Illustrate either effective or ineffective handling of an administrative situation.
This case was prepared by Ulrich Wiechmann as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright © 1976 by the President and Fellows of Harvard College. Distributed by HBS Case Services, Harvard Business School, Boston, Mass. 02163. All rights reserved to the contributors. Printed in the USA.
1
Minolta Camera Co., Ltd.
“We have got to fix this problem,” said Mr. Katsusaburo Nakamura as he read the letter he had just received from one of his company’s European retailers (see Exhibit 1). It was July 1971. Mr. Nakamura was the manager of the International Division of the Minolta Camera Co., Ltd., a leading manufacturer of cameras and camera accessories, headquartered in Osaka, Japan. The letter he was reading came from Mr. Wilfried Reuter,1 president of a large camera dealership in Germany with stores in Cologne, Düsseldorf, and Essen. Mr. Reuter, who had recently visited the Minolta headquarters in Osaka, complained about the fact that sizeable quantities of Minolta cameras moved through unofficial channels from Hong Kong to Germany, where they were sold at prices substantially below Minolta’s official suggested retail prices.
Mr. Reuter’s letter was not the first of its kind that Mr. Nakamura had received. A number of other authorized dealers in Europe and in the United States had voiced similar complaints about unfair price competition because of an inflow of Minolta cameras through irregular channels. In virtually all of these cases the source of the problem seemed to be that merchants in Hong Kong bypassed Minolta’s regular distribution system by exporting directly to camera retailers abroad. The basis of these export transactions was the significant price difference for Minolta cameras that existed between Hong Kong and Japan on the one hand, and Europe and the United States on the other.
Mr. Nakamura estimated that these “grey exports,” as he called the movement of Minolta cameras through irregular channels, accounted for less than 10% of Minolta’s total camera sales. A disturbing fact, however, was that the magnitude of these transactions, while hard to measure, seemed to be increasing rather than decreasing. Just a few days ago Mr. Nakamura had received a letter from one of Minolta’s exclusive distributors in Europe. The distributor was very concerned that in trying to sell Minolta cameras to the retail accounts in his country he frequently found himself competing against unauthorized exporters in Hong Kong. Attached to the letter was a piece of direct mail promotion that one of these exporters, Inter Export Enterprises, had sent to major camera retailers in the distributor’s country (see Exhibit 2). The distributor commented:
I wish to emphasize that similar direct mail is regularly coming into our market from firms in Hong Kong offering photographic equipment at exceptionally low prices. We are obviously concerned at these overseas firms selling in our market as the recent increase in such selling by overseas outlets causes great discounting to take place in our market and also reduces our market possibilities. There is nothing illegal whatsoever in companies, such as Inter Export, exporting to our country but, like other official photographic equipment distributors, we are being heavily affected because of this unreasonable practice.
1 Certain names, places, and financial data have been disguised.
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577-017 Minolta Camera Co., Ltd.
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Company Background
Minolta Camera Co., Ltd. was one of the leading Japanese manufacturers of still and movie cameras, lenses and camera accessories. Founded in 1928, the company reached a 1970 sales volume of ¥22.8 billion.1 Sales of cameras, lenses and accessories accounted for 82% of this volume. The remaining 18% were predominantly sales of electrostatic office copiers; a small fraction of total company sales was contributed by a diverse line of products, such as light sensing devices, planetaria, hand calculators and specialized optical instruments. Minolta’s sales had shown a rapid growth over the past five years (see Exhibit 3). For 1971, management expected to reach a sales volume of ¥24.5 billion.
Minolta’s line of cameras covered almost the whole spectrum from modestly priced simple cameras for the beginner or occasional photographer to premium priced sophisticated equipment for the serious amateur or the professional photographer. Throughout its history the company had been a pioneer in the development of advanced Japanese camera equipment. The Auto-Minolta, introduced in 1935, was the first range-finder press camera in Japan when it was marketed in 1937. The Minolta SR-7, introduced in 1962, was the world’s first single-lens-reflex camera with a built-in CdS exposure meter. While manufacturing and marketing a full line of still and movie cameras, Minolta’s sales volume and marketing efforts concentrated on sophisticated 35mm single-lens-reflex still cameras and a range of interchangeable lenses for these cameras. With these products Minolta competed against other well known Japanese brands, such as Nikon, Canon, and Asahi Pentax, as well as foreign brands such as Leica. All manufacturers offered essentially similar camera features and equipment. Furthermore, with the exception of the premium-priced Leica, all brands sold at more or less comparable prices.
