NORLIGHT A.S.

"This is a real mess!" Mrs. Sunhill had problems of hiding her temper when she confronted her marketing manager Mr. Mark Salsbury with a letter received the same morning from their Italian agent, Mr. Antonio di Napoli. Mr. di Napoli had in fact informed AS Norlight that he ended the contract they had entered into a year or so earlier, and he asked for EUR 1 million in indemnities.

And, if this was not enough: Their representative in Newcastle, GB-Lite, had insisted on more changes to be made on the products, in order to satisfy the requirements of the British market. According to Mr. Counting, Norlight's financial officer, additional adaptation costs would increase the end price to an unbearable level, making redundant all the efforts put into the British market.

They were lucky to have a good grasp of the Norwegian market, to at least sustain the costs incurred during the introduction to the new markets. In fact, they were holding a good 25-30% of the home market, with sales approaching 45 million NOK last year. They felt well entrenched in the market place with good relations to the distribution channels and a technological advance to the competitors. Although the profitability was not up in the sky, the return on sales showed a sturdy 4-6% per year over the last couple of years, and annual net profits were in the order of one million NOK. Besides the Norwegian archrival, Light-Tech, these latter consisted of companies mainly from Sweden and West Germany. Typical for this industry, however, was the dominance of the national companies in each market, Norwegian companies dominating the Norwegian market, Swedish companies in Sweden and so on and so forth. The major reasons for this industry structure were the local design and technical standards, and the multitude of different contractors and distribution channels in the national markets.

*This case is written by Carl Arthur Solberg, based on a story in "Ledelse", No 8-1986. Although the background of the story is real, facts have been changed, in order to disguise the real company. Any resemblance in any company with the persons mentioned in the case is coincidental. Maurcie Cruchon Hartmark has contributed to parts of the case. Carl Arthur Solberg
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The background for the export adventure was to anticipate what had to come: the adaptation to the Single Market with harmonization of standards to come, and the ensuing inroad of new competitors into the Norwegian market. So, they started to investigate different avenues for exporting. After some discussions with people in related businesses and Innovation Norway the Norwegian Trade and Industry Promotion Agency, and some research on statistics and magazine articles, they decided to approach the following countries in the EU: Great Britain, Denmark, Italy, France and Germany. The markets in Great Britain and Italy were deemed to be the most interesting ones and Mr. Salsbury was assigned the task to identify possible candidates for representation in these two markets. After some investigation - partly through small advertisements in the trade magazines, and partly with the assistance of the local representatives of Innovation Norway - they ended up with a long list of candidates in each country, most of which seemed quite serious and capable. They were of the most diverse types of companies, anything from the "one man show"-company to large, established import firms. Mrs. Sunhill expressed some doubt as to what kind of company they ideally should tie up with. On the one hand, a large and well introduced importing company with an established network of wholesalers and customers would facilitate the task. One major disadvantage with this kind of solution was of course that such a company could be too big for Norlight, and Norlight would only be a small and insignificant supplier to the larger company. On the other hand, "the eager beaver" solution had its clear advantages in the amount of attention the agent could bring to Norlights products. After endless discussions on the pros and cons of each alternative, Mrs. Sunhill decided to try both:

The British market In the UK they started discussions and negotiations with a company well entrenched in the business, GBLite Ltd. This company had been importing electrical fixtures and equipment ever since the early sixties, and - out of their base in Newcastle, they had developed a large network of retailers especially in the North East region of England. This company was chosen among all the other for two reasons: 1) the Managing director, Mr. Jones, seemed to go easily along with both Mrs. Sunhill and Mr. Salsbury; 2) GBLite had shown a spectacular ability to yield good financial results. With yearly sales of 54 million GBP and a sales staff of between 18-20 people, they were regarded as a solid potential partner.

