1. Introduction
Kone is currently facing a precarious financial situation in an industry that competes on price rather than differentiation. Should the situation persist, losses for 1996 will be imminent. With the launch of Kone MonoSpace in Germany, however, the company hopes to make profits as it expands its product line in this very critical market. Germany’s elevator market is the largest in continental Europe and with a market size of 15,500 units in 1995, it is more than the market sizes of the Netherlands, France and the UK combined. The German market is, thus, critical because of its sheer market size and its potential to bring Kone back into a profit making business. This report seeks to address the key considerations of the MonoSpace launch in Germany, its launch strategy and implementation process. 2. MonoSpace’s Value Propositions
Currently, MonoSpace can only be used in low-rise buildings because it can not operate on buildings with more than 12 levels. Value propositions of the MonoSpace include: 1. Machine-room-less A machine room is typically 25% of the total elevator cost for geared traction and slightly less for hydraulic elevators. Without the machine room, developers will have more area to rent out or sell. 2. More comfortable ride “ EcoDisc” offers a more comfortable ride as compared to a gearless traction elevator, the most expensive option for an elevator. 3. Extremely energy efficient The energy saved is considerable, ranging between one third to half of other elevator systems. In addition, electrical fuses required for the MonoSpace were $42 a year, significantly cheaper compared to $559 a year for geared traction elevator fuses and $1,119 a year for hydraulic elevator fuses. 4. No oil required Potential fire and environmental hazards are eliminated, as is the cost of oil. 5. Shorter installation time Requires 60 hours less time compared to the simplest traditional elevator 6. Lower construction and installation cost Cost savings can amount to 5% of savings for the construction company (should you quote this
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3. Situational Analysis 3.1. MonoSpace Market Analysis
When MonoSpace was introduced in the Netherlands, France and U.K, it was met with varying degrees of adoption rate. It was a great success in the Netherlands but fared very poorly in France and the U.K. A comparison study of the markets can give Kone Aufzug considerable insights to the MonoSpace launch in Germany. Price of PH
Price of PT
Price of PU
Netherlands $40,625 $38,750 France $30,000 UK $24,308 $$46,154 -
Price of No. of Monospace Monospace sold in a year $42,500 $43,125 630 $36,000 160 (estimate) $47,308 45 (estimate)
Netherlands: 40% x 2100 x 75% = 630, France: 40 x 4= 160, UK: estimate based on poor adoption rate
For all markets, MonoSpace was priced at a premium as compared to the PH, PT and PU. As all products are used in the low-rise residential market, MonoSpace can be considered as a substitute to the existing products. In the Netherlands, MonoSpace was priced 6% more than the PH and 11.3% more than the PT. In France, MonoSpace was priced 20% more than the PT. In the U.K, MonoSpace was priced 95% more than the PH and 2.5% more than the PT. Pricing MonoSpace at a premium can denote that it is a novel product of superior quality, thus shifting the competitive landscape away from pricing and focusing more on differentiation. However, if priced too high, the potential benefits of this new technology may be outstripped by the cost of purchasing a MonoSpace. Pricing is especially crucial because the 2 groups that the MonoSpace will be marketing to in Germany, the developers and contractors, are very price sensitive. Good pricing, along with a strong emphasis on relationship-based selling efforts, could have been a reason for MonoSpace’s success in the Netherlands market. A premium of between 6% and 11.3% is not high enough to outstrip the potential cost savings and decision makers may have found the price reasonable. However, the MonoSpace was definitely priced too high in the U.K. At a 95% premium, the MonoSpace is almost twice as expensive as a hydraulic elevator. Kone had neglected the fact that the U.K low-rise market is price sensitive and, on the contrary, emphasized Kone’s technological leadership. Kone’s weak marketing efforts in the U.K also contributed to the dismal adoption rate. Only 3 presentations were made in the U.K to a guest list of 500 as compared to approximately 3500 guests invited for one-to-one presentations in the Netherlands and around 600 guests invited for 20 breakfast talks.