All of Minolta’s products were manufactured in Japan. The company operated four plants for the manufacturing of cameras and lenses, and two plants for the business machines and other products. In spite of the rapid sales growth over the past years Minolta, like other Japanese camera manufacturers in 1970, was finding it difficult to fill the production capacity in its camera and lens factories. “The whole industry is characterized by a discrepancy between supply and demand and, consequently, intense competition.” Mr. Nakamura observed.
International Activities
Like most Japanese camera manufacturers, Minolta depended heavily on sales outside of Japan. In 1970, Minolta’s camera products were sold in about 100 countries. Exports contributed roughly 60% to the company’s total sales of cameras and equipment; for 1971 management expected this figure to rise to 65%. Moreover, export sales were considerably more profitable than domestic sales in Japan (see Exhibit 4).
Of the various export markets, the United States and Europe were the most important geographical areas for Minolta. The United States accounted for 45% and Europe for 35% of Minolta’s export sales of photographic products.
In the United States and in Germany Minolta had established wholly owned sales subsidiaries. In all other foreign countries the company worked through exclusive distributors for the sale and servicing of its products. It was company policy to appoint only one distributor per country. “We want foreign operations to run as orderly as possible,” Mr. Nakamura explained. Usually, these exclusive distributors carried only Minolta cameras and equipment. Exceptions were made in some
1 1 U.S. $ = ¥360 in 1970.
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Minolta Camera Co., Ltd. 577-017
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of the smaller countries where the distributors had to carry competing camera brands in order to reach a viable sales volume.
Like most marketers of expensive photographic equipment, Minolta and its distributor attempted to be selective in choosing retail outlets for Minolta cameras. Worldwide, Minolta cameras were sold through approximately 25,000 retail stores most of which could be classified as camera specialty stores or camera specialty departments of large department stores.
In most countries the retailer played a very important role in the consumer purchasing process. Consumer studies Minolta had obtained from several major European countries had shown that most consumers relied heavily on the advice and information of the retailer in deciding what type and brand of camera to buy. Moreover, these studies indicated that less than one-fourth of all prospective buyers entered a retail store with a clear idea about the brand of camera they wanted to buy. Even then consumers often would not insist on that particular brand if the dealer argued strongly in favor of another brand.
The marketing of Minolta cameras was fairly standardized from country to country, due to the fact that many of the important dimensions of the marketing activities in each country were determined in Osaka.
The products, model names and packaging were identical in all markets. Occasionally in the past, a distributor had suggested changes in either the packaging or the model design for his country. So far, such suggestions had never been followed; headquarters management in Japan feared that even slight deviations from a uniform product policy would create serious problems in production scheduling and incur additional costs. It was already not easy to provide the brochures, instruction booklets for the cameras, and dealer manuals, in many different languages. Accurate forecasting of demand in each country was a major problem.
Aside from the uniform product policy, the advertising for Minolta cameras was also highly standardized on a worldwide basis. Print media campaigns and posters were mostly prepared in Japan and then sent to the foreign distributors and subsidiaries for placement in local media.
Minolta also granted a uniform worldwide warranty for its products. Within the warranty period of one year, a customer could get free service in case of defective workmanship or materials from any of the authorized Minolta service representatives in the world. Management had always considered free worldwide warranty service, coupled with a uniform worldwide advertising approach, as a mark of quality and prestige in the field of high priced consumer products. It was the accepted practice not only of most major camera manufacturers but also, for example, of famous watchmakers.
While Minolta’s marketing approach showed great similarity from country to country in terms of product, advertising, service and distribution policy, it varied considerably in terms of price. In 1970, all export prices for Minolta products were quoted in U.S. dollars. Wide differences in retail prices existed between one export market and another and also between certain export markets and the Japanese domestic market. The reason for these price differences was primarily fierce competitive conditions in some markets which forced prices down to a very low level. Hong Kong, Singapore, and also Japan were these low price markets.
Exhibit 5 gives an example for the price differences that existed between Japan, Hong Kong, the United States and Germany for a popular Minolta single-lens-reflex camera. For many items in the Minolta product line the price differences were even more drastic. In several instances the price net to dealers in Japan was similar to the landed cost of distributors in Europe and in the U.S. “Generally, the retail prices in Europe and in the U.S. are between 50% and 200% higher than in Hong Kong or Japan; 200% is more typical,” said Mr. Nakamura. “Prices in Hong Kong and Japan are very
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577-017 Minolta Camera Co., Ltd.