The contract negotiations were a new and unexpected experience for both Mrs. Sunhill and Mr. Salsbury. In the introductory phases of their negotiations, they had met with Mr. Jones alone, who gave a refreshing impression of a professional manager, quite unlike the stereotype picture one typically has of established British companies. When they met to negotiate the details of the agency contract, Mr. Jones was joined in by three other men: Mr. P. Halloway, Mr. Jones' partner and co-owner of GB-Lite Ltd., Mr. A.G. Ressing their sales manager, and finally Sir John Lawson, their lawyer. The four were all equipped with a 10 page sample, standard contract which they would like to use as a starting point in their further discussions with Norlight. Sir John politely presented the details of its content to the two representatives of Norlight.

Mrs. Sunhill was quite astounded. This was very different from the relaxed meetings they had previously held with Mr. Jones. During these meetings they had discussed things like commission and sales volume and had reached a general agreement on these issues. Our friends from Norlight thought that the contract negotiations were a mere formalization of this discussion. Instead, they were met with a long range of requirements:

- Develop an English version of their product catalogue, manuals and service instructions.

- Transfer for one week in Newcastle a product engineer in order to train the sales and service people involved in the project. - Send GB-Lite within three weeks a complete set of demo-models - Take the responsibility of spare parts and the most popular models in a warehouse facility in the outskirts of Newcastle. - Maximum delivery time to be one month - Authorize GB-Lite to grant price discounts, accept returns and extend credits of more than 4 months when deemed necessary. - Contribute at least 40.000 GBP to the introductory advertising campaign, and further pay 25% of any advertising programs in the future.

Mrs. Sunhill did not find any clause in the suggested contract that really committed GB-Lite in any significant way, and she and Mr. Salsbury had a hard time introducing terms like: - Minimum sales the first year of 200.000 to be increased to 400.000 after two more years. - A guarantee of not extending credits or pursuing sales to customers who have exhibited a notoriously bad credit record. - Changes in prices and terms of payment should be submitted for approval in Norlight before being granted.

These "concessions" from the GB-Lite team, did not go without the inclusion of a major clause stating that GB-Lite is entitled to a compensation of 30.000 if any of Norlight s commitments were breached. This was a bitter pill to swallow, but Mrs. Sunhill and Mr. Salsbury accepted it because they were quite confident that they would be able to -putting some extra effort to the job - comply with the clauses. And the British, on their side were quite stubborn on this clause if they were to soften their stance on the issues put forward by Norlight.

Back home again, our friends in Norlight started to fulfill their commitments. They had the brochures and manuals translated; Mr. Prodding, the development manager of Norlight, was sent over to train the sales and service people; arrangements were made to rent storage space and transfer spare parts and demo models. And finally, GBP 30.000 were transferred to GB-Lite's account in Barclay's Bank, the Newcastle branch, to comply with GB-Lite's requirement on advertising expenditures. At the end of this "exercise" more than NOK 600.000 were spent on the British market introduction. Mr. Counting achieved after lots of persuasion an extension of the credit line with the local bank, and submitted a request for support on part of the money (translation, advertising
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budget, training program), to the Export Council. After one month of hard work, they could start "breathing normally" and wait for orders to come.

The Italian experience The Italian experience was quite different. Mr. Salsbury received a telephone call from a certain Mr. di Napoli, calling from the Oslo Airport. He had just landed and was together with his wife for two weeks of summer holiday. Norway was such a different country and he and his wife were in for a new kind of "experience". He referred to the ads about representation and would like to "poke his nose" in any time during the next two days to discuss the prospects for a deal.

Antonio di Napoli happened to be a charming and also knowledgeable man who could refer to a long list of references of sales assignments in Italy. He had in fact worked in the electro fixtures industry for several decades and knew the members of the dealer network better than his own cousins. After a visit in the factory, and a review of the products, their newly won friend expressed great interest in being assigned the agency for all of Norlight's products in Italy. At the end of a couple of hours discussion, they agreed to the main points in a contract to be signed when di Napoli passed by on his way back to Italy after his holidays in Norway, a week or so later. He had in fact accepted the idea of Mr. Counting to have his references checked before any contract was to be signed. Mr. Salsbury was sitting on the phone the next couple of days checking Mr. di Napoli's reputation. He also double-checked through the Export Council of Norway in Milan. All references recommended Mr. di Napoli without any reservation and Mr. Salsbury was confident that they had come across the right man for the job. Mr. Counting was somewhat more doubtful: what about all the others on the list? "We haven't even bothered to look at the list!" he exclaimed. But he was overrun by Mrs. Sunhill and Mr. Salsbury who both felt convinced that he was the man. Besides, he spoke very good English, and that was not commonplace in Italy, not even within the business community.

