Theft. Piracy. Counterfeits. Gray market activity. These words and their implied threat to any company’s bottom line intimidate even the most intrepid executive.

1.
HOW TO STOP GRAY MARKET AND
COUNTERFEIT PIRACY
Author |
Laura McCaughey
New Momentum
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2.
Theft. Piracy. Counterfeits. Gray market activity. These words and their
implied threat to any company’s bottom line intimidate even the most intrepid
executive. While some executives chalk up gray market activity as “the cost of doing
business,” New Momentum and Archstone Consulting believe that companies can
proactively recapture lost revenues, market share, and brand reputation through
tightening their value chains. They can accomplish this by implementing an end‐to‐end
structured process for analysis and utilizing state‐of‐the art Enterprise Risk Management
(ERM) software solutions ‐‐ and subsequently shut down illegal activity.
New Momentum, a leading provider of SaaS‐based Enterprise Risk Management (ERM)
software, and Archstone Consulting, a leading strategy management and operations
consultancy, recently co‐presented on how enterprises can regain the revenues lost
through unauthorized gray market sales. This white paper discusses gray market issues
and challenges; presents an overview of Archstone’s strategic approach, process and
techniques for combating product diversion; and demonstrates the capabilities and
effectiveness of New Momentum’s ERM software solutions in a plan of attack against
diverters.
Think this activity is irrelevant to you? Think again. These serious concerns affect almost
every department within an enterprise: the office of the Chief Financial Officer, the Fast Facts |
Chief Marketing Officer, the Vice President of Sales, the Vice President of Supply Chain,
the Vice President of Channel Management, the Vice President of Customer Service, Counterfeiting is a $650‐
and, of course, the Brand Protection Officer. The reward for attacking gray market and billion problem annually
counterfeit activity is substantial – on the order of more than $10.5 billion in annual
Goods sold worldwide in
recovered revenue for one customer – a serious return on investment (ROI).
2007 7‐10% believed to be
Do You Know What Gray Market and Counterfeit Activity is Costing Your Company? counterfeit
According to the Alliance for Gray Market and Counterfeit Abatement (AGMA) and Counterfeits cost 750,000
KPMG, the value of gray market information technology (IT) products alone averaged jobs in the US
$58 billion in 2007. Counterfeiting has been conservatively estimated as a $650‐billion
Counterfeit pharmaceutical
problem annually. Of all goods sold worldwide in 2007, 7‐10% are believed to have been
sales increasing at about
counterfeit. The cost of these activities is not just lower revenues, but lost jobs.
13% annually
Especially painful in today’s economy, counterfeits are believed to have cost 750,000
jobs in the US alone.
The Center for Medicine in the Public Interest estimates that worldwide counterfeit
pharmaceutical sales are increasing at about 13% annually—nearly twice the pace of
legitimate pharmaceuticals—and could become a $75‐billion industry by 2010. A
shortage of financial resources, a lack of coordination between countries, and weak
anti‐counterfeiting laws in some regions are hurting law enforcement agencies’ ability
to detect and prosecute counterfeiters.
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3.
E‐Commerce is a Primary Driver of Gray Market and Counterfeit Activity
B2B Accounted for 93% of All E‐Commerce in 2006
E‐commerce is a primary driver of this ever‐burgeoning gray market and counterfeit
activity. The US Census Bureau recently posted some interesting data points that
explain the growth in counterfeit and gray market activity. In 2006, as in the past,
Manufacturers and Merchant Wholesalers relied far more heavily on e‐commerce than
the Retail or Selected Service businesses. Business‐to‐business activity (defined as
transactions by Manufacturers and Merchant Wholesalers) accounted for a whopping
93% of all e‐commerce.
In four separate surveys of about 137,700 manufacturing, wholesale, service, and retail
businesses, manufacturing led all other segments, with e‐commerce accounting for
31.2% ‐‐ $1,568 billion – of total shipments. Merchant Wholesalers accounted for 20.6%,
or $1,148 billion; retailers’ e‐commerce was 2.7%, or $107 billion; and e‐commerce sales
for Selected Service Industries accounted for 1.8%, or $114 billion, of total revenues.
