Situation Analysis

UVA-M-0772 April 21, 2009

This case was prepared by Jaishankar Natarajan (MBA 2008) under the supervision of Robert E. Spekman, Tayloe

Murphy Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate

effective or ineffective handling of an administrative situation. Copyright  2009 by the University of Virginia

Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to

[email protected]. No part of this publication may be reproduced, stored in a retrieval system,

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SULLAIR: REDEFINING ITS CHANNEL OF DISTRIBUTION

Introduction

In February 2007, John Thompson, vice-president and general manager of customer care

at Sullair, was drafting his presentation for the Sullair distributors’ conference in Florida.

Although the conference was an annual event, the agenda for this year’s conference had taken

the previous six months to prepare. Some of the issues that remained unresolved were Sullair’s

current go-to-market strategy, its overall growth objectives—in light of its plan not to increase

the number of distributor partnerships—and the performance measurement tools required to

standardize the end-use customer experience. To be consistent with the Sullair culture, both the

agenda for this meeting and the proposed strategy would revolve around the end-use customers’

experience.

Thompson had commissioned an extensive survey to provide the data upon which the

new go-to-market strategy would be built. The survey was intended to gather information from

both distributors and customers and reflected both the end-use customers’ experiences and

distributors’ perceptions of their relationship with Sullair. Sullair was very mindful that

customers did not differentiate between the company and its independent distributors. In the

minds of the end user, the distributors simply were an extension of Sullair—Sullair’s face to the

marketplace—and were viewed as Sullair’s external sales force. Yet due to the autonomous

nature of the relationship with its channel, Sullair had difficulty imparting to them a sense of

urgency for growth; many distributorships were managed to provide the principal owners

adequate sales to support a comfortable lifestyle, with little motivation to grow their business as

Sullair might have wished.

Ingersoll-Rand (IR) and Atlas Copco (AC), the market leaders and holders of the largest

worldwide and U.S. market shares, had changed their distribution strategies from working with

independent distributors to the multi-channel format, going to market through multiple channels.

Both firms had company-owned stores that competed with their independent distributors, thereby

creating some pressure in the market for IR and AC distributors to grow their businesses. Such

competitive actions begged the question of whether Sullair needed to re-think its channel D O

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strategy and its approach to its own distributors. Thompson decided to pore over his survey

results again before beginning his PowerPoint presentation, since a change in Sullair’s current

approach to distribution could have very serious consequences.

United Technologies

United Technologies (UTC) provided high-technology products and services to the

building systems and aerospace industries worldwide through their industry-leading businesses:

Carrier, Hamilton Sundstrand, Otis, Pratt & Whitney, Sikorsky, UTC Fire & Security and UTC

Power. In 2007, UTC revenues were $54.8 billion, earnings per share $4.27 and net income $4.2

billion, placing it among the leaders in its category. Exhibit 1 summarizes United Technologies’

select financial data for 2007.

UTC had many direct competitors for each of its brands, but because of UTC’s size and

diversification, stockholders usually compared the company to such industrial giants as General

Electric (GE), Tyco, and Honeywell. GE’s total revenues in 2007 were $172.7 billion, earnings

per share of $2.18, and net income of $22.2 billion. Tyco had total revenues of $18.8 billion with

a net income of $(1.74) billion and Honeywell had revenues of $34.6 billion, earnings per share

of $3.16, and net income of $2.44 billion. UTC enjoyed a stellar reputation among shareholders,

stakeholders, and institutional investors, and its individual businesses enjoyed very high brand

awareness with the Otis and Carrier brands as well as with the Sullair name. Several of its

competitors, such as GE and Honeywell, preferred to maintain a single brand image across its

entire product lines.

UTC businesses

Carrier was the world’s largest manufacturer and distributor of HVAC and refrigeration

systems. It also produced food service equipment and heating/cooling systems and refrigeration-

related controls for residential, commercial, industrial, and transportation applications. Carrier

provided installation, retrofit, and aftermarket services and components for the products it sold

and for those of other manufacturers in the HVAC and refrigeration industries. Sales were made

both directly to the end customer and through manufacturers’ representatives, distributors,

wholesalers, dealers, and retail outlets.

