Lotus Development Corporation (Section A, Group 8):

The director of sales operation of Lotus Development Corporation John Shagoury was in a
dilemma on whether:
1. To bypass the dealers and directly sell to large corporates.
2. Sell the products through the existing network of distributors and dealers.

Market Size:

Microsoftware industry = $5 billion

General-purpose software = $2.5 billion (The microsoftware industry could be further divided into
general purpose and special purpose).
Application software = $2.25 billion
Dealers Margin = 45%
Market size = 2.25*55
= 1.24 billion
Lotus 1-2-3 is an integrated financial spreadsheet, tied to graphics and database management
capabilities.
= (1.24*75*2)/(3*100)
= $ 620 million (considering spreadsheets and database management system)

Sales by channels:

1) Distribution channel = 0.47*225 million

= 105.75 million
2) Direct channel = Hardware + House Accounts + Educational + Others
= (0.19+0.15+0.11+0.08)*225 million
= 119.25 million

Considering that the firm opts for direct selling, they will have to recruit 90 more salespeople to cover
the Fortune 2000 as 90 salespersons can cover 1000 companies.

1) Total sales = $ 225 million

2) Cost per product = $ 360
3) Total Softwares sold = (1)/(2) = 625000
4) House Accounts gives 19 % = 118750
5) Without dealers, profit = (360*118750) - (150000 * 180) = 1.57 million
6) With dealers, profit = 300*118750 - 150000* 90 = 2.21 million

With dealers, the firm is getting 6.3 million more profit.

So, looking at the market size and the profit margins we can conclude that it is indeed an extremely
important decision to make because it will affect the growth of the company and as well as strengthen
the market position among our competition.

Direct Selling vs Distribution

1) Dealers’ network might refuse to sell products if we bypass them.

2) Consumer behaviour varies according to the type of segment, companies tend to buy
it more centrally. Companies are price-sensitive.
3) We share the dealer network with our competitors. If we decide to not include the
dealer network, then the competitors might utilise the dealers to increase their sales.
 4) Dealers are more interested in large corporations. Direct selling would cannibalise the
dealers’ revenue and bypassing them (primary sales channel) will mean damaging our
relationship with them. We can’t afford that as we plan on working with them in
future.

Consumer Behaviour

Traditional storefronts dealt with low-end and price-sensitive clients. High-end dealers dealt
with external salespeople who handled business accounts on the behalf of their organisations.
They focused on customer support and system integration.
Lastly the pure discounters handled large volume and mail orders along with storefront
operations.

Computer manufacturers received 40 percent discount on retail price and educational

institutions received the most discount of 50 percent on the retail price. Large corporations
made up half of the Lotus’s revenue and the small, medium and individual users made the
other half. But the buyers from the corporation received support from their own data
processing departments. Hence, they were not dependent on the dealers and sought
manufacturers to get low price deals.

It was estimated that the market growth for next 5-10 years would be mostly accelerated by
small, medium and individual buyers that would contribute around 5 to 7 million. They were
mostly dependent on dealers as they did not have in-house activity.

Recommendation:
John Shagoury should not bypass the dealers (primary sales channel). With dealers,
additional yearly profit of 6.3 million is earned. Thus, Lotus Development Corporation
should sell the products through an existing network of distributors and dealers.