B2C: Web and Cross‐Channel Estimated to Influence Almost 40% of Retail Sales by 2012
Forrester Research estimates that nearly 40% of retail sales will be influenced by the
Web and by cross‐channel in 2012. In 2007, cross‐channel shopping (a variety of
channels, including in‐store, catalogue, mobile, and Web) accounted for $510 billion, or
20% of total retail sales. By 2012, that number is projected to exceed $1.1 trillion, or
about an estimated 17.3% compound annual growth rate (CAGR) for all retail categories.
IBM just released a survey of almost 4,300 US and UK consumers. Of these shoppers,
“46‐50% admitted to switching loyalties to retailers as they shopped across different
channels. Overall, most consumers cited price as their primary motivation for change,
followed by convenience and product availability.” In this survey, consumer electronics
purchases emerged as the most frequently shopped product category among multi‐
channel shoppers. Ironically, a deep discount is a tip‐off that goods are either gray
market or counterfeit.
Capitalism Seemingly at its Finest is an Ecosystem Spawning Lucrative Gray Market
and Counterfeit Activity
When we speak with prospects and clients, we sometimes encounter a view that gray
market and counterfeit activity is only an emerging markets problem. However, this is a
global problem requiring a global solution. Piracy differs substantially by region (and by
country, China, Vietnam, Ukraine, Indonesia, and Russia are the top pirating countries).
US Customs and Border Protection estimates that of all counterfeit goods seized by US
Customs officials last year, 88% was in China; 6%, Hong Kong; and 1%, Taiwan.
Enforcement of intellectual property/trademark/copyright laws varies drastically from
region to region. While different techniques are needed for combating the different
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4. forms of pirac
f cy, in every ca
ase, tightenin
ng supply/valu
ue chain cont
trols and proc
cesses is a
critical element in eliminat
c ting gray market leakage.
Figure 1. Valu
F ue of Pirated Software by Region
Value of Pirated Software by Region
n (%)
Asi
ia Pacific
US / Canada
a
26%
25%
Ea
astern Europe
7%
Latin
n America
4%
Weste
ern
Europ
pe
Middle
34%
%
East / Africa
Source: BSA a
S and IDC Piracy
y Study and th
he World Ban
nk. 4%
According to A
A Archstone Co onsulting, the most pervasive piracy oft ten happens in countries
with the faste
w est growth rat te in product demand. And d current ince
entives allow everyone in
the piracy cha
t ain to win exccept the IP owwner. While companies ma ake efforts to
o manage
pricing strateg
p gies, the market is efficiennt in the searc
ch for opportunity and arb bitrage. Better
coordination between and
c d among inter rnal and exter rnal functions
s – appropriate systems
infrastructuree, tighter chan
nnel managem ment, and be etter accountaability/compe ensation
structures, jus
s st to name a f few ‐‐ can sig
gnificantly red
duce piracy.
Figure 2. Pirac
F cy Rate versu d Annual Growth in Numb
us Compound ber of Compu
uters by
Geographic R
G Region
Piracy Rate (% of total units put into use)
100% China
Russia
80%
India
a
60%
Italy
I razil
Br
France
40% UK
Japan Germany
G
20%
US
0%
0% 5% 10% 15%
% 20% 25% 30% 35% 40%
4
CAGR (Num
mber of Comp
puters)
Source: BSA a
S and IDC Piracy
y Study and th
he World Ban
nk.
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5. The AMR Research Performance‐Driven Business Network (PBN) Model Supports the
Joint New Momentum‐Archstone Endeavor to Stop Gray Market Piracy
In November 2007, AMR Research unveiled its framework for taking a competitive
capability to the next level: the Performance‐Driven Business Network (PBN). One of the
main premises of this model for the future is that winning at the next level of global
competition requires simultaneously developing business strategies and enterprise
architecture to enable them, as well as establishing supporting organizational principles
to create a performance‐driven business network of your company and partners. There
are three linked facets of the model: business strategy, organizational principles, and
enterprise architecture. The competitive challenges of the future, ironically, offer ample
breeding ground for gray market and counterfeit activity: globalization, the changing
work force, reputation and regulation, and corporate churn.
Figure 3. The Three Facets of the Performance‐Driven Business Network (PBN) Model
Source: AMR Research.
Archstone Consulting helps corporations reduce their costs, grow their top line, and
transform their organizations. The firm is a leading authority on helping companies to
understand end‐to‐end value chain leakage drivers and develop roadmaps and
implementation programs for locking down and closing off gray market activity.
Archstone primarily serves the Consumer Products, Retail, Pharmaceutical, Financial,
Utilities, and Manufacturing industries.