Otis was the world’s largest manufacturer, installer, and servicer of elevators and

escalators. Otis designed, manufactured, sold, and installed a wide range of passenger and freight

elevators for low-, medium- and high-speed applications, as well as a broad line of escalators and

moving walkways. In fact, an Otis elevator was in every one of the world’s tallest buildings. In

addition to new equipment, Otis provided modernization products to upgrade elevators and

escalators as well as maintenance services for both its products and those of other manufacturers.

Otis sold directly to the end customer and, to a limited extent, through sales representatives and

distributors.

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Pratt & Whitney, one of the world’s leading suppliers of commercial, general aviation,

and military aircraft engines, produced families of engines for wide-body, narrow-body, and

military aircraft as well as for auxiliary power units, industrial applications, and space propulsion

systems. Pratt & Whitney’s products were sold principally to air framers such as Boeing and

Airbus, airlines and other aircraft operators, aircraft leasing companies, and U.S. and foreign

governments. The vast majority of sales were made directly to their customers and, to a limited

extent, through independent distributors or foreign sales representatives. Through its Rocketdyne

division, UTC provided the propulsion systems for the Space Shuttle.

Sikorsky was one of the world’s largest manufacturers of military and commercial

helicopters and also produced unmanned aircraft. Similar to its sister companies, they provided

aftermarket parts and services for helicopter and aircraft. Sikorsky’s aftermarket business

included spare parts sales, overhaul and repair services, maintenance contracts, and logistics

support programs for helicopters and other aircraft. Sales were made directly by Sikorsky’s own

sales force, its subsidiaries, and joint venture partners. Sikorsky was increasingly expanding its

service offering in logistics support programs. In a number of instances, Sikorsky partnered with

its governmental and commercial customers to manage and provide maintenance and repair

services.

UTC Fire & Security was a global provider of security and fire safety products and

services. UTC’s Fire & Security sector was created in the second quarter of 2005 upon the

acquisition of Kidde, which added industrial, retail and commercial fire safety businesses to the

earlier Chubb acquisition. In the electronic security industry, UTC Fire & Security provided

system integration, installation, and service of intruder alarms, access control systems, and video

surveillance systems under several brand names, including Chubb. In the fire safety industry,

UTC Fire & Security designed, manufactured, integrated, installed, sold, and serviced a wide

range of specialty hazard detection and fixed-suppression products and systems and

manufactured, sold, and serviced portable fire extinguishers and other fire-fighting equipment

under several brand names, including Kidde. UTC Fire & Security also provided monitoring,

response and security personnel services, including cash-in-transit security, to complement its

electronic security and fire safety businesses. UTC Fire & Security’s operations were

predominantly outside the United States. UTC Fire & Security sold directly to end-use customer

as well as through manufacturers’ representatives, distributors, dealers and U.S. retail

distribution.

UTC Power provided fuel cell systems for on-site, transportation, space, and defense

applications, including the U.S. space shuttle program. UTC Power also provided combined

cooling, heating, and power systems for commercial and industrial applications, geothermal

power systems, and energy consulting services.

Hamilton Sundstrand was one of the world’s leading suppliers of technologically

advanced aerospace and industrial products and aftermarket services for diversified industries

worldwide. Hamilton Sundstrand’s aerospace products (i.e., power generation management and

distribution systems, flight systems, engine control systems, environmental control systems, fire

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protection and detection systems, auxiliary power units, and propeller systems) served

commercial, military, regional, business, and general aviation, as well as space and undersea

applications. Aftermarket services included spare parts, overhaul and repair, engineering and

technical support, and fleet maintenance programs. Hamilton Sundstrand sold aerospace products

to airframe manufacturers, the U.S. and foreign governments, aircraft operators and independent

distributors.

Hamilton Sundstrand’s principal industrial products (e.g., air compressors, metering

pumps, and fluid handling equipment) served industries involved with raw material processing,

bulk material handling, construction, hydrocarbon and chemical processing, and water and

wastewater treatment. These products were sold under the Sullair, Sundyne, Milton Roy, and

other brand names directly to end-users through manufacturers’ representatives and distributors.

