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KONE’s “MonoSpace” Launch in the German Market

KONE’s “MonoSpace” Launch in the German Market

2011

Executive Summary: KONE’s launch in Germany is an incredible opportunity for it to showcase its revolutionary Monospace product. However, what goals should KONE pursue in this market introduction? We discuss the high level objectives that KONE should set: 1) Grabbing a larger market shares in the mid-tier non-hydraulic segment 2) Positioning MonoSpace and Eco-Disc product for future growth 3) Restoring some balance in the two-part pricing revenue model. Based on these goals, we explore the strategic choices KONE has to achieve these goals and discuss the merits and disadvantages of the different approaches. Based on prevailing market conditions and the high level objectives, a Neutral Market Pricing is deemed to be most appropriate. This targets the geared traction customers in the residential market and sets a pricing level between the current PT and PU segments. Necessary next steps for capacity planning, promotion, and communication needed to build a coherent launch strategy are listed. Finally, long term steps needed to develop a successful corporate strategy for MonoSpace/Eco-Disc are touched upon.

Industry Analysis After a wave of restructuring and consolidation, the worldwide elevator market in the early 90’s was dominated by 5 large players: Otis (USA), Schindler (Switzerland), KONE (Finland), Mitsubishi Electric (Japan), and Thyssen (Germany). Although KONE was the third largest elevator company, it was far smaller than the market leaders, who generated twice the revenue. KONE had also divested its nonelevator businesses and was entirely dependent on its performance in this competitive market. In Europe, KONE’s top competitors were 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. At this time, revenue in the elevator business was generated by a two part pricing system: new equipment ($9B) and service ($13B). All the large players sold equipment as well as provided post installation service. The volume and type of elevators sold largely depended on factors such as urbanization, population density, and government support of public housing. Choice of elevator technology depended on various factors such as travel height, speed, comfort, machine room requirements, drive systems, controls, cabin size, interior finishing and price. A key distinction was related to the type of drive system used to lift the elevator cabin. The primary drive technologies currently available were gearless (high speed), geared (medium speed) traction, and hydraulic, with hydraulic being the most popular due to its lower price. Both these technologies required a machine room to be built above the elevator shaft (PT), to the side of the top shaft (PU), or

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KONE’s “MonoSpace” Launch in the German Market

2011

on the bottom floor (PU and PH). These machine rooms typically accounted for about one-quarter of the total elevator costs (equipment and installation). The number of people involved in making the purchasing decision for an elevator varied greatly based on the size and cost of the building (complex DMU/DMP). Even for the same type of building, the importance of features differed based on the specific decision maker. For a low rise property, decision makers could include the property owner, a construction company manager, an architect, a construction company purchasing agent, or a building service manager. While owners/developers typically cared more about the upfront costs for an elevator, owners/landlords cared about the lifetime costs for an elevator but did not care much about comfort and aesthetics. A lack of innovation in product development had resulted in commoditization of the market, and competitors competed fiercely on price for new elevator installations. While equipment was often sold at or below cost, the major players maintained high margins on the annual service contracts, which were approximately 5% of the purchase price of the elevator. Low barriers to entry in the service market, due to relatively simple elevator technology, steady demand and high margins, attracted many new, smaller competitors. These smaller competitors offered better pricing and faster service, but for the moment, 80% of service contracts still flowed directly to the original elevator manufacturer.

German Market Germany was a critical market because of its large size (15,500 total units annually) and its global reputation as a technology leader. In 1995, the construction boom that started in Germany in 1988, ended abruptly and as a result, demand for new elevators was expected to drop 15% by 2000. The majority of construction was residential with 74% of elevator installations in low-rise residential buildings. Of this, hydraulic elevators accounted for 60% of the elevator installations in low-rise buildings with geared traction elevators making up the rest. Two thirds of the geared traction units were of the more expensive (PU) type. German Elevator Market

Low-rise

44%

Mid/High-rise Hydraulic - PH

26%

74% Geared Traction - PU 20% 10%

Total German Market

3

Low-rise Residential Market

Geared Traction - PT

KONE’s “MonoSpace” Launch in the German Market

2011

Schindler had the highest market share in terms of units sold, followed by Otis, Thyssen and KONE, other mid-sized held approximately 46% of the German elevator market. All the large players provided 24-hour service and had sales and manufacturing facilities in Germany. The mid-sized players operated regionally and typically sold 100 to 300 elevators per year. Several smaller players operated in various cities, but they lacked manufacturing facilities and focused on the purchase and assembly of components and installation as well as local service. In Germany, smaller contractors who possessed limited technical knowledge typically built residential buildings. As a result, these contractors usually relied on the architects to select elevators. KONE managers believed that in the German residential market the final purchase decision was made by the general contractor 50% of the time, by the architect 40% of the time and by the property developer 10% of the time.

