e. the smell) of Luctarom 1806 was well received and liked by customers but its intensity was too weak for many customers. Even though there were buyers of this product, the volume was small. The sensory profiles of other products however were too far different from what the market regarded as normal. Feed manufacturers were unwilling to try flavours with smells too different from the norm in order not to risk a drop in sales in fear that feed buyers (e.g. farmers) may reject the new smells. As a result, little of the 37661 and 38063 were sold, and none of the 37794, 37795 and 37787 was sold at all.

Table 6.1: The list of products first sent to Lucta China

Product Code	Characteristics
1806	Milky vanilla flavour used for piglets
37661	Fruity (strawberry) flavour
38063	Spicy flavour used for adult pigs
37787	Sensory the same as 37661 but lower concentration
37794	Fruity (honey and cherry) flavour
37795	Strong anise flavour

Practically all our customers were feed manufacturers, producing complete feed, protein concentrates and mineral & vitamin premix. In China market at that time there were a large number of feed mills but most were small in scales. In Nanning of Guangxi province, a street called " Wuyi Road " accommodated more than 50 feed mills, and those feed mills with a monthly production of 2000 tons feed would be considered as large plants. But in Guangdong , there were larger feed mills with production yield of greater than 10,000 ton per month. There were marked differences between regions in the feed industry. However, their sales channels were rather similar irrespective of the size. Majority of feed manufactures did not sell their feed products directly to the final users but through distributors or feed traders. The distributors were typically family-owned shops where farmers came to buy a bag (40 kg size) or two to take home for feeding. The distributors may sell products from more than one feed mills and thus the outlet point created competition among different feed brand names (see Figure 6.2). Unable to see its quality, farmers may select the feed purely based on its smell. There was a tendency of preferring stronger smells. This market preference drove the feed mills to use flavours which were increasingly strong in intensity and in pleasing the buyers. When the profit margin was down, feed mills would squeeze out expensive feed additives and look for cheaper raw materials. There was a weakness with this type of sales channel for feed mills. The feedback on the product quality from the end users was slow and was sometimes incorrect via the relay of the distributors.

Figure 6.2: The sales channel for animal feeds in China . Feed producers do not normally have direct contact with the buyers.

As can be seen from this analysis, Lucta at the time really lacked products that could meet the needs of the market. Such products should have the following features: 1) powerful in sensory intensity with good durability; 2) modest price and 3) sensory profile (the smell) acceptable and preferred by the buyers of feed. Through market studies and collaboration with Lucta Spain , finally we created a new product with a sensory smell similar to the then leading product in the market, but better in performance (the smell, the intensity and durability). The product went to market in October 1999. This product, Luctarom 38972, was priced at 50 RMB/kg with a dosage of 50-60% of competitors' products, thus the real cost to feed mills was 20-25 RMB/ton feed. It was competitive cost-wise, compared to its target competitor, a leading product from Dadi which was priced at 30-35 RMB/kg with a dosage of 800 g/ton (24-28 RMB/ton feed). The profit margin for this product was low, but this product was meant to compete with a price advantage as well. My rationale behind this move was to grasp some market share from our competitors. Through letting more customers use Luctarom and experience its quality, we make Luctarom name known, particularly because dominant products set the market trend. Only when our products have a considerable market share that we can start to slowly lead the market preference to our own direction. As an analogy, selling Luctarom at the time was like selling the colourful clothing of United Colour of Benetton in China of 1970s when every one was wearing blue worker-uniforms, or like selling suits then when every one was used to blue Zhangshan uniforms. We should produce blue colour garments, and let people accept the products and the brand name first. Once the brand name is well accepted and has established as a trend, other colours clothing can come in and lead the market.

The introduction of Luctarom 38972 was a success and the sales of this product increased significantly in the recent 2-3 years. It had grasped an apparent size of market share from our competitors. In Fujian province, feed industry was concentrated in Putian county. All four largest feed mills switched to Luctarom 38972 from a product by Dadi. Many smaller-size feed mills also wanted to adopt the same flavour product. The feed smell given by Luctarom 38972 became the best preferred one by farmers (the feed buyers). In other provinces too, Luctarom 38972 was well accepted in smell, heat resistant property, and intensity. The acceptance for the price also maintained for a while until the market situation changed.