Sullair

Background

Sullair began in the early 1960s as an industry leader of compressed air technology. Over

the ensuing twenty years it developed stationary screw compressors for industrial clients, making

significant technological inroads by responding to customer needs with innovative product

offerings. By the 1980s, Sullair established a market-dominating portfolio of air compressor

technology by utilizing its rotary screw expertise. In 1984, Sullair was acquired by Sundstrand,

and in 1999, Sundstrand merged with UTC’s Hamilton Standard division, creating Hamilton

Sundstrand. As one of the industrial business units of Hamilton Sundstrand, Sullair benefited

from expanded aftermarket opportunities and significant economies of scale through its

affiliation with other UTC companies.

Technology

Central to Sullair’s product offerings was rotary screw technology, which displaced and

compressed air with rotating intermeshed helical screw elements contained within a specially

shaped chamber. While several mechanisms compressed air, such as scroll pumps and piston

technologies, rotary screw technology was considered to be at the high end of the market.

(Exhibit 2 shows the various components of a Sullair air compressor.) In the 40-, 50-, and 60-

horsepower markets, the advanced Sullair rotary screw technology set new standards in every

category. Specifically, Sullair excelled in the following areas:

 Compact size— The compressors measured only 62” x 34.5” x 61.5”, more compact than any other product on the market. It could fit through a standard 36” door, simplifying

installation. Also, the maintenance areas were on the side, minimizing the clearance and

floor space required.

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 Low sound levels— The compressors incorporated such noise-reduction features as rubber isolators on which the air end, motor, and service tank were mounted, insulated

intake and exhaust louvers, and a low-noise centrifugal fan.

 Serviceability— Routine maintenance was greatly simplified with Sullair’s compressors. Twelve features reduced the serviceability and made for a cleaner, safer work

environment and cost-effective compressor, including unimpeded access to the inside of

the compressor, an electric solenoid drain, and simplified part-changing processes.

 Cost of operation— The Optimal air filter provided filtration that was 10 times better than the standard cellulose media filters offered by the competitors, increasing life of

many parts by reducing wear and tear. In addition, the gears were designed with high

helix angles to reduce gear stress and increase bearing life.

 Energy efficiency— Energy costs were typically 77% of the total cost of owning the compressors. Features such as an air end with an integrated inlet valve, a high-efficiency

centrifugal fan, and a low-pressure-drop air-fluid-separation system enhanced energy

savings.

 Air quality— Sullair air audits reviewed the entire air system, offering three levels of audit corresponding to the U.S. Department of Energy’s standards (walk-through,

assessment, and audit).

Market segments

Sullair focused on two primary market segments: industrial and construction. Industrial

products included large air compression systems such as contaminant removal, vacuum systems,

and air ends. Contaminant removal systems removed oil and water from the compressed air

before it went downstream to a specific application, thereby making cleaner air for certain sterile

applications (e.g., food and pharmaceuticals). Vacuum systems provided pulse-free delivery of

air which is more dependable. Air ends were the heart of the compressor or vacuum: the engine

of a rotary screw compressor comprising two rotary screws encased in housing with an inlet and

an outlet. The main difference between a construction and industrial compressor was that an

industrial compressor was electric-motor-driven and was stationary. A construction compressor

was driven by a diesel engine and was on a base with wheels and therefore portable. In addition,

Sullair’s construction products met the needs of more project-focused customers with a complete

line of portable and open-frame compressors and air-powered tools available for purchase or

rent. Their construction products boasted versatility and flexibility for varying work

environments.

