CASE ANALYSIS KONE: The MonoSpace Launch in Germany

Abhishek Sahu (M007-14) Ankita Nareda (M017-14) Chetan Sehgal (M024-14)

N Vinoth Kumar (M040-14) Yagna Teja D (M067-14) Gauri Rajpal (M094-14)

Harsh Marodia (M095-14) Shailesh Singh (123-14)

Shalini Sathapathy (M124-14) Toshima Singh (M129-14)

Subject: Strategic Marketing Submitted By: Group 6

Situation Analysis Industry Analysis The Elevator Industry

High consolidation in the industry with 5 major players. The business is split into 2

sectors: new equipment (V1) and service (V2).

Global sales in 1995: $ 9Bn in V1 and $13 Bn in V2.

Competition: Fierce leading to price wars and profit erosion in the new equipment

sector.

Low entry barriers: Simple technology, steady demand and high margins in the service

market. But 80% contracts still flowed from new equipment sales.

Customer: Urbanization and increase in population density led to a rise in demand for

elevators.

Substitutes: The threat of substitutes was low.

There was a lack of innovation in product development. The equipment was often sold at

or below cost, but the major players maintained high margins on the annual service

contracts, which were approximately 5% of the purchase price of the elevator.

The elevator drive units could be of 3 types:

Type Sales Percentage Gearless 10% Geared Traction 30% Hydraulic 60%

The elevator purchasing decision involved the property owner, construction company

manager, architect, construction company agent and building service manager.

49%

13%

38%

Demand By Region - Residential Low-Rise, 1996

Europe, Middle East &Africa

North and South America

Asia & Australia

Market Analysis

Aspect of comparison Netherlands France United Kingdom Germany Sales Volume (1995) 2,100 7,000 3,300 15,500 Kone Market Share (Volume)

40% 14% 20% 9.2%

Construction Activity Relatively Stagnant Relatively Stagnant Relatively Stagnant Declining Market Residential Building share of Construction Activity

~50% ~50% ~50% Dominated by Residential

Construction % of Low Rise Elevators sold

70% 90% 70% 74%

Type of elevators dominating the market

Mid Quality Elevators Mid Quality Elevators Top of the Line and Rock Bottom

Elevators

74% Low rise to remain for 5 years

Geared Type Elevators sales

60-70% 20% 10% NA

Hydraulic Elevator sales NA 80% 90% 60%

PH Price (Hydraulic) DG 65,000 N/A 15,800 N/A

PT Price (Traction) DG 62,000 FF 150,000 30,000 N/A

PU Price (Traction) DG 68,000 N/A N/A N/A

MonoSpace Price DG 69,000 FF 180,000 30,750 N/A

Premium Pricing Rationale

Savings due to no machine room to

owner

Savings due to no machine room to

owner

Due to Transfer Price N/A

Price Range set near Geared Traction (PT) Geared Traction (PT Geared Traction (PT N/A Primary mode of marketing

Individual Customer Meetings (100)

Breakfast Meetings (20)

Presentation in London Museum

(80)

N/A

Monospace Results Successful Not successful Not successful N/A

KONE is the third largest elevator company and in Europe, KONEs top competitors include Otis, Schindler and Thyssen. KONE had the largest market share in the

Netherlands, where geared traction elevators were the most abundant. Otis had the

largest market share in France and UK, where hydraulic elevators were much more

popular.

74%

26%

German Elevator Market

Low Rise Mid & High Rise

48%

52%

German Market Sales

Residential Commmercial

Key Learnings from the test markets

Netherlands where Kone had the maximum market share has been a successful launch

for Kone. All these markets are dominated by the sale of low rise elevators where

MonoSpace has a huge potential. The support from the regulatory authorities also

provided help for the sales of Kone in Netherlands. The significant penetration of geared

traction type of elevators in Netherlands impacted positively the sale of MonoSpace. The

pricing of a superior product like Monospace in the range of a geared traction type of

elevator given that the Hydraulic type costed only ~6% lesser helped Kone in the

Netherlands.

It can be assumed that the pricing in France where MonoSpace was 20% more expensive

than the PT type did not quite work out well for Kone. It is also observed that the Kone

branch managers were not correct in their assessment of the situation that customers

would be willing to shell out all the cost benefits due to energy savings into the cost of

MonoSpace elevator. This indicates that Kone should try to get additional revenue from

the service contracts rather than charging a hefty premium on the equipment sale.

Regulatory obstacles also did no good to MonoSpace sales in France.

In the UK market which is highly price conscious the availability of a cheaper hydraulic

elevator did a lot of damage to the positioning of MonoSpace. The cost efficiencies took a

backseat when the purchase managers considered the upfront costs of Monospace which

impacted the sales negatively in the UK. Considering the three scenarios it can be seen

that it is of paramount importance for Kone to get the pricing and positioning correct.