Product Benefits KONE’s MonoSpace elevator design is based on an innovative component called the “EcoDisc”. This innovation equips the MonoSpace with capabilities similar to those of geared traction elevators, but with improved comfort, better aesthetics and a number of short term and long term cost savings. The following list details the benefits that differentiate the MonoSpace from current elevator designs: Tangible benefits – Quantifiable benefits that can be measure by the customer: o Energy efficiency : The “EcoDisc” power unit consumes 50% less energy than a comparable geared traction elevator and 33% less energy than a comparable hydraulic elevator. Furthermore, the lower energy requirement allows less expensive wiring and fuses to be used. The total energy savings based on the France entry amounted to DM2,091 (FF5,000) per year [Beneficiary : Owner] o Space/ Installation cost savings (machine-room-less): MonoSpace elevators in low-mid rise buildings do not require a machine room, which typically occupies 11 SQM of space. Therefore, the cost to build such a room and the opportunity cost of the space occupied can be eliminated. Machine room installation costs account for 25% of the total cost of installation, and for the case of a PT installation, the savings amount to DM37,500. [Beneficiary : Owner] o Easier and shorter installation: Installing a MonoSpace elevator requires 60 fewer hours than a comparable geared traction elevator. It also does not require scaffolding, which further reduces the complexity and the cost of installation. Such cost savings were estimated to be 5% of the total installation cost (i.e. For a PT elevator, these savings amount to DM3,750). [Beneficiary : Owner/Contractor] Intangible benefits – Difficult to quantify, but can differentiate the product: o Safety & Environmental friendliness: Unlike Hydraulic elevators, MonoSpace elevators are oil free, thus, eliminating hazards associated with using large amounts of oil and the negative environmental impact of an any oil leaks. [Beneficiary : Owner]

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KONE’s “MonoSpace” Launch in the German Market

o

o

2011

Aesthetics & Design flexibility: The machine-room-less design gives architects the freedom to use all of the surrounding space for aesthetic purposes. [Beneficiary : Architect] Ride-comfort: The speed control of the MonoSpace results in a more comfortable ride compared to that of the geared traction and hydraulic elevators. [Beneficiary : Owner/Tenants]

Least Important/ Not Quantifiable

Customer Benefits Offered Comfort

Tenants/Users

Safety

Building Service Managers

Aesthetics, Look

Most Important/ Quantifiable

Decision Makers

Structural Engineers

Energy Savings

Property Developers

Low Maintenance Cost

Architects

Low Equipment and Installation Cost

Contractors

No Machine Room

Owners/Landlords

Seller

Buyer

Clearly, the MonoSpace elevator is a differentiated product that offers a variety of tangible and intangible benefits to everyone involved in the decision making process. Some of the tangible benefits can be realized instantly (installation costs savings for example), while others accrue over time (energy savings). Detailed calculations are included in Exhibit 1, but the following list highlights the value of each benefit: Machine-room-less installation cost savings (PT): Other installation cost savings (time saved, easy): Annual energy efficiency related savings:

DM37,500 DM3,750 DM2,091

Lessons from Prior Market Introductions KONE’s previous forays into the Dutch, French and British markets offer valuable lessons that should be applied to the launch in Germany. The Netherlands demonstrated the power of being the market leader and the importance of designing a marketing campaign that carefully targeted DMUs. KONE leveraged its position as market leader and also offered face-to-face and individual presentations that were very effective in selling the benefits of MonoSpace. In addition, they created an easy mechanism for the architects and contractors to “drop”

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KONE’s “MonoSpace” Launch in the German Market

2011

in plans by offering electronic designs on a CD Rom. Kone now has market knowledge that when positioned against geared traction elevators in the correct environment, MonoSpace will have outstanding sales. The market launch in the UK showed how cost sensitive buyers will react to an uncompetitive price. Also, the unique segmenting of the UK market into a bifurcated market made up of only top-of-the-line and rock-bottom elevators meant that Monospace lacked an appropriate target segment to attack. France also had the same broad demand in the mid-range, mid-quality elevator of the Dutch market, but KONE’s marketing outreach program was much more haphazard and less directed. This coupled with KONE’s much smaller market share helps explain the lackluster results in the French market. Although there were valuable lessons learned, differences between these individual markets and the German market must be considered. The Netherlands is a much smaller market that was already dominated by KONE, and hence, competitors’ willingness to fight for this market may have been muted. In addition, this was a bit of an “anomalous market” where geared traction elevators were 5% less expensive than hydraulic elevators. Some of the UK results must be discounted because of the bipolar nature of the market and the effect of the required “£15,000 transfer price.” Differences between the French and German markets included the regulatory environment and the prevalence of the two-stage bidding process in Germany.

Pricing Objectives and Role for MonoSpace The two lukewarm market introductions in the UK and France make the MonoSpace introduction in German market especially critical in building credibility and market acceptance for this revolutionary product. Though facing a competitive marketplace both in Germany and globally, KONE’s development of the MonoSpace product gives it a fundamentally superior product with which to achieve some key objectives. 1. KONE must move into the mid-tier geared traction segment because it represents a large untapped market 2. KONE’s introduction and pricing strategy in the German market should position MonoSpace as a future flagship product that can eventually carry a large bulk of its global product line by expanding sales into the growing mid-tier market without cannibalizing its share of the PH segment. 3. Kone should try to restore margins that have eroded over the years and recapture some of the service revenue that had begun to leak to the smaller start-ups.

