SNAP.ON TOOLS CORPORATION

Differential Advantage through Channel Strategy

lntroduction

Snap-on Tools is the world's Iargest manufacturer anddistributor of tools and related service items for profes-sional mechanics. Its principal products are hand tools,including wrenches, screwdrivers, hammers, and similarproducts, as well as pneumatic impact wrenches and chis-els, power-assisted drills, tool cabinets, and electronic au-tomotive diagnostic equipment. In all, 12,000 differentproducts are manufactured by Snap-on. These productsare used primarily for automotive service and mainte-nance, but they are also used in manufacturing and otherrepair and maintenance activities.

The products are sold through 5,000 independentdealers throughout the world. The dealer group ac-counted for 81 percent of 1989 sales. Each dealer oper-ates out of a walk-in display van or similar vehicle that car-ries an extensive inventory of products and parts directlyto customers. Total 1989 sales for Snap-on were almost$891 million. Exhibit 1 provides additional sales data forthe companv.

Company History

The history of Snap-on Tools begins in 1919. The nationwas recovering lrom World War I and many tactorieswere attempting to shift from military to cMlian produc-tion. One of these factories, American Grinder Manufac-turing Company based in Milwaukee, had just promotedan employee to manager of the socket division. This divi-sion was in the business of making one-piece wrenches(see Exhibit 2),

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The employee's name wasJoeJohnson, and he hadjust turned 25. Joe was promoted because of his manu-facturing knowledge as well as his marketing skills. Aftera few months, Joe recognized a flaw in the product. Heasked, "\rVhy buy a handle in order to use the socket?" Hisidea was that instead of buying a socket and handlefor each size, buy only one handle and many differentsizes of sockets that would all fit on the same handle (see

Exhibit 3). This idea would significantly reduce the costof wrenches and would require less storage space. Joepresented his idea to the management of AmericanGrinder and it was immediately refused. 'We sell tools,not toys," said management,

Undaunted,Joe quitAmerican Grinder, found a part-ner, hired two salesmen, and began producing the newwrenches himself. Using the slogan, "Five do the work offifty," he was able to sell 500 C.O.D. orders in the remain-der of thatyear alone. In 1920, Snap-on Wrench Companywas legally incorporated.

The company grew tremendously during the nextfewyears and by 1929 Snap-on had spread to 26 branchesand employed more than 300 salesmen. In 1930, Snap-onWrench Company merged with Blue Point Tools to forma new tool-making giant, In 1931, Snap-on took its firstcorporate step on international territory by establishinga Canadian subsidiary. The sales orders were increasingfaster than the plants could fill tJrem, and profits were in-creasing every year. But then 'the Great l)epression sweptover the nation,

During the depression, Snap-on salesmen intro-duced two new sales strategies that kept them (and thecompany) from sinking. The first idea, still rather novel atthat time, was referred to as time payrnent selling-that is,extending credit and accepting monthly payments. The

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The next major event that affected the history ofSnap-on Tools was World War IL During this period, gov_ernment demand was very high. Tanks, jeeps, boats, air_craft, aud othel war.equipment had to be repaired. Snap_on Tools signed a contract making it a major supplier ofindustrial tools to the government during the war, But al-though the manufacturing plants ran at full capacity, themany civilian customers could not get their orders filledat all. Management's answer to this problem was to re_lease any excess stock to the salesmen. Because the excesstools were shipped to the individual salesmen rather thanto customers, it soon became common to see Snap_on

Company History 573Jh

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second ideawas so successful that Snap_on Tools adoptedit and turned it into a competirive advantage. The ideawas to "pre-sell" tools to customers for future use. Thesalesmen would put an order in but would not ship thetools or charge customers until the economic situationimproved. These pre-sale orders were a big hit and wereeventually referred to as "dream lists.,'

The depression had eased by 7gZZ, so Snap_on Toolsopened its second manufacturing plant in lllinois.By 1939, the company had fully recovered from the de_pression and declared its first dividend payrnents tostockholders.

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salesmen with cars loaded with tools and mechanical ac-

cessories. In effect, their cars and trucks became bothmini-warehouses and display floors for the Snap-on toolsthey were selling, Although this did not completely solvethe demand problem, it soon became the normal way ofselling Snap-on tools for several reasons: (1) it reducedthe inventory carrying costs of the company; (2) it metsome of the civilian demand; (3) it was a strong sign ofgoodwill toward civilian customers; and, most important,(4) it added to the earnings of the Snap-on salesmen. Infact, this new distribution strategy became so effectivethat the logical next step was to let each salesman oper-ate as an individual business with Snap-on franchisingrights and an assigned territory.

After World War II, with an innovative and strong in-dependent dealer distribution system in place, the keyemphasis at Snap-on was on marketing, The company de-veloped and planned effective advertising campaigns,coupled with a strong commitment to providing cus-

tomers with the tools and equipment they asked for. Thismarketing focus continued into the 1950s with Snap-ondiversifring into new markets primarily through acquis!tions, both national and international.