German Elevator Market New Elevator Market

Player Value Value Units Units Average Price Per Unit

Thyssen 15.4% 157355 12.9% 2000 78697

Otis 13.8% 141007 11.6% 1798 78424

Huashahn 6.5% 66416.2 5.8% 899 73878

Schmitt & Sohn 5.4% 55176.6 5.8% 899 61375

Kone 8.5% 86852 9.2% 1426 60906

Others 32.7% 334125 35.5% 5503 60722

Schindler 17.7% 180857 19.4% 3007 60145

Total 15,500

If we take into account the average pricing it can be assumed that Kone does not charge

a heavy premium compared to its competitors in Germany. Of the top three players while

Thyssen and Otis seem to price their elevators on the higher side Schindler does not

follow a similar approach. Both Otis and Schindler have lost market share during the year

and they have focused a bit more on equipment sales. It also makes a better case to focus

on the service revenues and price MonoSpace at the current average to increase sales.

SWOT

Objectives 1. Launch the MonoSpace in Germany in a way so as to ensure market acceptance

of this superior product

2. Maintain market share in Germany

3. Realize higher profits in the given market

4. Price and position MonoSpace for long-term profitability

5. Devise a launch plan

Implication of success of the MonoSpace Launch:

1. Kone will gain market share Though Kone does not want to upset the market by

securing a very high share, some increase in likely if the launch is successful

2. Increase in profitability

3. First mover advantage It would be the first to introduce a superior product which is

commercially viable

4. Establish itself as a credible brand

5. Some cannibalization of sales of low-end elevators

Implication of failure of the MonoSpace Launch:

1. Kone will have to suffer huge financial losses

2. Loss of reputation - A failed product will reduce the trust in the brand value

3. Loss of market share and profitability

Alternatives Pricing Alternative I Comparable to Hydraulic ~ DM 60000

This option will grab the market share from Hydraulic & Traction.

Cost price of a Monospace near to Hydraulic and Hydraulic is sold at 8% loss in Germany. So the cost price comes to be DM 65000 (60000/.92)

The company will aggressively gain the market share but lose on profit one sale of new equipment which is not as per their desired policy of maintaining the

market share and gaining higher profit because the competitors (Otis) will jump

in price war.

But the higher market share will enable them to increase their profit through service.

Pricing Alternative II Compared to Traction between DM 60000 75000

This will serve as a replacement for Traction with little impact on Hydraulic segment.

The company will gain market share and also earn profit on the sale of new equipment and subsequently on service.

Competitors may not proactively react to this move.

Pricing Alternative III DM 75000 + 5% premium

This will have no impact on Hydraulic segment with little impact on Traction segment.

Since the Monospace will be sold at a premium, it will ensure significant profit on the sale of new equipment and subsequently on service.

But the gain in market share wont be much and competitors wont react as their share will be maintained.

Solution The learnings from previous launches are

Small items such as using lower risers, time/process savings taken together could

amount to 5% savings for the construction company. This provides a reason to

charge premium for our product.

Peoples worry about the monopoly of Kone given they are the only provider of

elevators that doesnt require machine room and hence may lead to price gouging in

the future. Hence they cannot position Monospace as something that saves room

space. So they can position it as a superior technology product with a better

performance.

Saving for Builder on Machine Room:

Saving if Machine Room not built DG 8,000 or DM 7,150

Saving on Construction for the Builder:

Total Elevator Cost (PT) DM 150,000

Machine room Construction Cost (PT) 25% of Total = DM 37,500

Construction & Installation Cost (PT) 25% of Total = DM 37,500

Cost Saving on Construction (PT) 5% of construction cost = DM 3,750

Energy Savings:

Energy Saving in France (assumption: similar case elsewhere)

FF5,000 or DM 1430

Saving on Fuse Cost (Geared) DM 661.38

Total DM 2091.38 We prefer alternative III because of the reasons mentioned above.

POSITIONING

We will position MonoSpace as a technologically advanced product that leads to various

advantages for the customer and the combined value derived out of these advantages is far

more than the premium charged on MonoSpace. Let us look at the customer benefits offered

by MonoSpace that make it the preferred choice:

1. Energy Efficiency: The drive unit consumes 50% less energy as compared to geared

traction and 66% less as compared to hydraulic system. This means the requirement

for electrical wiring and fuses is less expensive.

2. Faster Installation: Installation time for a MonoSpace is 190 hours which is 60 hours

less than for the simplest elevator.

3. Safety: It requires no oil, eliminating potential fire and environmental hazards.

4. Ride comfort: The drive unit in MonoSpace can control speed as done in gearless

elevators.