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close, usually Hong Kong is only about 5% above retail prices in Japan. Our low prices in Hong Kong and in Japan are dictated by the tough competitive situation and the overhang of supply and demand. Our distributors in Hong Kong and Japan buy from us at prices which are close to our FOB prices for Europe and the U.S. The margins for the distributors and the retailers in Japan and Hong Kong are relatively low; in Hong Kong, in particular, a retailer often takes only a 2–3% markup. Distributors and dealers in Europe and in the U.S. insist on much higher margins. These high margins have largely historical reasons. When Japanese camera manufacturers first started to enter the Western markets after the war, high margins were absolutely necessary to gain distribution. We have thought of reducing these margins in Europe and in the U.S., but we can’t do a thing as long as our competitors keep their margins high.”
Hong Kong and the “Grey Export” Problem
In Hong Kong, Minolta had been represented for more than ten years by Goddard & Co., Ltd. as their exclusive distributor. Goddard was one of the many medium-size specialist camera distributors that operated in Hong Kong. The company carried only Minolta camera products.
Goddard & Co., Ltd. was founded by Mr. George Ho, a Chinese businessman, well connected to business and government circles in Hong Kong. Aside from being a camera distributor, Mr. Ho was associated with other businesses in Hong Kong, the most prominent of which was in the field of TV and radio broadcasting. Through his association with Minolta, Mr. Ho had become a personal friend of Mr. Kazuo Tashima, the founder and president of Minolta.
“Through his connections, Mr. Ho is very valuable to us,” Mr. Nakamura observed. “Mr. Ho comes from an old family with excellent connections to Chinese merchants, banks and the Hong Kong Government. He has a lot of information that we couldn’t get alone.”
Goddard & Co., Ltd. sold to roughly 80 regular retail accounts. Many of these retailers carried very little inventory. “When a customer comes into his store and the retailer doesn’t have a particular item, he orders it from Goddard for same-day delivery,” explained Mr. Nakamura. “Goddard has messenger boys making daily deliveries to retail stores.”
Goddard employed two salesmen for sales to retailers. The salesmen were paid a commission and a small fixed salary. The salary amounted to roughly 30–35% of the salesmen’s total compensation.
While Goddard served about 80 regular Minolta accounts, there was no effective control of who the salesmen visited and to whom they sold. Mr. Nakamura suspected that they occasionally sold to dealers who re-exported Minolta cameras to other parts of the world. “It is hard for Goddard and their salesmen to turn down an order,” Mr. Nakamura commented. “Goddard has done a good selling job for us over the past ten years and we have a very nice relationship with them. But they don’t control distribution. They don’t care about ‘grey exports,’ who they sell to and where the merchandise goes after they have sold it. Of course, distribution control is very hard to do. The people who re-export to Europe and to the U.S. are not easily identified; the frequency and quantity of their purchases may be an indication.”
Minolta’s export sales to Hong Kong had increased rapidly in the past and in 1970 had accounted for almost 4% of the company’s total export sales. This figure was, however, only a fraction of the total volume of Minolta cameras moving from Japan to Hong Kong. Mr. Nakamura explained:
Most of the grey exports to Europe and to the United States are organized by traders in Hong Kong. But the Hong Kong market has to be seen together with the Japanese market. The grey exporters in Hong Kong, we call them “smugglers” although there is nothing illegal about their operations, they actually get most of their merchandise from regular camera retailers in Japan. It
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Minolta Camera Co., Ltd. 577-017
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works like this: Every day a lot of Hong Kong ships and a lot of Chinese sailors come into Japanese ports. Many of these sailors “work” for the “smuggler” in Hong Kong. On his order they each buy one camera tax free1 in a regular camera store, take it back to Hong Kong, deliver it to the “smuggler,” get reimbursed for whatever they paid and receive a commission. Since they buy only one camera and some lenses at a time as personal property there is no export or import documentation necessary.
I don’t know how many cameras move this way to Hong Kong. The retail price level and the supply and demand situation in Japan are decisive factors. If the market in Japan is weak, and it frequently is with so many camera makers around, a lot of merchandise flows into Hong Kong.
What I do know is that this is a regular, organized business. Sometimes the “smugglers” also “employ” airline stewardesses and pilots. The annoying thing is that all this happens strictly within the boundaries of the law; so from that angle there is nothing we can do to stop it.
The individual deliveries that reach Hong Kong from Japan in this manner are then pooled and perhaps combined with purchases the “smuggler” makes in the Hong Kong market to form large shipments to Europe and the United States. Again, this whole export operation is perfectly legal. At the moment, most of the cameras go to Europe, Germany in particular. The buyers at the other end are typically large department stores, discount-type operations, specialty camera retailers, and sometimes even our authorized Minolta dealers.