By August 2000, we introduced a mid-price product, Luctarom 40797 and the product was also successful. This was a lower concentration version of Luctarom 38972 thus requiring higher dosage. It was priced at 30 RMB/kg. The cost of application (cost per ton feed treated) to the customers was effectively the same as 38972. This product was created because there was an enlarging segment of customers who did not like "expensive" (i.e. high unit price) products. This is a price-sensitive segment. The product of 30 RMB /kg may appear more acceptable while that of 50 RMB/kg too expensive. The owners of some private feed mills, who would receive report of feed additive raw materials purchasing prices without knowing the actual dosage, may question their technical manager why their flavour cost 50 RMB when the usual price was only 20-25 RMB. Luctarom 40797 was just to address this niche and was successful. The sales increased steadily and became one of the major selling products (see Figure 6.3).

Figure 6.3: The sales evolution of different Luctarom products (data are moving average of 2 months). Luctarom 38972 , 40797 , and 1474 were created for Chinese market. Sales of 1474 was affected by fishmeal market price.

From the success story of 38972 and 40797, which were created specifically to fit the Chinese market, we can see the importance of matching products to the market needs. This is particularly true for products like flavours, because the preference for smell is subjective and influenced by many local factors. For instance, a "biscuit flavour" referred to by most Chinese was that based on vanillin since for a long time in the past biscuit contained ethyl vanillin as a flavouring ingredient, whereas a "biscuit flavour" referred to in Spain would be totally different, it may be fruity or chocolate. Moreover, there were marked differences in market characterises between different geographical regions. Even within the same region, market characteristics and demands can vary. This was true with the feed flavour market in China . Therefore it was necessary to continuously align our products with the market needs. I will also elaborate this topic in the next section.

This section touches the subject of international strategy for product. On this subject, Keegan (1995) distinguished three adaptation strategies of product to a foreign market:

1) straight extension : introducing products in the foreign market without any change

2) product adaptation : altering products to meet local conditions or preference

3) product invention : creating new products to meet the need. Product invention is a costly strategy, but the payoffs can be great, particularly if a company can move product invention into the target foreign country.

Lucta's experience showed that straight extension of product was a failure, product adaptation, e.g. the creation of Luctarom 38972 , 40797 to meet the local preference, was essential for the acceptance of product by local market.

There was also a case of product invention. In central and north China the major form of feed produced was protein concentrate, containing fishmeal as the protein source. Therefore, there was no need for adding milky or fruity flavouring to protein concentrate. In fact, our customers wanted a fishmeal flavour to enhance the "rich in fishmeal" impression of their products (farmer would buy protein concentrate with a strong fishmeal smell assuming it had a high protein content). As the prices of fishmeal increased, a lot of feed manufacturers also wanted to replace fishmeal with other protein sources, but the absence of fishmeal smell may not be accepted by buyers. Thus there was a need for a flavour that gave fishmeal smell, and the market potential was large because this flavour was not restricted to piglet feeds (i.e. it may also be used in poultry feeds, thus the market would be greater). However, Lucta did not have a fishmeal flavour in its product library, and had no experience of working with fishmeal flavour raw materials. This was because in Europe fishmeal smell was the one to be masked and not to be enhanced. This product had to be created brand-new or invented. It took two years of work, though not intensively, to create three versions of fishmeal flavour product (Luctarom 1474). Although further improvement was needed, the products had gained a reasonable success. At 2002, the fishmeal flavour product as a whole ranked 4 th place in the sales of all Luctarom products (see Figure 6.3).

6.6 New target market segment: medium-price products

From 2000 to 2001, the sales of Luctarom increased steadily. The company's sale revenue increased from 13 million RMB in 2000 to 23 million in 2001. Market share had also increased. Within the territories (provinces) where we operated, most of the major feed manufacturers had become Lucta's customers. However, we found that some of them did not purchase to their potential, i.e. their order size was much too small relative to their buying potential. The reason was that: they limited the use of our product in their top product range because of the apparently high cost of our product, and used other cheaper products from other suppliers in their big volume medium and low-price product ranges.

