Amway in China - A case on B2B strategy PDF

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Amway in China:This case underlines the problems faced by Amway in direct selling/MLM(multi level marketing) in China due to various reservations of the Chinese government. These reservations have a strong background be because of the track record of Amway and particularly “its multi level marketing...

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Amway in China: This case underlines the problems faced by Amway in direct selling/MLM(multi level marketing) in China due to various reservations of the Chinese government. These reservations have a strong background be because of the track record of Amway and particularly “its multi level marketing approach” in this regard. The case has specified three alternatives i-e 1. Change its business model (Alternative 1) 2. Protest against the government in China (Alternative 2) 3. Leave the country (Alternative 3) We would consider each alternative’s pros and cons and see which alternative is the best suited to Amway at this time of turmoil Evaluating the Alternatives To come to a conclusion each alternative has to be looked at in comparison with the other alternatives and see whether a hybrid alternative can be developed if these alternatives fail to satisfy the company objectives. As far as leaving the country is concerned, China is a very big economy with very high growth potential. It wouldn’t be wise for any global firm especially in the current product category to ignore such a big market. Even when its presence was being scrutinized by China it still had sales of $30 million which indicates how big a market opportunity China is if the company is on the right footing in terms of following the regulations and business laws.

China has a communist government which doesn’t promote free economy unless beneficial to its people and helping its government agenda. Although Amway can protest against China in WTO(World Trade Organization), it would not have great chance of winning against the Chinese government because of its shady past and even if it wins in the WTO, it would infact develop bad relations with the Chinese government which would make it very difficult for Amway to operate in China. Now there is the alternative to change its business model. This may also not be a wise thing to do. Because what we have gathered in the case the business model is the distinctive competence of the company and it should be keen to keep capitalizing on the business model instead of outright abandoning it. One thing the company can do is that it can amend its business model so that is becomes less controversial and more efficient. The company can also adopt a separate business model in China until direct selling is unbanned in China. Multi Level Marketing; Promises and Concerns: MLM is a marketing approach, started at around 1960’s which is characterized by an aim to compensate the independent sales force (Independent business units in Amway) of the company for the sales that they generate and also for the further IBO’s they introduce to the company. In this way the incentive is twofold i-e. either bring sales or get new IBO who make sales. The more IBOs a current IBO is able to recruit, the greater is the chance of an exponential increase in profits of the parent IBO. Due to the inherent structure of the MLM the distributors tend to be more focused on selling distributions rather than the product itself which leads it to becoming a pyramid scheme even if Amway intended it not to be one. Amways has also been accused and found guilty of reporting higher profits /revenue than actually earned by FTC in 1979.

The reason for ban on pyramid scheme in most countries is due to the fact that the bottom tier distributors/IBOs in actuality lose money instead of making any until and unless the IBO recruits more IBOs. This generally results in more and more emphasis on recruitment of IBOs rather than the actual selling of products. In Amway’s case the average gross income of a distributor is close to $40 per month. In Wisconsin when charges were levied against Amway the average losses per distributer were $918. So the bottom line is that the new IBOs who have the perception of making good profits while having the flexibility of an independent business are rather mislead and end up with losses.

Recommendations: Amway has been proclaiming since the start of allegations that it has not adopted a pyramid scheme. This can be supported by the fact that pyramid scheme has inherent instability and cannot be sustained in the longer run. Also the current revenue of $17 billion is a huge amount which cannot be only earned through membership kits/fees only(which is approx $50 for each IBO). Amway shouldn’t completely change its business model because it has been one of its primary success factors in becoming one of the biggest private firms in the world. It can alter its model to have a bit more control over its IBO, so as to prevent any wrongdoing on part of the IBOs. It should specify a minimum geographic area for each IBO to cover and award distribution in those areas on first come first serve basis. This would decrease saturation of IBOs in that area and would prevent these IBOs to further try and recruit IBOs instead of actually selling the product. This would also give each IBO an opportunity to become profitable. In the shorter run limiting the micro franchising may erode profits due to lesser IBOs being recruited but in the longer run it will result in more efficiency and more satisfaction amongst IBOs. In tern the IBOs would be more willing to share success factors because of no competition amongst them rather collaborative spirit maybe developed.

Whenever new IBOs are recruited by the existing IBOs, the margins to the existing IBOs should be exponentially decreased so that It becomes more profitable to put effort in selling products rather than dealerships. Amway should also introduce mass media advertising techniques to dispel any impressions of being a pyramid scheme. A rather generalized suggestion important nonetheless is that effective communication between the IBOs and the company should be given very high priority by the company as it needs to maintain good relations with the IBOs especially to keep them informed about the changes in the model and how the IBOs will be able to benefit from these changes. Retail stores can also be increased which can act as both distribution centers for the IBOs and retail outlets for the consumers...