New Momentum offers 24/7 software‐as‐a‐service‐ (SaaS‐) based solutions that enable
companies to manage risk across the enterprise: brand protection intelligence (brand/IP
protection), enterprise sales intelligence, market intelligence, and warranty watch. The
deep search Internet analytics have the ability to process more than one million
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6. targeted pages per day. The actionable intelligence software enables management
alerts and established system‐monitored business rules. These unique solution
attributes enable rapid, tangible results.
This offering embodies the attributes of PBN in that makes it an end‐to‐end solution to
companies that are sophisticated in attacking their gray market and counterfeit
problems, as well as those who are just beginning to develop a strategy. We have found
that even the early adopters have been using semi‐manual methods to mitigate risk:
investigating suspects/offenders; recovering assets, cash, and margins; and taking legal
action to shut down/jail counterfeiters. These early adopters are working with
government agencies and associations to assist in the process. And we can help them
streamline and automate the process to save time and recover lost revenues more
efficiently.
The majority of companies are still not aware of the magnitude of the gray market and
counterfeiting problem. They are often challenged by limited resources and may lack an
executive plan of action to combat the problem. Until they do, the “majority” will
endure escalating counterfeit problems that will rob them of their brand, revenues, and
profits.
Four Main Challenges to Finding Counterfeit and Gray Market Activity
There are four main challenges to finding counterfeiters and those involved in gray
market activity, and getting them to cease operations:
• Top management does not understand the bottom line cost of this activity.
• Manufacturers don’t know how to find the counterfeits. (Often they find out
about a counterfeit part when, because of poor quality, it comes in for
warranty repair.)
• Once they find the counterfeits, many companies either lack the resources or
don’t know how to go about enforcement and getting the counterfeiters to
cease operations.
• Ongoing monitoring of distribution streams is difficult and resource‐
consuming.
Understanding the Root of the Problem: Three Major Gray Market Drivers
According to Archstone Consulting, the fundamental opportunities for a gray marketer
are supply/demand balancing for cash flow optimization and the arbitrage between
channels, regions, and distribution models.
• Know the financial health of partners in the network. Partners may
manipulate stocking levels because of the carrying cost of inventory, thus being
unable to meet demand with legitimate product. They also might openly stock
gray market products alongside legitimate products. They could misreport
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7. inventory and sales to realize undeserved price protection and promotion
benefits. Another possibility would be to leak product to compensate for
perceived cost issues. As a result, order patterns may change as these partners
compensate for inventory costs. They may be less willing to carry some or all
products. Finally, return volumes may increase as they are unwilling to sit on
inventory.
• Manufacturers’ Operating Practices. Financial Management practices and
capabilities involving invoice accuracy, payment terms, price protection, and
return allowances all affect network behavior. Marketing and Sales practices ‐‐
beginning with sales force incentive structures, licensing agreements,
promotional allowances and programs, stock balancing, and stock rotation ‐‐
can drive undesirable behavior. Transportation policies must support a tight
value chain. Engineering/authentication capabilities and tracking vigorousness
also influence behavior.
• Manufacturers’ Operating Model. Criteria to address include the following:
the economics of being a distributor; the number of tiers in the value chain;
the number of partner hand‐offs and coordination events; the degree of
dependence the manufacture has on the distributor for end‐user fulfillment
and satisfaction; the extent of regional and cross‐border coverage; the
differences in local operating practices; and the cost of managing and
controlling small, distant distributors.
Specific Value Chain‐Tightening Opportunities
According to Archstone Consulting, end‐user education/outreach and aggressive legal
action and lobbying are important parallel actions; however, they take time and require
coordination with multiple “outside” groups and agencies. Below we highlight some
areas where proactive financial management, marketing and sales efforts, effective
transportation policies, business/operating model improvement, and engineering can
help a company prevent gray market losses:
Financial Management
• Invoice accuracy/tracking
• Real time procurement tracking systems
• Electronic records of all transactions
• Supplier audits
• Payment terms
• Price protection
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8. • Return allowances
Marketing/Sales
• Restructured licensing agreements
• Promotional allowances
• Stock balancing
• Stock rotation
• Detailed shipment tracking
• Improved sales force incentive structures
Transportation Policies
Business / Operating Model
• Alternative billing models
• Adopting new pricing models
• New business model paradigm
• Supporting local market development
Engineering
• Authentication
• Complex logos, markers, tags, etc.