So far, our product was positioned at the high end of the quality range, i.e. good quality but high price. The market segment was those customers who cared more about quality than cost. In fact we had occupied a very good market share in this market segment (estimated to be 30-40% share). However, the total volume in this high price quality product market segment was small (see Figure 6.4). The medium price market segment was much bigger in volume. In sales experience, we also noted that large feed mills (for example, producing 10,000 tons feed per month) did not normally use much flavour at all, because they believed their products did not need to use flavours to please their buyers; the big users of flavours were, in fact, those medium to medium-small size feed mills producing around 2000 tons pig feed per month. They could buy 1 ton/month of our flavour, much more than large feed mills would normally order (300-500 kg/month). However, this segment of customers were very sensitive to price and would not pay higher prices. Our products at unit price of over 50 RMB/kg were difficult to be accepted. At the time, the competitive situation had changed too. The general market prices for flavours from local suppliers had reduced to 15-25 RMB/kg, and the performance to price ratio of local products had been significantly improved. Since the profit margin of feed industry was reduced, feed mills were increasingly more cost-conscious and would squeeze out expensive raw materials. This imposed a threat to us.

Figure 6.4: Market segments for Luctarom. The target segment of Luctarom in 1999 was the "high quality and price" segment. In 2002, a new "mid-high" segment was also targeted.

As the market requirements changed, our strategy had to be modified accordingly. Despite the fact that Luctarom's "high quality-high price" brand image and product position had been established, we needed to get into the "medium quality- medium price" market segment in order to get enough market share to consolidate our position in the market. Our new strategy was to strengthen our leadership position in top range market segment by creating even better performing products, and at the same time, extend to the medium-high range market segment (see Figure 6.3). New products to target on the medium range market segment would be around 25-30 RMB/kg, with an application cost of around 15 RMB/ton feed. The launch of Luctarom 40797 at mid-2001 (priced at 30 RMB/kg, application cost 18-20 RMB/ton feed) was the first step in this strategy. In March 2002, a new product, Luctarom 44971, was launched. Subsequently, a series of new products were also developed with different sensory profiles. Specific products were also developed for premix applications within this price range.

6.7 Differentiation by customerization and service

By 2001, competition in the feed flavour market of China had become more and more intensive. Although some of the previously active brand names, such as "Hongda", "Lixiang", "Harse", had gradually lost their market stands in the market; "Dadi" had grown stronger in market position and was the largest in terms of volume of product sold. A new local company "Meinong" (from Shanghai ), recruiting a flavourist who previously worked for Jiamei, entered the market with a vigorous marketing campaign aiming ambitiously to become the No.1 supplier in feed flavours. Bayer Sichuan , a German company joint venture, had started its feed flavour production in Sichuan and shared the similar target market segment as Luctarom. Foreign products from Feed Flavours (USA) and Pancosma ( Switzerland ) had also entered the Chinese market. Local products had also improved in quality, particularly in the physical appearance of the products. Some competitors started to use the same type of carrier for their products as that used for Luctarom. The differences in the physical attributes became smaller. By now, Luctarom had become one of the significant brands of feed flavours in the China market. As its market share increased, it had attracted the attacks and imitation by its competitors. Dadi and Meinong had been working on imitating Luctarom 1806 and 38972 and offered cheaper alternatives to Lucta customers.

In face of the tougher competition, at a meeting of the board of directors held in May 2001, two important decisions were made: 1) start manufacturing of Luctarom, Luctacid and Luctamold in China ; 2) start providing tailor-made solution to customers as a point of differentiation. The first installation of production facilities had been in place by end of 2001. At earlier 2002, we started to import essence nucleus in liquid form from Lucta Spain , and other raw materials were sourced locally. The final products were thus made in China . Local manufacturing had enhanced the competitiveness of Lucta China , lowered cost and lowered stock of finished products; moreover, it had also made it feasible to provide customerized products to customers. In our customerized approach, we provided products to customers with labels such as "for the exclusive use of XXX company". Our target was to supply to our customers products of "individuality" based on their choice. Working together with the flavour creation department of Lucta Spain , we created as system which would enable us to provide a range of products based on a smaller set of product nucleus.