The target audience is comprised of the general contractors and the architects who make the

purchase decision 50% and 40% of the times respectively. The contractors possess little

technical knowledge and therefore, what appeals to them is the economic gain they can make

on a purchase. Price savings should be detailed to attract them. On the other hand, the

architects are concerned about the safety as well as quality of the product and the efficiency

achieved in installation of the elevator.

PRICE AND PERFORMANCE IN GERMANY, 1995

With respect to competitors:

Pe

rfo

rma

nc

e

Price

Hydraulic

Gearless

Geared MonoSpace

Implementation MARKETING PLAN

The Marketing Resources available for the Monospace launch in Germany included

Advertisements, Direct Mail, Launch Events, Exhibitions, Customer Visits and Public

Relations.

Target Audience Direct Mail Trade& Journal Advertising

Customer/ Sales Visits

Seminars Press Kits+ Videos

Architects Yes Yes Yes Yes Yes Big 4 Contractors

Yes Yes Yes Yes Yes

Small Contractors

Yes Yes Yes Yes No

Property Owners

Yes Yes No No No

Advertising: It is given that single ads were the most common with campaigns being very

rare. Hence, Trade Press and Journal Advertising was chosen as one of the mediums to

propagate the Monospace. Given that a single ad is the most preferred frequency, a black

and white one-page advertisement in a monthly journal with a circulation of 18,000 and

cost DM 1,600 was chosen.

Direct Mail: This channel was targeted by large companies to architects, investors and

general contractors. It is given that KONE sent letters to 22,000 existing French

customers requesting them to watch a television program. Taking a similar number of

customers into account, a direct mail campaign can be undertaken for around 30,000

customers can be sent regarding the launch of Monospace.

Trade Press and Journal Advertising was targeting the mass media (Above the line) while

the direct mail was more personalized. These can be the two mediums that can be used

to target the property owners whose purchase decisions amount to a meager 10% of the

total number of purchase decisions.

Launch Events: Since Road Shows can be a heavy marketing investment during the early

stages, seminars targeting the Architects, Big 4 Contractors and the small 20,00

contractors.

Exhibitions: Since this was mainly used by the component companies, this option is not

viable in this context.

Customer/ Sales Visits: Personal Selling along with Advertising are the most preferred

modes of communication during the early stages in a product life cycle. Personal Selling

can done during the sales visits to the Big Contractors alone which can capture 20% of

the market share. This can also be extended to the other 20,000 small contractors and the

architects.

Press Kits/ Videos: These can be primarily targeting the big four contractors and the

architects who are the major deciders of the purchase decisions.

COST ALLOCATION

Type of Marketing Channel

Circulation/ Reach Cost Anticipated Sales

Direct Mail 30,000 60,000 DM 90~120

Trade Press & Journal Advertising

18,000 1,600 DM 40~60

Exhibitions - - -

Launch Events: Seminars

10( Assuming as the no of seminars) *70=700

100,000 DM (Assuming 30% conversion) 210

Customer/ Sales Visits

(Assumption)2,000 500*2000=10,00,000 DM

(Assuming 30% conversion) 600

Press Kit+ Video 4+ 10,000 (10,000 architects as the assumption)

20,000+ 10,000*5=70,000 DM

(Assuming 30% conversion) 3.0012

Total Marketing Cost= (60,000+ 1,600+ 1,00,000+ 10,00,000+ 70,000) DM=17,31,600

DM

Total Anticipated Sales= 120+ 60+ 210+ 600+ 3=993 units of Monospace Elevators

Let us analyze the marketing cost that can be covered by the sale of each unit

anticipated in terms of three situations:

Best Situation: Assuming that 60% of the total Anticipated Sales (595 units) are

Converted. Then the Cost per Unit Ratio is 2910.3 DM

Realistic Situation: Assuming that 40% of the total anticipated sales (397 Monospace

elevator units) are converted. Then the marketing cost per Monospace unit that is

covered amounts to 4361.7 DM

Worst Situation: Assuming that 20% of the total anticipated sales (198 Monospace

Elevator units) are converted. Then the marketing cost per Monospace unit that is

covered amounts to 8745.45 DM

The above figures indicate the pricing that must be set on the Monospace elevator and

the amount of marketing cost that can be covered by the sale of each Monospace

Elevator unit.

Short-term Strategy Kone must focus on launching the MonoSpace so as to gain credibility in the market and

increase its profits. Also, from Table E, we note that Kone serviced only 4.9% lifts in 1995. This

is a very low share as compared to other players. We also know that the margins in this

division are higher. Therefore, Kone could lower its price for providing service in a bid to gain

market share.

Long-term Strategy Extend the capabilities of the EcoDisc machine and the MonoSpace product line. To stay

ahead of the competition, Kone must maintain its core ability to come up with innovative and

technologically superior products.

Kone could target a high growth market like Asia in order to expand its business.