Defining a Gray Market Action Framework
Archstone Consulting does an initial assessment of a client company’s capabilities and
designs a unique business process and tight value chain proposition to combat that
client’s individual gray market issues. As part of this process, Archstone develops go‐
forward roadmaps and implementation programs for locking down and closing off gray
market leakage. Some of the key determinant metrics used in this assessment and
process‐building follow.
Size of the Gray Market Leakage
• Magnitude ‐‐ method of calculation, sources of data, reliability of data, audit
trail, repeatability, etc.
• Impact ‐‐ pain points: economic, product availability/mix, customer service,
channel integrity, etc.
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9. • Segmentation ‐‐ geography, business unit, product family, channel, value chain
participant, etc.
Identify Root Causes
• Supply Chain Model ‐‐ partner network, push vs. pull, outsourcing strategy,
level of control, KPI approach, etc.
• Business Policies ‐‐ pricing strategy, partner agreements, payment terms,
promotions, stock balancing, and stock rotation, etc.
• Processes ‐‐ sales, fulfillment, invoicing, forecasting, reverse logistics, new
product support, partner education and certification, supply chain controls,
etc.
• Operational Consistency ‐‐ level of process/policy fragmentation, channel
conflict, etc.
• Enabling Technology ‐‐ visibility, level of integration, tracking, etc.
Develop Mitigation Opportunities
• Options ‐‐ ideation process, prior pilots/tests, cross‐ functional and partner
feedback, etc.
• Impact Assessment ‐‐cost/benefit, root cause alignment, supply chain
integrity, etc.
• Risk Assessment ‐‐ partner impact, achievability, complexity, supply chain
integrity, etc.
• Clustering ‐‐ identification of redundancies and synergies, etc.
Build Roadmap, Business Case, and Mobilize
• Prioritization and Phasing ‐‐ business case, goal alignment, timing, complexity,
achievability, etc.
• Active Sponsorship ‐‐ identification, education, commitment, etc.
• Deployment & Governance – project management office, team participants,
global vs. regional, cross‐functional, etc.
The New Momentum Solution: How to Give Counterfeiters and Gray Market Players
“A Bad Day”
Both strategic and tactical remedies are part of the solution. Continuing pointed attacks
on individual cases of piracy are necessary to maintain the consistent message that IP
owners are still intent on curtailing piracy. “Giving counterfeiters a really bad day” will
be an effective deterrent if combined with larger strategic measures (concurrent top‐
down and bottom‐up responses).
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10. The appearance of relentless pursuit has significant value. Successful companies
establish an ongoing program for designing and implementing short‐, medium‐, and
long‐term fixes. They also focus on money, visibility, and control. Pirates and others will
look for and exploit any weaknesses in any company’s system. There is generally no
permanent fix. The IP owner must be more diligent than the pirates.
The New Momentum SaaS‐based ERM solution leverages technology, content, and a
positive user experience to mitigate counterfeit and gray market activity and enable the
IP owner to outwit the pirates. These solutions help manufacturers who make or use
electronic components, pharmaceuticals, luxury goods, and other high‐margin at‐risk
products mitigate these risks. The solution set includes Enterprise Brand Intelligence,
Enterprise Sales Intelligence, and Supply Risk Management (including a Strategic Parts
Monitor and Constrained Parts Finder). This solution enables a customer to find new
targets and networks that sell counterfeits; locate large players; and better model to
find consistent trends.
Unlike most enterprise and supply chain planning software, which only gathers
information from within a company and its suppliers, New Momentum’s advanced web‐
mining technology allows the customer to monitor the “global open market.” The
system primarily gathers unstructured transactional data – a real‐time snapshot of
global buying and selling activity that no other company provides. This dynamic 24/7
visibility into a broad variety of market intelligence data can be used to identify suspect
products and companies. This visibility enables a proactive response to head off
counterfeiting before it hurts the customer’s bottom line.
New Momentum continuously monitors the global open market for buy/sell listings of
products and part numbers, utilizing sophisticated search agents, which are able to
capture detailed market data from a broad variety of market source types, including the
following:
• Franchise and large distribution websites
• Independent and gray market websites
• Email‐based forums that aggregate buy/sell listings
• Trade boards
• Auction sites
• Chat
• B2C sites
• Blogs
• B2B sites
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11. Unlike all othe
U er offerings o
of its type, New Momentum m data is delivered via web portal
directly to the
d e customer inn a comprehensive, multi‐ddimensional mmarket intellig
gence
cube, from wh
c hich custom r report views, personalized
d dashboards,, and even usser‐
formatted dat
f ta export files
s can be creatted.