Our sales activities were also refocused. More emphasis was now placed on differentiation by service and by our capability to provide customer-driven solutions. The mode of our sale activities was changed from selling products to providing service and customer-solutions. Sales personnel job nature was also changed, from "sale executives" to "customer service executives". Further and regular training was provided to our sales staff to improve their capability and skills for their new role.

There were two key elements in our service differentiation strategy. One element was to provide solutions to meet our customer needs. For some of these requirements, the work could be accomplished at sale staff level. Each of our sales staff was equipped with a notebook computer, and was trained to be able to make professional presentations to customers and formulate a "Customer Solution Report" to be delivered to customers either by email or in well-presented printed format. For some more complex requirements, the work had to be accomplished with the participation of our technical department and the product application laboratory. With this type, normally the customers needed to provide samples of their products for use as substrates in our laboratory tests. Different solutions were tested and screened before selecting two or more solutions for submission to the customers for evaluation.

Figure 6.5. Training sales staff in computing skills to meet the demands of the new strategy which was based on service differentiation.

The second element of our service differentiation was to provide training to our customers. The training subjects may include technologies related to the use of feed additives, general aspects of animal nutrition and feed formulation, sales management and selling skills. Sales skill trainings were given to customers' sales team. The owner of one of our largest customers in Shanghai said to me: "The collaboration between our two companies in the past two years has been fine. The quality of your products is very good, but there are many other products which are superior in price than yours. Many suppliers often come to me to promote their products. If you can help us to train our sales staff so that our company can improve our competitiveness, there is no need to talk about price anymore." This view was shared by many of our customers, particularly those medium size feed mills with a product scale of over 2000 ton feed per month. Most of the feed mill owners in this group had limited levels of education. There was a gap between the demand for management knowledge by the business and what the owner could offer. When our service was given to these companies, the feedback was good.

Backham & Vincentis (1999) classified business buyers into three groups, each requiring different type of selling :

1) price-orientated customers (transactional selling): they want value through lowest price

2) solution-oriented customers (consultative selling): they want value through more benefit and advice

3) strategic value customers (enterprise selling): they want value through the supplier co-investing and participating in the customer business.

In the feed additive business in China , we had seen groups 1 and 2. Although group 1 was by far the biggest in number, there were an increasing numbers of customers in group 2. This group of customers were the ones addressed in our service-based strategy. I have not yet come across customers of group 3, perhaps because the industry is not yet consolidated.

Preliminary results indicated that the service differentiation strategy was successful in improving the competitiveness of Lucta China . The service we offered in fact was the technical know-how of our staff. In a developing country like China , where the technical competency of the industry is still relatively low, the provision of additional knowledge and technical know-how can be an added value to the products.

In accordance to the approach of providing customerized product solutions and service to customers, internally, the company also adopted a "customer focus" philosophy. The objective was to enhance the loyalty and thus retention of value customers. We put more importance on building customer-relationship. A Customer Relationship Management (CRM) software system was also implemented to support our key accounts management.

6.8. Sub-segmenting the market

Market for a particular product/service is composed of all potential customers who have needs for the product/service and are willing to pay money in exchange to satisfy their needs. " Potential customer", "needs" and "satisfy needs" are the three key elements. In marketing, there are accordingly three questions which we need to ask all the time: Who are our target/real customers? What are their needs? What and how should we do in order to win the customers preference? Only when we know clearly the answers to these questions that we can direct our limited resources to create successful sales. Potential customers have different needs. The grouping of customers according to their needs or other certain criteria is the process of market segmentation.

Market segmentation is a useful means to help us identify who are our real potential customers which we can target on. Many factors can be used as criteria for grouping, including: geographic location, industry, nature of business, size of company, technological capability, purchase size, quality or cost orientation, personal factors etc. The choice of criteria obviously varies with industry and individual company.

When applying to our business, we had segmented the feed flavour market using the quality and price variable, for the purpose of business strategy setting. This has been discussed already in Chapter 4. However, for the purpose of marketing operations, we had sub-segmented the market of Luctarom using several variables (or criteria). Details and results are listed in Table 6.2. Below I highlight the characteristics of some market segments.