The 1960s were a period of increased technologyand innovations in the automobile market. Cars were be-coming more complex, stimulating a need for electronicdiagnostic and tune-up equipment. Snap-on satisfied thisneed by matching manufacturing with marketing-developing a myriad of new and innovative products andmarketing them aggressively through its dealers. As mar-ket share and profits grew, Snap-on was one of the firstU.S. companies to own its own mainframe computer fororder processing and inventory management, With thisstrong grounding in manufacturing, marketing, and dis-tribution, Snap-on was well prepared for the 1970s, andthe next ten years would show the biggest growth in thehistory of Snap-on. Between 1969 and 1973 sales dou-bled; between 7973 and 1979 sales doubled again to $373million.

In the early 1980s a recession led to a significant de-

crease in demand for new tools and, hence, sales growthslowed during the first few years of the decade. Then inthe mid-l980s sales picked up so that, by 1989, salcs hadmore than doubled over the 1980 level.

Ghannel Strategy and Structure

The Snap-on Tools channel structure stresses a verystrong and well-supported effort on the part of itsindependent mobile dealers to provide an extraordinary

standard of customer service that is unique in the indus-try. The dealers bring a wide assortment of products di-rectly to the mechanics in their places of business, when-ever needed, and provide product information andservicing. In effect, the entire range ofresources ofSnap-on Tools Corporation is brought right to customers'doors through the mobile van dealer.

Snap-on's 5,000 independent dealers are supporteclby 75 company-owned sales branch/warehouses that arcsupplied by six manufacturing plants, all located in thcUnited States. Exhibit 4 provides an overview of thcchannel structure for Snap-on Tools.

The independent dealers replenish their invento-ries, usuallyweekly, from the branch inventories. Becausedealers' territories are generally close to a branch, thecombined inventories ensure that the vast majority ofcustomer product needs can be filled by their dealersquickly, if not immediately.

The most direct and important connection betwee n

the independent dealers and Snap-on Tools is the fielclmanager. The field manager is an employee and formersuccessful dealer who works closely with a small dealergroup. Field managers undergo extensive training inproduct knowledge, sales techniques, inventory manage-ment, tool displays, and overall dealer business opera-tions. They in turn transfer the benefis of this training toindividual dealers by demonstrating and helping dealers

to sell new tools and more sophisticated diagnostic

equipment. Field managers also provide a critical com-munications channel to Snap-on Tools regarding shifts incustomer demand, reaction to new products, and the eI:fectiveness of company's marketing programs.

In addition to the marketing and service support forthe individual dealer provided by the field managers,

Snap-on provides a variety of other types of support forits dealers. For example, dealers are able to offer clrsn

tomers fast and reliable repair service for air tools, tune-

up equipment, and other items through one of six re-

gional centers. To mechanics, who depend on tools and

equipment for their livelihood, prompt repair service is

of immeasurable'"'alue.Mechanics have similarly grown to rely on the fast re-

placement of parts and other needed items not normallycarried by dealers. A national parts distribution center,operating out of Kenosha, Wisconsin, provides such a

service. Parts are routinely shipped within 24 hours of re-

ceipt of the order. Because most dealers provide loanersfor the short time that a customer waits for a repairedtool or needed part, the customer is still equipped withtools and equipment to perform any automotive repair,

These services demonstrate to the customer that his

4t+DiscussionQuestions b7b

Notes: (1) 6 manufacturing plants, all located in the United Stares(2) 75 company-owned sales/wrehouses located in the United States and abroad(3) 5,000 dealers located in the United States md abroad

dealer has a thorough understanding of the demandingnature of an auto mechanic,s business and a commrt_ment to satisf' those demands.

Several other elernents play a key role in the Snap_on Tools channel straregy. First, Snap-on assigns territo_ries to each ofits dealers. They are expected to cultivatethe assigned territory extensively but not venture outsideofthe territory in search ofadditional business. Second,the company operates on an exclusive dealing arrange_ment with its dealers, They are required to sell only Snap_on products and no other competitive or even comple_mentary products. Third, Snap-on expects dealers tocarry a full assortment of Snap_on products in their mo_bile vans so that customers are provided with high levelsof selection and choice in tools and equipment. Finally,Snap-on supplies much of the inventory to its dealers ona consignment basis whereby the clcalers do not have topay for an item until ir is sold. Snap-on believes that this

strategy plays a vital role in sustaining its dealer networkbecause it reduces dealers' capital requirements and thecost of dealer start-up, while improving dealer cash flow.These benefits are especially important during ad.verseeconomic conditions. Snap-on also feels that its consign_ment strategy helps the company to recruit the mosthighly qualified and motivated dealers.

Discussion Questions

1. What do you see as the most valuable benefits thatSnap-on Tools offers to its customers? On what arethey based? Discuss.

2, Discuss the rationale underlying the main featuresof the Sn+p-on Tocrls channel structure andsrrareg-y.