Typically the actual air compressors were sold at low margins. Using a “service-centric”

revenue model, Sullair and its distributors relied on service contracts as a main source of

revenue. To that end, Sullair championed a “total systems” solution-based approach. Essential to

this model was a process whereby Sullair distributors first worked with the customer to

determine the inefficiencies in the customer’s current systems. Then, Sullair and their

distributors looked for opportunities where it could add value. For instance, they sought

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opportunities to implement proprietary software which performed continuous system checks and

air audits, and finally arranged training and service schedules. By monitoring both the supply

side and the demand side of airflow, Sullair could ensure steady system pressure and

uninterrupted workflow. Since energy costs account for 77% of total compressor costs, Sullair’s

approach to system optimization was appealing to both market segments.

Distribution network

Compared to its largest two competitors, Sullair had a distinctive go-to-market strategy,

using a non-contractual exclusive distribution philosophy rather than the dual approach adopted

by other leading air compression manufacturers. Sullair partnered with eighty-eight specialist

distributors in the Americas to reach its end users. While not contractually bound, Sullair

honored its distributors’ trading territories and protected them from other Sullair distributors. In

addition, Sullair had publically stated that it would not compete with its channel by engaging in

any downstream distribution-related activities. Practically, these distributors became trusted

partners to Sullair and were an essential ingredient in their go-to-market strategy. In effect, these

distributors could be considered Sullair’s outbound sales force. These channel partners valued

Sullair’s loyalty to independent distribution, and through this relationship, Sullair could extend

its market reach and customer contact beyond its boundaries to encompass the breadth of all of

its distributors’ boundaries. Thus, when compared to both IR and AC, Sullair did not compete

with its own channel. On a conceptual level, such an arrangement promoted greater cooperation,

decreased the potential for dysfunctional conflict, and resulted in greater profits for all parties.

However, the relationship between Sullair and its channel was not without its challenges.

This was especially true for the relationship between Sullair and its “lifestyle distributors,” who

were reluctant to grow their business to the extent Sullair would prefer. In some instances

distributors, often smaller channel members, resented the fact that Sullair would try to “dictate”

how they conducted their business; they had taken the term independent distributors to heart, and

did not want Sullair involved in their daily operations.

Several observations were worthy of mention regarding the nature of Sullair’s channels

relationships. First, an independent channel did not mean an independent channel member.

Second, channel decisions ought to be driven by end-use customer requirements and needs, not

by distributor preferences; that is, the end user dictated channel design, not the distributor. Third,

Sullair’s loyalty to its channel ought to have demanded some degree of channel loyalty in

exchange. It was not unreasonable to have expected the channel to engage in behaviors unique to

Sullair, which were non-fungible kinds of activities.

From the survey, it appeared that loyalty to independent distribution was most important

to distributors while involvement of the manufacturer was least attractive. There was an

interesting pattern here: distributors wanted to be partners with Sullair and wanted Sullair’s

commitment but they wanted to set the terms of Sullair’s involvement. Again, larger dealers

were more sanguine and slightly less negative about Sullair’s involvement in their business. The

point is that there was a desire for more expertise and planning from Sullair, but this was a mixed

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message. The perceived intrusion needed to be managed carefully. The irony here was that in

most situations protection of territory exclusivity came with a quid pro quo: certain policies,

restrictions, and/or demands enforced by the manufacturer.

Thus, the door swung both ways. It was unreasonable for the channel to assume that

Sullair would not demand or establish a certain set of norms for channel behavior. The question

was how overt and explicit those demands could be, given that they were all intended to benefit

the customer, the distributor, and Sullair. Some distributors felt that even the slightest intrusion

of Sullair into its business was too much. At the same time, if Sullair’s involvement in the

distributor’s business was viewed as outside Sullair’s realm of expertise, this incursion would not

be seen as helpful and could contribute to tension between the two.

Customer interaction

Both Sullair and the distributor shared responsibility for customer service at every stage

of the process. Initial customer questions prior to installation were addressed based on the

complexity of the problem. Complex solutions were generated by support engineers at Sullair

whereas simpler solutions were more likely to be addressed by the distributor. After the product

and service options had been identified, the distributor became the face of Sullair. In fact the

customers did not differentiate between Sullair and the distributor and treated them as a single

entity. This was both an opportunity and a threat. Thus, Sullair achieved its objective of treating

its channel as its outbound sales force and achieved a degree of unity with its channel. Yet the

element of control over its channel was not guaranteed, so there was a potential degradation in

service as multi-region or national customers attempted to be serviced in different regions by

different distributors.