1). Geographical areas: We used "province" as a unit of segment. Neighbouring provinces were treated as blocks for ease of sales management. There were large differences in the degree of feed industry development between provinces even within a block. Guangdong was the most developed, where feed mills were bigger in size, and pig production were most intensive. In contrast, in most other provinces, feed mills were much smaller in size. For this reason, in Guangdong , we sold our products by direct sale, but in some other provinces we had to use distributors. There was also a difference between the south and the north in the type of feed products manufactured. In the southern and southeastern provinces, complete mixed ration was the main product; whereas in the north, where energy feed (typically corn) was grown, protein concentrate was the main feed product (farmers could prepare the complete feed simply by adding corn to protein concentrate).

2). Production scale of customers: Our earlier strategy was just to concentrate our sales activities on feed mills of large production scales. However, we later found that large feed mills did not necessarily buy big volume of flavour products. Some big feed mills did not use flavours at all. Chia Tai feed mills, the agro-industry business of the Thai conglomerate Charoen Pokphand (CP) Group, were examples. They did not use flavour up until recently because their nutritionists considered that flavour was used only to compensate poor quality of raw materials. In fact medium-size feed mills used more flavour in their feed products.

3). Customer's products: Depending on the type of feed products feed mills made, different flavours should be recommended. Moreover pelleted feed also required more temperature resistant flavours.

4). Purpose of using flavour: Different flavour products should be recommended depending on the purpose. For instance, Luctarom 1806 should be recommended if the purpose was "boosting feed intake"; while Luctarom 38972 or others may be recommended if the purpose was "pleasing the buyers".

5). Sales channel: If the feed mill's sales of product was through distributors, in our experience it would be more suitable to recommend stronger flavours, even though the customers may think that feed intake improvement was what they needed. Their market needed stronger flavours instead.

6). Customer's product positioning: Those feed mills whose products were low-cost orientated were less likely to buy high quality and expensive raw materials. For instance, Hope Group, which positioned as cost-leadership would not be our customer yet despite its size and huge potential (producing 3 million ton feed a year). We could only waste our time and resources trying to work on it unless we had suitable products to offer.

7). Ownership of business: We found it easier to work with foreign-owned and privately-owned companies than state-owned companies. Foreign-owned companies were easier to accept our products since most of these companies positioned their products by quality differentiation and were thus willing to use high quality raw materials as well. Decision makers in state-owned companies often did not put product performance and price in their consideration. Personal interest was often the prior consideration. Private business cared more about benefit from the product and would be workable if our product really delivered benefits.

8). Age of technical manager: Technical manager was the main decision maker on the choice of feed additive in most feed mills in China . We repeatedly found that those who were older than 50 years old tended to be conservative, unwilling to accept new things and difficult to communicate in technical matters (people of this age group had their education before or during the Cultural Revolution.). The chance of getting business was significantly lower. Very often, this group of technical managers were unwilling to younger, though more knowledgeable, people for the sake of not losing face.

9). Qualification of the technical manager: Technical managers with high qualifications (MSc or PhD degrees) were more ready to adopt new things and try new raw material products. But doing business with them required people of similar or higher qualifications to interact with them. If the technical manager did not have a university degree, his readiness/willingness to learn and to adopt new things declined with age. We found that technical managers under 30 year, even without university degree, were also easy for us to taking in our products, but this group required a lot of technical assistance.

Through market segmentation and analysis of the needs of the different groups of customers, we were able to identify clearly who were our target customers (whose needs matched our products offerings). Our target market segments, had the following characteristics: 1) large to medium size feed mills, foreign or privately owned, located within the geographical areas (provinces) where we operated; 2) they were quality orientated and not low-cost orientated. 3) their technical managers should be below 45-year of age and had university or postgraduate degrees. Depending on the feeds they produced, the type of sales channel they use for their feeds, and their specific needs for our product, different Luctarom products should be recommended.

Table 6.2: Criteria used for the segmentation of feed flavour market in China .

