The dealerships have different objectives and key points that are targeted at the sales department as compared to the brands. This leads to the imbalance of goals that is devastating for the planned value creation by both brands and dealerships, which also affects the customers.
It is essential to pursue the strategic alignment to provide incentives that are intended in compliance with the strategy of both parties. The lack of a well-aligned planning approach results in poor practices, adverse outcomes, and moral hazards. Any enterprise might face pitfalls because of the disparity between goals in terms of service, the negative results due to high bonuses and commissions that adversely affect the salesperson’s performance. This case analysis is examining the decline in Company T’s strategic objective and plan implementation throughout five years.
Consistency or Conflicts Between the Strategic Plan and Strategic Objectives of Company T
The critical points of the strategic plan included offering attractive financing packages for new dealerships and dealer inventory purchases, as well as implementing a demanding, incentive-driven dealership commission plan. The attractive cash bonuses and their stepped increase does not comply with improving the company’s market position. In addition, there is no clear strategy for the sales volume increase. One can argue that a bonus or commission might promote a moral hazard.
The companies and dealerships are entirely dependent on the salesforce to get the appropriate products for customers. Bonus and commissions are the motivation indicators that lead the sales department towards high effort and strategic goals. It is necessary to maintain clear monetary incentives, such as quota-based bonuses and commission schemes, towards salesforce to increase performance and achieve long-term strategic results.
Inherent Moral Hazard in Company T’s Dealer Financing and Compensation Plan
When the public and the management of an enterprise assume that the company will receive financial support, management might take more risks for achieving the profit. The alternative way for creating a moral hazard implies allowing the companies to fail when there is high risk and, therefore, letting the stronger companies purchase the debris (Beattie, 2019). Such a theoretical approach of the market-oriented economy should eliminate any moral hazard.
Moral hazards are devastating as they can affect the quality of the traded products by some action that cannot be indicated by the other party. According to data on the company’s change in the number of dealerships, there is an inherent moral hazard in the statistics of large dealerships in the United States. The moral hazard occurred during the year 3+ period when Company T’s number of large dealerships amounted to 15 %. The starting number was 5 % when the final point during the year 5+ term was rated at only 1 %. The percentage decreased by 12 % during the year 4+ period, which is shortly after its peak level in the year 3+ period.
The large dealerships took a risk before the company faced the pitfalls after two years of the strategic plan implementation. There is also a case of moral hazard in a change in sales volume (units). During the year 2+ term, the number of sales volume reached 10 percent. However, the following period demonstrates the rapid decline to – 5 % of the sales volume. The analyzed moral hazards within the Company T market might be caused by several reasons.
For instance, it could be the lack of any incentive before and after the transaction or the absence of any controlling mechanism in the market. Furthermore, the moral hazards, in this case, could have emerged because of untrustworthy behavior between the transacting parties, namely the company, and large dealerships. The vast disparity between purchase and sale due to the involvement of mediators in the market could have enhanced the creation of moral hazard as well.
Inherent Adverse Selection in Company T’s Dealer Financing and Compensation Plan
Similar to moral hazard, adverse selection is another principal form of information asymmetry. It is also considered as hidden knowledge when one party has more information on the quality of the products marketed or contract variable. Considering the adverse selection in Company T’s statistics, it can be traced to the percentage of change in dealer inventory. The dealers that are better connected are less subjected to adverse selection due to enhanced order flow (Li & Schürhof, 2018).
The company dealer inventory reached 15 % in the year 2+ period and 12 % in the year 3+ period. However, the industry dealer inventory was rated at only 3 percent throughout each of these terms, which created a significant disparity of 12 % between the two parties. In such a case, the car dealership company has strong incentives to optimize the returns at the cost of purchasing and selling. Adverse selection is affecting Company T’s market image since the good quality is forced out by the bad. A dealer usually faces both adverse selection and inventory control problems that affect the dealer’s profits.
Modification of Dealer Financing and Compensation Plan
The dealerships and Company T should mainly pursue the alignment of strategy with bonus and commission schemes, as it can add more value and result in a stronger value-creation promoter that will also benefit the customer side. Linken (n. d.) determines the basic strategies that aim at optimizing dealership networks, such as “understand one’s regional market, estimate current and future network opportunities, find prospective customers and locate opportunities.” Furthermore, it is crucial to model the influence of network modification and innovation, respond rapidly to market changes, and focus on increasing sales, market share, market coverage, and profitability.
Some of the positive effects for dealerships identified by Kleef (2018) involve a “stable income and regular communication” (p. 53). Concerning the bonus and commissions approach, they are seen as insufficient because its rational argumentation is not fully effective in practice. Ultimately, one should keep monitoring the global environment to find new financial methods of international auto dealerships and, therefore, estimate and implement them in various contexts.
The Summary of the Case
Company T is a major multinational enterprise and a lead competitor within all key markets that competes against several highly successful companies around the world. The CEO of the company aimed at improving its market position in the United States by expanding the number of company’s dealerships across the country and growing the net sales of an individual dealership. Company T implemented a dealer financing and compensation incentive plan to address the strategic goal.
Despite the success of the plan during the first two years of its implementation, many dealership networks of the company receded over the next three years. Moreover, the average dealer costs to customers did not keep pace with inflation and, thus, customer non-payments on car loans increased, together with the decline in dealer auto service profits from non-warranty work. Based on the company’s performance and its dealership networking throughout five years, the inherent moral hazards and adverse selection, as well as several shortcomings were revealed in this case. Therefore, the key strategies were determined for the modification of dealer financing and compensation plan according to the analyzed chart.
Beattie, A. (2019). What is a moral hazard? Investopedia. Web.
Kleef, B. (2018). The role of bonus and commission schemes in value co-creation: Exploring tensions and conflicts in car dealerships. Independent Thesis, 1–68.
Li, D., & Schürhoff, N. (2018). Dealer networks. The Journal of Finance, 1–76. Web.
Linken, T. (n. d.) Auto dealer network development. Ihsmarkit. Web.