With a new installation or a service offering, material and indirect labor costs were

incurred by Sullair while the direct labor portion belonged to the distributor. With no competing

channels, Sullair provided recommended prices for all its products and services, but it was up to

the distributor to provide the final quote based on the specific market conditions. For the most

part material costs were kept consistent among the many distributors. Although there were

instances when a distributor would ask Sullair for a special price due to a competitive situation,

each request was judged on its own merits. Since distributors did not compete in the same

markets, there was no intra-brand competition.

Sullair knew that its present relationship with its channel was subject to mixed reviews.

In fact, product-related attributes, features, and benefits were seen in a more positive light than

attributes and features of the relationship between Sullair and its channel. The strength of the tie

to corporate was based more on the quality of the products than on the perceived knowledge and

expertise of the people and what they brought to the channel.

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Competitors

Atlas Copco

Swedish conglomerate Atlas Copco was a world leader in the production of compressed

air and gas equipment, compressors, generators, and construction and mining tools. Founded in

1873, the company sold products in over 160 countries and utilized a unique go-to-market

strategy by branding their products under approximately twenty-five different names. This

strategy allowed the company to successfully operate in different market segments with very

different client bases. The worldwide organization was organized into three primary units:

Compressors, Construction and Mining, and Industrial. Each of the business groups had primary

responsibility for their brands and the customers whom they served. The corporation regularly

acquired new brands, introduced new products and concentrated on expanding sales and

distribution networks in order to fuel growth. The Compressor group was the largest revenue

generator for Atlas Copco through sales of five different types of compressors, turbo expanders,

electric power generators, air treatment equipment and air management systems. The United

States operation for compressors was located in Rock Hill, South Carolina and there were a

number of other regional offices which handle local customer needs.

Although products were distributed throughout the United States by a network of third-

party companies, maintenance needs were serviced via factory service centers and Atlas Copco-

trained distributor service departments. Traditionally, Atlas Copco’s go-to-market strategy in the

compressor division was through these third-party companies, referred to as sales companies.

Atlas Copco did not protect its channel partners from each other by assigning exclusive

territories. For example, Amarillo Electric Specialists, in Amarillo Texas, sold Atlas Copco parts

but was not the only company in town allowed to do so. To appease its channel partners, Atlas

Copco allowed its distributors to sell competitors’ parts as well. However, as the corporation

continued to buy competitors’ and other products lines, there were fewer and fewer competitors

available. Also, it had started acquiring some of its successful distributors. On May 23 2008, it

bought Gulf Atlantic Equipment Company in Florida and Compressed Air Products in Georgia.

Ingersoll-Rand

Ingersoll-Rand was organized in 1905 as a consolidation of Ingersoll-Sergeant Drill

Company and the Rand Drill Company, whose businesses were established in the early 1870s.

Over the years, additional products, developed internally or obtained through acquisition, had

supplemented the original business. The company was a leading provider of security and safety,

climate control, industrial productivity, and infrastructure products. In each of these markets, the

company offered a diverse product portfolio that included well-recognized industrial and

commercial brands.

The Industrial Productivity group was made up of a wide range of businesses offering

products and services to enhance industrial efficiency. These products and services included:

Ingersoll-Rand air compressors and components for compressed-air systems. For over 75 years,

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Ingersoll-Rand had been a world leader in air compressors and air system accessories. Ingersoll-

Rand offered multiple technologies of air compressors including reciprocating, rotary screw, and

centrifugal as well as a wide variety of control and support hardware. These products were sold

in highly competitive markets throughout the world against products produced by both foreign

and domestic corporations, including Sullair. Competitors tended to focus on price, quality, and

service as their primary tools, but Ingersoll focused on full system offerings to leverage the

breadth of their product portfolio against niche manufacturers; they focused, in other words, on

the fact that an air system was much more than an air compressor: it was the complete system—

the piping, filters, dryers, drains, hoses, valves and point-of-use tools. Peak efficiency was only

achieved when the quality and reliability of all of the elements complement each other to get the

job done.