Next Tuesday, they signed a contract with the following terms: - di Napoli would get the exclusive rights to represent Norlight's products in Italy. - He committed himself to sell for at least 400 000 Euro the next year, increasing to 1 million the year after and finally reaching and 2 million after four years of operation. - Furthermore, he was granted a commission of 10% of the total sales. - Finally, the two parties were committed to develop a good spirit of cooperation.

No mention was made to advertising expenditures. In fact, Mr. di Napoli did not place any importance on
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advertising. "What matters", he said, "is a good network and personal selling. Then the rest comes by itself. Mr. di Napoli even agreed to come by himself to Norway for an introduction into the technical parts of the product offering, disbursing all the travel expenses out of his own pocket.

Business as usual? After half a year, approaching Christmas, the status of Norlight's export efforts was as follows:

In the UK trial orders started to come in already two weeks after the first "introductory month" (when all the preparatory work had been done). GB-Lite had in fact presented the products on a local trade fair outside Newcastle, and received some noticeable interest from one dealer. However, Mr. Jones reported that in order to push the sales, they had to grant substantial price discounts, between 12 and 15%. Mr. Salsbury was not in doubt: "We have to go along with these requirements, otherwise we will not get the products through the dealers in the first place, and nobody will get to use them." This made sense, but both Mr. Counting and Mr. Prodding were reluctant to do anything more for their British representative at this moment: "Who do they think they are?" exclaimed Mr. Counting. "We have put more than half a million NOK into the venture, and now they ask for discounts!" After one hour of discussion they settled for a compromise: GB-Lite was allowed to grant 5-7% discount to particularly interesting customers.

The reaction from Mr. Jones was what one could term a qualified acceptance. After some two or three weeks' time, Mr. Jones returned with inquiries concerning "minor product alterations", as he put it. "Our dealers find it difficult to achieve preference for your products as they now stand and at the price that you quote, etc., etc." He finally suggested some changes in the design of the products.

Mr. Prodding was out of his mind, and during their internal discussion of the issue, he expressed a great deal of annoyance with the whole venture: "We have now ended up in endless discussions with our British representatives on just about every tiny issue of our marketing program, and they have not achieved a single major sale. In Italy we don't meet any of these objections to what we can offer: both the price and the product are being accepted as they stand, and Antonio has succeeded in getting our product introduced in at least 20 dealers' network.' I think that we should start looking for a new candidate for our sales in the UK. I'm fed up with these petty quarrels around details, which don't lead us to anything but higher costs".

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In Italy, things at first seemed to develop much more brightly. There was an endless stream of orders, first small trial orders, but later on they amounted to much more than the amount of sales agreed upon in the contract. Norlight was very happy and executed the orders as they came in. "We certainly have found a good niche in Italy", Mrs. Sunhill stated at one moment. But only a week later, Mr. Counting entered into her office and presented the last quarter's book report. Only ten percent of all the invoices due from Italy had been honoured! "I don't like thish e grumbled, "I really wonder what kind of customers our friend, Antonio, has led us into". "I can't understand this", Mr. Salsbury said, "Antonio reassured me about the solidity of his customer base, and based on the references we have received, I find it hard to doubt what he is saying". "That's all fine, Mark", the financial officer countered, "but I think that when twelve out of our fourteen invoices have not been paid in time - and we have granted liberal credit terms - I think it is time to review our credit policies toward Italy".

