Executive Summary The Strategic Problem is that Kone is currently facing a precarious financial situation in an industry that competes on price rather than differentiation. The Strategic Alternatives are: (1) Price Skimming Strategy (2) Penetration Pricing Strategy (3) Neutral Market Pricing Strategy. The Strategic Recommendation is to follow a neutral market pricing strategy with a recommended price of DM 76,500 to create an economic value for the product and generate DM 10,628,769 (Exhibit 4) in next 5 years with a 50% retention rate. (Exhibit 3) Situation Analysis: Category: Germany is a critical market because of its large size (15,500 total units annually) and its global reputation as a technology leader. Although, the elevator market in Germany is a highly saturated market and a slump in construction led to a demand fall of about 15%. With high buying power, contractors consistently used the bid process to pressure contractors for price reductions (Exhibit 7). As the selling process is largely dependent on bidding, it is inevitable that the industry competes on competitive pricing. The market attractiveness is high due to low entry barriers, simple and established technology and high profit margin in service industry. Competition: Schindler’s market share is the highest in the German market, at 19.4% followed by Otis, Thyssen and KONE, other mid-sized held approximately 46% of the German elevator market. The competitive advantage for large players is that they provided 24-hour service and had onsite sales and manufacturing facilities. Most of the selling was based on bidding thus, Kone’s lower market share points to its competitive advantage being medium-low medium-low as it doesn’t have a better priced product. Company: Although Kone Aufzug has access to the entire demand for elevators elevators in the German market through the bidding process, the market share in PH, PT and PU are only 9.1%, 2.7% and 0.46% (Exhibit 6). As the country with the largest market, Germany is ironically Kone’s weakest weakest market in comparison to France (14%), U.K (20%) and the Netherlands (40%). Customer/Consumer: Customers are price sensitive due to market saturation. There are also quality, efficiency, and service oriented customers. Property developers, general contractors and architects are our customers where property dealers are concerned about price while general contractors whose top 4 constitute 20% of market, are highly fragmented in nature & influence the sale of the product using competitive bidding process. process. Architects select elevators’ cosmetic options only. COI: Our COI are the contractors and architects who make the final purchase decision 90% of the time. Context: There is a need for legal approval for Monospace to be installed in every state throughout the country and also Government does not subsidize the elevator industry. Key Takeaways: (1) Kone has significant market share in PH over the rest. This has important implications since the introduction of Monospace could potentially cannibalize sales of PH. (2) In order to mitigate product risks, consumers will usually sample a product before purchase. Unfortunately, in the elevator industry where investments made are rather substantial, there is no chance to experience a ride in the elevator before purchase. The installation of a MonoSpace in the Kone office will give potential buyers a chance to experience a MonoSpace, reduce perceived product risks that they may have and create a greater incentive to purchase MonoSpace. Strategic Alternatives: (1) Price Skimming Strategy: This approach would entail pricing near the very top of the price window and retaining most of the economic benefit created by Monospace. Pros: -Emphasizes profit margins -Higher price conveys benefits and reinforces the message that Monospace is a revolutionary product in the market. -Does not upset other current players in the market and minimizes their reaction -Gives KONE the most room to maneuver & change future pricing (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 due to present machine room designs. -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 (2) Penetration Pricing Strategy: 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 Cons: -Will incite a far greater reaction from stronger competitors in the segment
-May make it harder to position the rest of the product line in the future -May cannibalize sales of its low rise PH product (3) Neutral Market Pricing Strategy: A market strategy that that prices prices near the the middle of of a value map. map. Pros: - Price is adequate to create customer demand -Will create a positive position in future -No strong retaliation attacks Cons: -May not provide big profit margins -Its success depends on Kone’s future position -Require an adequate mix of volume play and skilled sales force Strategic Recommendation is to pursue a neutral market pricing strategy that targets geared traction elevators customers in the low-to-mid rise residential market. A neutral pricing strategy that prices Monospace Monospace in between the PT and PU levels on the value map (Exhibit 5) 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. Using the pricing model and assuming that switching costs and other negative differentiation values are close to zero, we get a total differentiation value of 33,000 DM (Exhibit 4). Because we are not the market leader, we recommend that KONE give the consumer at least 50% of the economic value (V) created by the Monospace product. Kone’s superior technology and the above exercise leave us with a price recommendation of DM 76,500, which sits between the PU and PT price range. Tactical Marketing Plan: Target audience : Communication of the benefits to each decision maker must be customized and focused on their individual benefits. It is important that these constituencies are not grouped together, and they must be presented material specific to their needs. Marketing Kit: As a result, we recommend a combination of sales-visits, targeted seminars, a media kit that includes a video CD, and advertisements in subscription based monthly trade journals. This can make KONE to develop a stronger foothold with a promotion cost of DM 264,200 (Exhibit 1). Pilot projects/Live demonstrations: Because this is a new technology, it is important to have several installations around the country for demonstration purposes. These installations must be designed so that architects can appreciate the freedom they will have, owners can quantify the savings, and for contractors to experience the ease of installation. Supplier power concerns: Customers may have concerns about price gouging once they have designed their buildings for MonoSpace. Other concerns could arise over switching costs if KONE were to decide to suddenly discontinue the product line. KONE can demonstrate its commitment by offering contracts that offer price guarantees once building designs are finalized and penalty clauses if the MonoSpace line is discontinued. New technology: With any innovation, concerns about reliability may arise. KONE can offer customers warranties or bundles with a 1-year 1-year service contract included free of charge (KONE’s estimated cost for maintenance is DM 2,100 per year). Furthermore, KONE can emphasize its leadership position in other markets and its history in delivering reliable innovative product to reassure customers. Maintenance and Distribution: KONE must also undertake the proper capacity planning and build-up to guarantee capacity needs on both the new equipment and service side can be met. With the aforementioned plan, Kone would be able to generate a profit of DM 3,499,575 in the next year at a 3% annual growth rate with a potential profit of DM 10,628,769 with a 9% growth rate in the next 5 years considering a 50% retention rate. Long-Term Plan: Kone must continue to invest in technology development to both expand the capabilities of the EcoDisc technology and drive down costs. KONE should consider increasing its R&D expenditures (1.5% of revenues) to close the spending gap with the market leaders. This will enable KONE to maintain its technology lead and extend a high end EcoDisc solution higher up the price/performance line. Cost reductions will also enable KONE to sell cost competitive low-end EcoDisc solutions closer to the PH segment. In the future as this product line gains breadth, further market segmentation can transition MonoSpace products into a farreaching product line that completely spans the low to medium range segments. In addition, as it grows its technological and organization capabilities, KONE should devise entry plans in the fast growing markets in Asia.