The Hong Kong exporter can offer very low prices to these outlets. First of all, he buys the merchandise cheaply in Hong Kong or in Japan. He takes only a small markup, usually less than 5%. The price difference between the Far East markets and the markets in Europe and the U.S. is large enough to pay for shipping expenses and still offer an attractive price to the Western dealers. For example, for a shipment from Hong Kong to West Germany we figure that an exporter would have to pay roughly 20.5% of the FOB Hong Kong value for freight, insurance, and import duty.
Sometimes the shipments from Hong Kong don’t go directly to retailers but to somebody who specializes on “grey imports” from Hong Kong. We have identified a number of these firms in Germany, France, Belgium and Switzerland. The “grey importer” usually takes another 7% of the FOB Hong Kong price.
This is pretty much all we know about the situation and probably all we are ever going to know. We certainly also know that these “grey exports” are a danger to our idea of orderly marketing. Just recently 3,000 SR-Ts2 emerged through the Hong Kong system in the U.S. Our regular dealers screamed like hell.3 In Germany, a department store just offered 600 SR-Ts at “drastically reduced prices.” The problem is that these “grey exports” create a lot of attention; the retailers who buy them in Europe or in the United States, of course, heavily advertise that they have a special deal “as long as supply lasts.”
Tackling the Problem
“We have got to fix this problem,” said Mr. Nakamura. He had called a meeting with key executives of the International Division. The meeting was attended by Mr. Isao Izuhara, Manager of the Export Department, Mr. Akio Miyabayashi, General Manager of Minolta Camera Handelsgessellschaft m.b.H. in Hamburg, Germany, Mr. Sadahei Kusumoto, President of Minolta
1 Under Japanese law, foreign visitors were allowed tax exemption on cameras and several other products – a saving of from 10 to 20 per cent. 2 Model designation for one of Minolta’s single-lens-reflex cameras. 3 Minolta’s total export sales of the SR-T model to the U.S. in 1970 had amounted to about 51,000 units.
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577-017 Minolta Camera Co., Ltd.
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Corporation in New York, and Mr. Koji Kusumoto, who had previously been the general manager of Minolta’s Hamburg subsidiary and was now working in the Export Department.
“I agree,” said Mr. Koji Kusumoto. “I got into some very uncomfortable situations with our regular dealers when I was over in Germany. At the last Photokina1 a number of our dealers cornered my sales manager and myself; they wanted to know what Minolta is going to do about it. But I am not sure whether there is anything we can do unless we eliminate the current differences in price that exist between the Far East and the Western markets. Water will flow from high points to low points, and cameras will flow from low price markets to high price markets.”
“Well, our dealers don’t see it quite that way,” replied Mr. Miyabayashi. “They think that what we should do, first of all, is better control of our distribution. They keep arguing that other companies, prestigious watchmakers like Omega, in particular, which have similar price differences, don’t seem to have our problem. Of course, what the dealers don’t say is that wristwatch distribution is much more selective, almost exclusive, than ours; I don’t think that would be feasible for our products.”
“Still, distribution control and stock control, is something we can do and we should do better,” said Mr. Izuhara. “Goddard in Hong Kong just isn’t doing a good job in this respect. We have discussed the matter with them several times. They don’t care where our products go. I think we should control the Hong Kong operation ourselves. I have had some very preliminary discussions with George Ho about this. I think there may be a chance of talking him into changing Goddard into a 50:50 joint venture with us. We have made some rough calculations; for a 50:50 joint venture we might need a capital expenditure of roughly HK$600,000.”
“But certainly, we would want more than an equity participation,” said Mr. Nakamura. “If we do it, we would have to insist on Japanese management of the joint venture. I wonder whether George Ho would go along with that.”
“If he doesn’t, I believe that we should terminate our agreement with Goddard and establish a wholly owned subsidiary in Hong Kong,” Mr. Izuhara replied.
“These are all very drastic steps,” commented Mr. Sadahei Kusumoto from New York. “I think there are a number of tactical changes we can make to improve the situation. I believe that if we sold our cameras under different model names in the Far East and in the West we would reduce the inflow of ‘grey exports’ from Hong Kong significantly. Consumers in the United States would be reluctant to buy the Hong Kong imports if the imports carried a model designation that is different from the models we show in our advertising. They would feel that they would get an inferior model if they bought the lower priced Hong Kong imports.”
“Furthermore, we could change our current warranty policy under which we service any camera free of charge during the warranty period, irrespective of where the camera was bought. Why not impose a handling charge, say $25.00, for any camera we receive for service that was not imported through the Minolta Corporation in New York? We could make similar arrangements in Europe. Since each of our cameras and lenses carries a number, it’s easy to determine whether we imported a specific camera or whether it reached the U.S. in some other way.”