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KONE’s “MonoSpace” Launch in the German Market

2011

Strategic Consideration in MonoSpace’s Price Focusing on the high level objectives stated above, KONE must determine the market segments and by extension, the competitors, they will target through the prices they set. A pricing window should be determined by calculating the added economic value MonoSpace provides over existing products and adding this to the most appropriate reference value. In this section, we consider the qualitative advantages and disadvantages of the different approaches to dividing the economic benefit with the customer. Later, we delve into a detailed quantitative analysis of the four-floor, residential pricing model. The case for skimming: For KONE, this approach would entail pricing near the very top of the price window and retaining most of the economic benefit created by MonoSpace. The emphasis is high profit margins rather than large volumes (i.e. SOM). Pros: Emphasizes profit margins Higher price conveys benefits of MonoSpace to the market and reinforces the message that MonoSpace is a revolutionary product Does not upset other current players in the market and minimizes their reaction Helps improve revenue model to the benefit of the KONE and the industry Gives KONE the most room to maneuver and change future pricing (as it is easier to lower prices than to increase them) Cons: Price may be too high since not all benefits are enjoyed by all the decision makers Total economic value of MonoSpace will not be enjoyed until later (since many customers have already designed machine rooms into their buildings) Harder to sell benefits of the product to the customer since they receive a smaller portion of their value Need a very skilled, experienced sales force that can carefully market the high value of each of these benefits to the customized segments

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KONE’s “MonoSpace” Launch in the German Market

2011

The case for penetration: For KONE, this means pricing near the bottom of the price window and giving the customer most of the economic value created by MonoSpace. Pros : Easier to sell benefits to the customer Volume play that will likely increase revenue results in Germany Likely short lead time makes it important to establish strong first mover advantage Cons: Will incite a far greater reaction from stronger competitors in the segment Increases reliance on the equipment loss leader- service revenue model May make it harder to position the rest of the product line in the future May cannibalize sales of its low rise PH product The Neutral Market option: Because of the prevailing competitive landscape, our recommendation is to pursue a neutral market pricing strategy that targets geared traction elevators customers in the low-to-mid rise residential market. A key objective in Germany is for a successful launch that can be used to evangelize MonoSpace’s benefits and position it in future market and geographic segments. For this, KONE need to sell units and reach as many people as possible while balancing the ability to position this product in the future. It is imperative to begin growing the MonoSpace ecosystem—making architects aware of the design flexibility, selling owners on the operating efficiencies, demonstrating savings to contractors, and even making consumers aware of the comforts and intangible benefits to MonoSpace. The present competitive landscape makes skimming an unattractive option because KONE will not reach enough customers. The benefits of MonoSpace are distributed to several different DMUs and some of the benefits are difficult to quantify or may accrue in the future. For example, developers may not be concerned with future energy cost savings that are enjoyed by landlords in the future. Other benefits such as the cost savings from the removal of the machine room cannot be realized initially until the MonoSpace market matures and architects and contractors design buildings to MonoSpace’s abilities. In addition, selling individual DMUs on the full value of these benefits will be difficult with KONE’s limited sales force in Germany. There are also several important factors that discouraged the use of a penetration strategy. As the fourth largest player in Germany, KONE is vulnerable to retaliatory actions taken by the market guerillas that would react strongly to a low price incursion into the PH market. In particular, the hydraulic market is the heart of the residential low rise market and also represents the most cost sensitive segment. It will take time to build the EcoDisc technology into a vibrant product line and KONE lacks the deep resources of its competitors to engage in a price war at this moment. Even though the PU and PT 8

KONE’s “MonoSpace” Launch in the German Market

2011

products are a much smaller piece of the total market, for KONE, it still represents huge incremental revenue gains that it is currently missing. In the residential market, KONE’s geared traction products brought in only DM3.3 million (8% of KONE’s revenue) out of the DM333 million residential geared traction market.

For all these reasons, a neutral pricing strategy that prices MonoSpace in between the PT and PU levels seems to strike the right balance between immediate sales and future positioning. It allows time to grow the ecosystem while increasing chances for a successful German launch; it maintains current revenues from existing hydraulic markets by minimizing cannibalization. This price level preserves the current discrete product segments and leaves KONE well placed with respect to margins, product positioning, and flexibility for future expansion.

PERFORMANCE

Moreover, a low price interferes with the ability to position MonoSpace as an anchor of the future. It erodes the message that this is a new revolutionary product and makes it more difficult to segment and position future EcoDisc products as KONE drives improvements in this technology. A price based on a penetration strategy also squanders the opportunity to improve on the current revenue model. With production costs equal to those of a hydraulic elevator, MonoSpace has the ability to re-establish some margins without disrupting customer’s price expectations. This rebalancing of the revenue model means profits on elevator equipment can be restored and the threat from the service ankle biters can be minimized.

Gearless

MO NO

U

PS

PH PRICE

Quantitative analysis of 4-floor pricing: A quantitative analysis for the 4-floor residential elevator illustrates the pricing proce...