Mr. Salsbury conceded that something had to be done and agreed to write a letter airing Norlight's concern over late payments. The situation did not get less sour when they two days later received a note from Banco di Milano, about Stella Lucia, their biggest account so far in Italy, had filed in for bankruptcy. An inquiry from Mr. Counting to Innovation Norway's local representative in Milan revealed that a good deal of di Napoli's customers did not exhibit the world's best track record concerning timely payment. In his report the trade officer added that this is not unusual in Italy, and that Norlight had to be patient if they wanted to retrieve their outstanding balance with their Italian customers. Mr. Salsbury still tried to be polite when writing the letter:

Antonio di Napoli Villa di Lucia Genova Italy Ytterfjord, March 2, 2006 Dear Antonio, We have received a note on the bankruptcy of Stella Lucia, and would like to ask you to do anything in your power to retrieve what is possible to get out of whatever is left of their assets. We have experienced that some of your customers are not very prompt in paying their dues, and as you certainly understand, we are suffering from this. Until this day we have liberally paid the commission to you and we certainly intend to do so also in the future. However, we would suggest that the following practices should be introduced: 1. All new customers should pay by Letter of Credit, and the established slow payers should also be confronted with this new policy, until we get to know them better. 2. We will not transfer any commission on sales made until we receive payment from our customers. I trust you understand this and look forward to hearing from you in the near future. Sincerely, Mark Salsbury

The response received two weeks later was not very pleasant!
Norlight POBox 13 Ytterfjord Norway Att. Mark Salsbury Genova, March 12 2006 Re terms of payment I have received your letter of March 2, 2006, and can inform you that I don't see how I can work under the conditions stated in the letter. I thought that I had to do with professional business people, but your suggestions on commission payment and L/C suggest to me that we will have problems in getting along in doing business in the future. I will therefore by April 1 of this year, end our relationship and will require that you pay a fee of 150000 Euro in indemnities. Sincerely, Antonio di Napoli

This was not good music in anybody's ear, and Mrs. Sunhill concluded her intermezzo with Mark Salsbury by calling the management team for a meeting to discuss the situation. She introduced the issues as follows:

"Gentlemen, we have tried for one year to enter two export markets, with so far - I dare say - very meager results. Off course we are newcomers, but what we now are into exceeds any expectation of bad luck. The efforts we have put into this misadventure, run up to a balance of more than NOK 700000 in the UK and outstanding receivables of at least one million in Italy, plus of course the indemnity hanging over us from Antonio. If this was not enough, I'm afraid to tell you that our business in Norway has been suffering from this. We have paid too much attention to our situation in our new markets and opportunities in Norway have been left behind. I think time has come to look at our strategic position and reassess the whole investment. This should be done, I think, in any event, while we discuss how to proceed with Antonio and our British "friends" in the short term. I am open to your comments, and while you start thinking about it, I have to place a phone call to our lawyer Franco Bartoloni in Italy, in Genova. I also have a phone appointment with Mr. Jones in Newcastle, on some preliminary questions I put to him recently. Let us meet again Tuesday next week after lunch at two oclock.

NorlightAS Profit and Loss Statement -2004and 2005 (all figures in million Norwegian kroner) 2004 Sales Materials, subcontractors Salaries Marketing Depreciation Miscellaneous Operating Profit Financial costs (net) Profit before allocation and taxes 28,4 25,3 2,1 5,5 0,8 64,2 27,7 24,9 1,9 5,4 0.9 (60.8) 1,9 (1,1) 0,8 2005 62,7

(62,1) 2,1 (1,0) 1,1

Balance Sheet 2005, December 31

All figures in million NOK

Assets Current Assets Cash Bank Inventory Customers ., Fixed Assets Building Machinery 1,2 1,8 2,9 5.8

Liabilities Current Liabilities Bank Suppliers 11,7 Long Term Debt Bank Soft Loan Equity Share capital Funds Total Liabilities 4,4 7.5 11.9

8,9 1,3

10.2

6,7 9,8 16.5 4,2 2.9 7,1 29.2

Total Assets

29.2

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