“These are all very interesting ideas,” said Mr. Nakamura. “I wish we had more information about the ‘grey export’ problem. But I am sure we won’t get much more. We have got to make some decisions on the basis of what we know now. The fluctuation in currency exchange rates we are experiencing at the moment certainly doesn’t make this job easier.”
1 Important trade exhibition of photographic products in Cologne, Germany.
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Minolta Camera Co., Ltd. 577-017
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Exhibit 1 Letter of a Camera Retailer in Germany
Dear Mr. Nakamura,
After having safely returned to Cologne, I would like to thank you again for the kind welcome extended to me at the occasion of my visit to Japan. It was certainly a pleasure to see you and have the opportunity to exchange thoughts and discuss various matters with you.
On my way home I spent one day in Hong Kong, where I had to notice the very low prices at which the Minolta cameras and particularly the lenses are offered. For a German photo dealer it is still very much worthwhile to purchase the products in Hong Kong direct. This situation should really urgently be changed. We would like to point out again that this price difference makes business very difficult and has repeatedly been the subject for unpleasant discussions with some of our customers.
We are convinced, that you as International Manager can appreciate our difficulties and we suggest that you exchange your position with the Manager of your Domestic Department for a while, which would most certainly make him understand our problems much better afterwards!
We sincerely hope that the “problem Hong Kong” can soon be solved. Meanwhile, we remain, with best regards.
yours very truly
REUTER PHOTO AG
Wilfried Reuter President
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577-017 Minolta Camera Co., Ltd.
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Exhibit 2 Direct Mail Promotion of an Export Firm Sent to European Camera Outlets
Dear Sirs,
Understanding that you are important photographic dealers, we address this letter with the hope of establishing business relations with your esteemed firm.
By way of introduction, we are a Japanese firm with head-office in Tokyo. We specialize in the photo line trade.
From the free port of Hongkong, we are in position to supply you with all Japanese brands of cameras and accessories at low Hongkong prices. We are in position to supply ASAHI PENTAX, CANNON, FUJICA, KONICA, KOWA, MAMIYA, MINOLTA, MIRANDA, YASHICA, OLYMPUS, NIKON and also all brands of accessories.
Please specify the brand-name you are particularly interested in. Offers will be promptly submitted for your perusal and consideration.
We are also in position to supply Hongkong made Transistor Radios.
Very truly yours,
INTER EXPORT ENTERPRISES
HONG KONG B.C.C.
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Minolta Camera Co., Ltd. 577-017
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Exhibit 3 Consolidated Sales 1965–1971
Year Total Sales (Billion ¥) Sales of Cameras, Lenses and
Accessories as Percentage of Total
1965 8.4 95% 1966 9.0 92 1967 12.1 84 1968 14.7 82 1969 18.5 79 1970 22.8 82 1971* 24.5 86 *Estimate. Source: Company records.
Exhibit 4 Profit and Loss Statement for Sales of Camera Products, October 1970 – March 1971, and April 1971 – September 1971,* (million yen)
October ’70 – March ’71 April ’71 – September ’71*
(million ¥) (million ¥)
Domestic Export Domestic Export Sales 3,684 5,869 3,510 7,036 Cost of Goods Sold 2,382 4,105 2,304 5,011 Gross Profit 1,302 1,764 1,206 2,025 Selling and Administrative Expense 1,092 902 1,133 1,045 Operating Profit 210 862 73 980 *Estimate. Source: Company records.
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577-017 Minolta Camera Co., Ltd.
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Exhibit 5 Price Schedule for a Minolta Single-Lens-Reflex Camera with Case in Japan, Hong Kong, Germany and the United States, First Quarter 1971* (in U.S. dollars)
Japan Hong Kong Germany U.S.A.** Production cost 62 62 62 58 Price net to wholesalers 108 – – – Export price FOB Japan – 98 94 99
Landed cost to distributors – 121 130 123 Price net to dealers 136 148 189 205
Retail list price 170 174 270 342 Approximate actual retail price 160 165 248–271 260–280 *Disguised data. **Case not included. Source: Company records.
Exchange Rates: Early 1971: 1 US$ = ¥360 = HK$6.06 = DM 3.66
In mid-1971 there were strong signs that significant changes in the exchange rates would take place. The position of the U.S. dollar had weakened. The German mark had begun to float. Market observers predicted a devaluation of the U.S. dollar by 5 to 10 percent before the end of 1971.
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