Criteria	Segments
1. Geographical areas	a) South China ( Guangdong , Guangxi , Hunan , Fujian ) b) East China ( Shanghai , Zhejian , Jiangsu ) c) Southwest China ( Sichuan , Chongqin , Yunnan ) d) Central-North China ( Hubei , Henan , Beijing , Tianjin ) e) Northeast China ( Shandong , Liaonin, Heilongjian)
2. Size of customer	a) Large size: complete feed >10000 ton/month or premix > 500 ton/month b) Medium size: complete feed 1000-10000 ton/month or premix 200-500 ton/month c) Small size: complete feed <1000 ton/month or premix <200 ton/month
3. Customer's products	a) Complete feed (pelleted mixed ration) b) Concentrate c) Premix
4. Purpose of using flavour	a) To improve animal feed intake b) To improve feed marketing traits
5. Sales channel	a) Product sold direct to pig farms b) Product sold through distributors
6. Customer's product position	a) Low cost orientated b) Quality orientated
7. Ownership of business	a) Privately-owned b) Foreign venture or joint venture c) State-owned
8. Age of technical manager	a) Old (>50): conservative, afraid of trying new things b) Young (<40): willing to take in new things
9. Qualification of technical manager	a) No university education b) BSc c) MSc or PhD

In terms of targeted geographical areas, we progressed from South China in 1999 to East China and Central China provinces in 2001, and to North China in 2002. Gradually the area would expand to Northeast China in 2003.

In our experience, the keys for success of sales activities were: identify the right target customers, formulate the right marketing mix (which consists of product, price, promotion and place), and focus all the resources on those targets. Focusing was the means for reducing selling cost and getting better results.

6.9. sales channels for feed additives

Feed industry in China started effectively only in 1980 when Thailand 's feed giant Chia Tai (or CP) Group set up feed mills in China . Within the short span of development, the industry had not reached its maturity. There were two characteristics: 1) feed manufacturers were large in number and small in size. Table 6.3 showed that in 1998 there were 13742 feed mils with production capacity greater than 1 ton/hour (equivalent to 300 ton/month). Only 13% had a production capacity greater than 5 ton/hour (1500 ton/month). These feed mills spread over a large geographical area (Each of the over 25 provinces of China could be a size of a country in Europe ). 2) Collection of payment from the goods sold could be a problem for all business in China . In the feed industry, feed manufacturers owed their suppliers money, and were owed by their distributors, who in turn were owed by the animal producers (e.g. the pig or poultry farms). Any problem occurred to any node of this chain could easily result in a risk of dead payments for the front part of the chain, the suppliers. Collection of debt took a substantial part of business time (for Lucta China , up to 30-40 % of our sales time).

Table 6.3: The number of feed manufacturers in China from 1990 to 1998.

Year	Production capacity*
	Greater than 1 ton/hour	Greater than 5 ton/hour
1990	6045	555 ( 8% of total)
1995	12678	1424 (10% of total)
1996	12107	1503 (11% of total)
1997	11301	1567 (12% of total)
1998	11950	1792 (13% of total)

* Production capacity of 1 and 5 ton/hour are equivalent to 300 and 1500

tons per month per shift assuming 10 hours per day. Data: China Feed (1999).

With the feed additive business, with customers being feed manufacturers, the most common sales channel is the "product manufacturer ¨C distributors ¨C users" type. International business such as Roche, Pfizer, BASF, Finnfeeds, ADM, Bayer, and Zinpro, and more local feed additive manufacturers (including our competitor Dadi, and Meinong), used this mode of sales distribution. Typically, one province is regarded as a sales territory unit; and one distributor is set up in each unit. The use of distributors in this sale channel has the following advantages:

1) Benefit of using the existing sales network (including sales resources) of local distributors and the customer relationship for faster market coverage.

2) Better control over accounts receivables and thus less risk. It is easier to control one distributor than to control hundreds of individual feed mills.

3) Reduced sales expenses, since part of the cost of sales is taken up by distributors.

However, there are also disadvantages of using the distributors:

1) Lower profit margin

2) Loss of direct contact with the final customers

3) Relies heavily on capability of the distributor and the amount of resources the distributor allocates to your products (distributors often also market other companies', but not competitors', products). If the relationship with the distributor goes wrong, there is a risk of losing the network of customers already established.

In order to overcome the disadvantages of 2) and 3), feed additive manufacturers usually provide the direct service to key customers while the goods are still supplied by their distributors. In this way, the direct connection between the manufacturer and the final users is enhanced.

Initially Lucta did not wish to use distributors and decided that only direct sales would be used in China . It was agreed however, by end of 2000 to experiment with one distributor in Henan province, and subsequently three other distributors at end of 2001.