IR distributor strategy had evolved continuously. It started with the limited distribution

philosophy with no exclusive contracts. If there were overlapping territories, it was planned and

no overlap of customers was allowed. As a result a high degree of trust was built between

Ingersoll-Rand and its distributors. Then, they established a catalog system which competed with

their channel partners. Relationships with channel partners that were fostered over 30 years

began to disintegrate and conflict became more severe. To exacerbate the situation, when IR

introduced a new product not all distributors were given the opportunity to carry the new

product. In effect, distribution was confined to a select few channel partners. If customers in a

non-serviced area wished to purchase the new product, often IR would sell direct. Ingersoll-Rand

then set up levels of distribution based upon the level of commitment the distributors gave to

their products. Distributors were characterized by “light” “heavy” etc. Today, the Company's

products are distributed through a number of channels, depending on the type of product. Thus,

sales are made in the U.S. through IR branch sales offices and through their distributor/ dealer

network across the United States. In some product categories Ingersoll has also entered into

master distributer agreements.

Under both the Ingersoll-Rand and Atlas Copco models where company stores competed

against independent distribution it was likely that both companies gained an advantage in market

coverage. In fact, an old maxim states that if there was no conflict there was not enough

coverage. Yet, such a model encouraged intra-brand competition where prices were a source of

competitive pressure. In addition, since there was less commitment on the part of the distributor

to either manufacturer there was likely to exist dysfunctional behaviors. As channel members

competed for the same business price dropped, emotions ran high, and trust dissipated between

the manufacturer and its channel members.

Sullair’s Strategy: A Single-Channel Focus

There were many advantages to a single channel, more exclusive distribution partnership

strategy employed by Sullair. It ensured that good relationships were maintained with

distributors and hopefully would decrease the debilitating effects of channel conflict. It also

resulted in greater share of mind and greater commitment since Sullair accounted for a high

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percentage of their distributors’ business. Even with distributors that had a lower share of

revenues generated by Sullair products, the remaining revenue for the distributor was mostly

generated by complementary products, not competing products. Such interdependence in the

relationship fostered a greater sense of mutuality since both depended on each other and both

recognized that neither could survive alone. Through this interdependence distributors would be

more inclined to invest in the Sullair relationship since gains will accrue to both. For Sullair,

there were other benefits such as reduced fixed and overhead costs due to the lower number of

employees required compared to Sullair owning company stores as sales outlets. Company stores

would also require huge initial investments. Finally there was less confusion in the market as the

distributors represented a single face of the company. The question was whether the face

presented to the market was consistent with Sullair’s expectations and provided a differential

advantage in the minds of the end users.

However, working through an independent channel of distribution was not an easy task.

Given the distance from the marketplace, Sullair had little direct contact with their end-user

customers. This distance made it difficult to gather information about their needs and concerns.

One immediate implication of the distance was that it is harder to ensure that customers received

a consistently high value experience across the entire distributor network. Specifically, Sullair

grappled with how to exert enough control over its channel to ensure consistent high standards of

performance across a national network while maintaining a true partnership with its channel.

Simultaneously, Sullair struggled with how to get close to its end use customers to better

understand market needs without eroding the trust of the distributors. This struggle was often

interpreted by the distributors as attempts to disintermediate them. Such feelings were

compounded by the fact that the second generation of Sullair distributors might not share the

same degree of loyalty and commitment that their father’s might have had to Sullair. In addition,

the status quo could result in complacency where the distributor ran the business less for growth

and more to maintain a certain life style.

Recent Trends in Distribution Industry

Like every other industry, distribution has not been able to escape the advent of new

technologies. This section addresses certain general trends to see how they might also affect the

nature of competition in the markets served by Sullair. To be sure, these trends pose a number of

challenges to Sullair and its channel partners.