All data is accessible and utilized within
A n an intuitive user interface
e, providing
investigators wwith the ability to develop
p and manage e case historie
es, analyze evvidence,
and better un
a nderstand associations bet tween suspec ct companies, , partners, and related
contacts. As w
c well, email ale
erts keep the brand securit ty group apprised of poten ntial new
counterfeit ac
c ctivity.
Step‐by‐Step:
S : User‐Friendly Simplicity to Solve a Co
omplex Globa
al Problem
The customer
T r inputs all pro
oducts, pricess, partners, and suspects hhe/she would d like to
track into an E
t Excel spreads sheet that is t
then loaded in nto the New Momentum S SaaS‐based
system. The search agents in the system
s m go out to mmore than 10,0 000 sites 24/7 –
equating to m
e more than one e million page n the global open market. T
es nightly – in The data
are then brou
a ught back into o the system aand cleansed and uploade ed to the clien
nt in a
user‐friendly personalized executive dashboard that
u t provides acttionable intell
ligence.
A
Among many y other featur res, the execu
utive dashboa ard features a
a classification
n summary
(suspect, grayy, high risk, ne
ew, and partnners), as well as total open
n market activ vity over
the life of the project and t
t the past 30 days. Other im
mportant features include T Top
Comparison b
C by Discount in n the Last 30 D
Days (discounnting being a good indicato or of gray
market and co
m ounterfeit acttivity) and Top Suspect Companies by Q Quantity in thhe Last 30
Days (see Figu
D ure 4).
Figure 4. New
F w Momentum
m Executive D
Dashboard – A
Actionable Intelligence
S
Source: New Momentum.
Customer Pain Points and the New Mo
C omentum Res
solution
Company A. P
C Pain points fo
or this custom
mer include qu and high return rates, as w
uality issues a well
as IP licensing
a g. Remarking was at $2 vs. $20, and cou unterfeits werre rampant. IP licensing
violations also
v o were contributing to lostt revenues, as
s was lax parttner managem ment.
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12.
The immediate results were staggering. In the first 30 days of using the new Momentum
solution, 500 violators were found. Based on the intelligence the solution provided, the
customer was able to embark on a partner conversion program, which benefited all partners.
Here’s how the program works: The company offers suspects the opportunity to become
legitimate distributors. These suspects respond by either becoming part of the channel or
ceasing operations and moving on to another target.
Company B. The challenges for this customer were that it was encountering quality issues
and receiving a high level of returns. The culprits were counterfeits and trademark
infringement. As a result, the customer was experiencing brand and revenue erosion, as
well as service and warranty fraud. This customer estimated losses of more than $1 billion
annually to counterfeit and gray market activity. In response, it set up a significant brand
protection department that works closely with US Customs and Border patrol. However,
this company needed greater visibility into the global open market to find the culprits. The
customer was able to reduce gray market activity with the New Momentum data. One
seizure of counterfeit products netted more than $75 million.
Company C. Challenges included price arbitrage (no reseller management) and brand
equity (counterfeits and service and warranty fraud). The resultant action from the
actionable intelligence provided by the New Momentum solution included a US Customs
interface working back to the solution and a distributor “watch and education” program.
Company D. This customer was losing revenue on one specific drug to counterfeits and
genuine product diversion. More important, patient safety and population wellness was at
stake, given that counterfeits were being sold in the global open market and products were
originating from outside the US. In the first eight weeks of using the New Momentum
solution, 530 suspect companies were found, and 1,750 new suspect URLS were found. Six For one
large‐scale potential “syndicate” rings were found in the first six weeks. Bottom line, the
client, in one
customer achieved a 33% success rate versus 16% with a competitor’s solution.
year, that
What an End‐to‐End Solution Means to a Line of Business Executive
revenue
Conservatively, AGMA and KPMG estimate that 10% of all goods are gray
market/counterfeit. Of that amount, at least 25% can be recovered through implementing recovery
an end‐to‐end process and software solution like the one that New Momentum and
Archstone Consulting have described in this white paper. For one client, in one year, that
amount
revenue recovery amount translated into more than $10.5 billion. That’s a pretty big translated
number to add back onto a revenue line.
into more
than $10.5
billion.
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