In China the use of distributors seems necessary. The reason was that there were marked differences between China and Europe in the feed industry structure: 1) In Europe , feed mills are large in scale and small in number. For instance, in the UK , there are fewer than 10 feed mills in total. The feed industry is mature. 2) In Europe , generally speaking, there is no problem of collecting payment for good sold to customers. Thus the risk of bad debt is much lower. 3) The geographical span of each country is small, making it possible for direct sales with reasonable expenses.

The Chinese situations have been discussed earlier in this section. In order for us to conduct direct sale, we must own a large team of sales staff and technical support. Conti Beijing company used this approach of direct sales, but the company had 22 sales offices, over 100 sales and technical staff and 8 warehouses.

Considering the Chinese specific conditions and our company situations, I believe that the sales channel suitable to Lucta China should be the one based on distributors in most areas, yet combined with direct sales in some other areas. Currently, we carried out direct sales in Guangdong , Fujian , Beijing and East China provinces, and had one distributor (exclusive distribution) in each of the four provinces of Guangxi , Hunan , Sichuan and Henan . The distributors were not left alone. Training was given to distributor staff twice a year. One of our sale staff was allocated to support one or more distributors, to facilitate sales into key customers. For larger customers, successful sales may require the technical department and product application laboratory participated in providing solutions. To enhance the relationship with customers in the distribution areas, technical director, sales manager, and even general manager may also visit the customers although they were receiving our products through distributors. Figure 6.6 schematically illustrates the sales channels used by Lucta China .

Figure 6.6. A schematic illustration of the sales channels used by Lucta China . In some areas direct-sales was used, and the others distributors were use. The circles denote customers, with the large circles large customers; dotted line denotes direct support from Lucta to customers.

Our criteria for selection of distributors were: the candidate should:

1) be highly reliable so to reduce the risk of bad debt;

2) have existing network of customers;

3) have certain level of technical capability, since Lucta products required technical sales;

4) have certain size of sale team. On the other hand, the distributor does not need to be very big since a big company may not market our products as its main business.

5) not market competitors' products.

Whether the sales channel using distributors is successful or not, the key lies in whether one can effectively manage the distributors. Our experience was:

1) Always safeguard the interest of the distributors; increase their share of profit when possible. Treat the distributor as a staff member of our own, given him target, and reward for achieving the target.

2) Having distributors does not mean that one can take a rest. The manufacturer should now take of the role of support and management.

3) There must be a suitable pricing system so that there is not price inconsistency between direct sales and distributor sales.

The use of distributors in our sales channel could be regarded as successful. At 2002, distributors sales ranked in the first 6 places of our total sales. In Hunan province, the sales revenue was 50,000 RMB/month with direct sale by one dedicated salesman in 2001; when the sale was carried out through a distributor in 2002, the revenue increased to 500,000 RMB/month yet without our input of one dedicated sales staff.

Figure 6.7. Training of salesmen from distributors. In order to get the most out from distributors to sell our products, it is necessary to train them.

Figure 6.8. Two photographs of a scene of the feed additive market in Chengdu , Sichuan Province. Large feed mills would receive delivery to their plants. Smaller feed mills and final users (pig farms) may buy from these shops. Retail can account for a substantial proportion of total sales. The first right is the shop owned by Lucta's distributor in Sichuan .

6.10 Summary

The story described in this chapter illustrated a business in real life, a process of try and error, failure and success. At sales operations level, the keys used as the differentiation point started from tangible attributes, shifted to benefits and intangible attributes, and finally changed to company's capability in providing customer-tailor-made solutions (Figure 6.9). The strategy set out initially had to be modified accordingly as the business developed and as the market situation changed.

Figure 6.9: The evolving emphasis of differentiation of Luctarom.

The key to the success of doing business is to stay in line with the market conditions and requirements. In a rapidly developing economy like China , the needs are changing rapidly, and competition conditions are also changing rapidly. One should be prepared to response quickly. Products may need to be redesigned; and strategy may need to be modified. Moreover, differences in country characteristics do exist either in the market or in culture between China and Europe . These need to be taken into account in making business strategy and decisions.