Customer self-service

Customers have started performing more of the pre-sales and transactional activities that

were typically handled by the wholesaler-distributor. They included information gathering,

price/availability queries, technical support and order placement. By avoiding support from the

distributor, companies hoped to gain economic favorability in terms of price. The role of the

wholesaler/distributor was becoming a commodity. It also meant that distributors were spending

less time educating the customers on new products.

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The solution for distributors was to provide value-added services that helped customers

eliminate positions in procurement. Also, instead of just selling products, distributors began to

offer implementable solutions that enabled customers to reduce time to market and costs. Such

activities gave rise to the value buyer who appreciated the value added capability that the

channel can provide to enhance the overall product offering.

Strategic sourcing

Strategic sourcing was found among larger multi-location customers that had better

resources to manage their supply chain. These buyers would first aggregate and analyze internal

purchasing data based on distributor, supplier, application, and location. After identifying

opportunities with greatest potential savings, the buyers would flex their purchasing muscle

either through contracts, vendor / distributor consolidation, or reverse auctions. Online

technologies also helped reinforce processes that help sustain buying discipline for customers.

Through a strategy that promotes one consistent face to the customer Sullair was better postured

to serve the multi-location customer in a standard fashion that capitalizes on the synergy gained

through a loyal and committed set of distributors.

Fee-based services and pricing

Manufacturers built barriers to entry either through technology or brand names in the

early part of the lifecycle. However, as their products became commodities through technology

proliferation and price pressures from imports and domestic competition, it became increasingly

difficult for manufacturers to differentiate themselves. By increasing the array of services they

provided manufacturers utilized their distributors to provide unique capabilities. Often these

services were provided as a fee based option. While some will reject the fees, those suppliers that

understood the customers’ value equation would be better able to improve their margins by

providing key services to customers. Value will also shift from distributor metrics such as

delivery time, to customer metrics of productivity improvements, labor savings, and time to

market.

Logistics and fulfillment

As firms try to find other ways to provide value to customers they attempted to capture

more of the value chain by moving either up or down stream. Logistics companies, for instance,

increasingly looked like distributors since logistics services have become commoditized. One

way to protect their position in the value chain was to provide services that set up barriers to

entry and made it hard for logistics providers to duplicate distributor capabilities. It was essential

for the distributor to know its core skills are and continue to invest in them.

The above trends have placed negative pressure on margins for distributors. They also

emphasized the need to build capabilities such as selling services and creating implementable

solutions that differentiated them and make them a valued member of the supply chain.

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What Would the New Sullair Strategy Look Like?

In light of these trends and the differences among IR, AC, and Sullair, Thompson began

to craft his message for the distributor conference. He was committed to the notion that Sullair

could only be as successful as its distribution channel. In fact, Sullair was steadfastly committed

to a strong independent channel but acknowledged that such channel support came at a cost. It

was now time for Sullair to make its feelings known. If Sullair was to protect its channel

members, they would have to reciprocate in kind by supporting Sullair’s long-term objectives.

The real question was how to engender a sense of unity with its channel without being too

heavy-handed. What would drive home the point that support comes with strings, that Sullair

could not be excluded from the distributors’ plans?. In addition, how could Sullair ensure that the

same high quality of service was delivered to every customer, wherever in the U.S. they were

located?

If Sullair believed that the distributor was its external sales force, how would Sullair

share workload and responsibility with its channel? If both entities shared the customer

experience, how would Sullair deliver a seamless, cost-effective and meaningful sales and/or

service encounter for its end-use customer? Such questions begged answers that Sullair had not

addressed previously and tended to move Sullair into unchartered waters. Issues surfaced as to

how to evaluate distributors and what to do with those who did not change their behaviors and

did not align with Sullair’s new strategic direction? Whatever policy Sullair enacted would

require teeth and would have to be enforced. To waver in the midst of change doomed the project

to failure. This was not the time to be meek and indecisive. But what should the new path be? If

the channel was to change to meet these new demands, what skills were needed, and what should

Sullair do to lead that change? While an independent channel was important, what was more

important in the long term for Sullair was that an independent channel behave as if it were

captive.

As Thompson assembled his slide deck, a number of unanswered questions running

through his head, he acknowledged that one issue remained clear: there was a lack of alignment

between the current channel’s operating philosophy and Sullair’s desired involvement in the

channel’s affairs. Not competing with its channel and protecting its territory meant that Sullair

was within its rights to exercise some control of the channels’ decision processes.

Among the questions facing Thompson were two key considerations: 1) how to best

communicate the new strategy to Sullair’s distributors and 2) how to implement the new strategy

in such a way that the message is heard loud and clear. It was essential that the channel partners

hear that the partnership with Sullair was strong and that success would come only by working

together. At the same time, the channel needed to recognize that consistent and uniform service

delivery by the channel would differentiate Sullair form both IR and AC. Consistent and uniform

service delivery could only be achieved if the channel relinquished some of its decision-making

autonomy to Sullair.

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-13- UVA-M-0772

Exhibit 1

SULLAIR: REDEFINING ITS CHANNEL OF DISTRIBUTION

United Technologies Consolidated Income Statement, 2007

(in millions of dollars, except per share amounts)

Revenues

Product sales $ 39,240

Service sales 14,679

Other income, net 840

54,759

Costs and Expenses

Cost of products sold 29,927

Cost of services sold 9,995

Research and development 1,678

Selling, general and administrative 6,109

Operating Profit 7,050

Interest 666

Income before income taxes and minority interests 6,384

Income taxes 1,836

Minority interests in subsidiaries’ earnings 324

Income before cumulative effect of a change in accounting principle 4,224

Cumulative effect of a change in accounting principle, net of tax --

Net Income $ 4,224

Earnings per Share of Common Stock

Basic:

Net income $ 4.38

Diluted:

Net income $ 4.27

Source: UTC 2007 annual report.

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-14- UVA-M-0772

Exhibit 1 (continued)

United Technologies Consolidated Balance Sheet, 2007

(in millions of dollars)

Assets

Cash and cash equivalents $ 2,904

Accounts receivable 8,844

Inventories and contracts in progress 8,101

Future income tax benefits 1,267

Other current assets 955

Total Current Assets 22,071

Customer financing assets 963

Future income tax benefits 1,126

Fixed assets 6,296

Goodwill 16,120

Intangible assets 3,757

Other assets 4,242

Total Assets $ 54,575

Liabilities and Shareowners’ Equity

Short-term borrowings $ 1,085

Accounts payable 5,059

Accrued liabilities 11,277

Long-term debt currently due 48

Total Current Liabilities 17,469

Long-term debt 8,015

Future pension and postretirement benefit obligations 2,562

Other long-term liabilities 4,262

Total Liabilities 32,308

Commitments and Contingent Liabilities

Minority interests in subsidiary companies 912

Shareowners’ Equity:

Capital Stock:

Preferred Stock, $1 par value --

Common Stock, $1 par value 10,572

Treasury Stock (11,338)

Retained earnings 21,751

Unearned ESOP shares (214)

Accumulated other non-shareowners’ changes in equity:

Foreign currency translation 1,355

Other (771)

Total Accumulated Other Non-Shareowners’ Changes in Equity 584

Total Shareowners’ Equity 21,355

Total Liabilities and Shareowners’ Equity $ 54,575

Source: UTC 2007 annual report.

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-15- UVA-M-0772

Exhibit 2

SULLAIR: REDEFINING ITS CHANNEL OF DISTRIBUTION

Rotary Screw Compressor Diagram

Source: Federal Energy Management Program Website, U.S. Department of Energy,

http://www1.eere.energy.gov/femp/operations_maintenance/ om_actypes.html

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-16- UVA-M-0772

Exhibit 2 (continued)

Sullair S-energy Lubricated Rotary Screw Air Compressor

Source: Sullair Corporation brochure (Michigan City, IN, 2008), p. 6–7, http://www.sullair.com/Files/Sullair/Global/US-en/industrial/LIT_S-

energy_LS14E.pdf, accessed January 29, 2009. Used with permission.

Drive Coupling Element

Motor

Air Filter

Fiberglass Fluid

Filter

Air/Fluid Separator

Thermostat

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