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3.2. Key Take-aways from European Marketing Learning Points
1.In the eyes of the contractors, the elimination of the need for a machine room and a simplified installation process are benefits that are not unique to MonoSpace. Ultimately, they are most concerned over the construction costs so emphasis on the elimination of a machine and simplified installation process without stating the actual cost savings is not compelling enough for them. 2. Energy suppliers have been recommending MonoSpace because they find the energy savings very favourable. Kone Aufzug should consider if it wants to target energy suppliers in its marketing efforts. 3. 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. 3.3. The German Market Market Analysis
Although Kone Aufzug has access to the entire demand for elevators in the German market through the bidding process, its market share is the fourth largest behind its main competitors Schindler, Otis and Thyssen. As can be seen from the table below, the market share in PH, PT and PU are only 9.1%, 2.7% and 0.46%. Germany’s Market Size (1996) Germany’s lowrise residential Market Size Germany’s Market Size in each segment Kone’s Market Share Kone’s Market Share in the lowrise residential market Kone’s Market share in each segment Market share
15, 500 11,470 (74%) PH 6,882 (60%)
PT 1,529 (27%)
PU 3,059 (13%)
1,426
684 (48%)
PH 629 (92%)
PT 41 (6%)
PU 14 (2%)
9.1%
2.7%
0.46%
The weak market share presents an opportunity for Kone Aufzug to increase its market share substantially. As the country with the largest market, Germany is
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ironically Kone’s weakest market in comparison to France (14%), U.K (20%) and the Netherlands (40%). Schindler’s market share is the highest in the German market, at 19.4%. However, Schindler had suffered losses of around 11% of turnover because of its aggressive pricing efforts. As the selling process is largely dependent on bidding, it is inevitable that the industry competes on competitive pricing. With Kone Aufzug only fourth in the industry, it is reasonable to conclude that its prices were not as competitive as Schindler’s, Otis’ and Thyssen’s. Another key takeaway from the market penetration table is that 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. Subsequent decisions will need to take into account such an effect. Key Decision Makers
The key decision makers in the elevator industry are the developers, contractors and architects. In Germany, contractors and architects make the final purchase decision 90% of the time and are concerned over different aspects of the elevator.
Final Elevator Purchase Decision Key Concerns
MonoSpace’s Value Propositions
Developers
Contractors
Architects
10%
50%
40%
Overall cost
Price
Quality Timeliness
No changes to architectural drawings
Machine-room-less
*Machine-room-less
Extremely energy efficient
Lower construction and installation cost
No oil required
*Although in the Netherlands machine-room-less technology did not seem unique, it helps to reduce costs substantially and should still be considered as a value proposition.
Lower construction and installation cost
Aesthetically pleasing
?
As can be seen from the table, there are many ways to reduce the price for the contractors but currently, there are no value propositions that meet the architects’
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concerns. Kone Aufzug should look into adding some aesthetic elements to its MonoSpace elevators in preparation for the launch. 5. MonoSpace Germany Launch Strategy 5.1. Positioning The MonoSpace should be positioned as a substitute to the hydraulic elevators because 1) it has the biggest market size in the low-rise residential segment and 2) it will give buyers the largest value.
In 1996, the demand for hydraulic elevators would be 6,676 (assuming the market size will shrink by 3% annually) in the low-rise residential segment, still making up 60% of the market size, or 20% more than the demand for geared traction elevators. If Kone’s average price of hydraulic elevators is a fair indication of the approximate selling price of each hydraulic elevator in Germany, the market will be worth around $280,111,888. Clearly, the hydraulic elevator industry is highly lucrative. With the aim of capturing the largest segment of the market, MonoSpace should be positioned on a lower price as compared to PH. The production cost of MonoSpace is lower than that of PH because it is a machine-room-less system, giving it a superior cost advantage. Additionally, 60% of the decision makers are highly price sensitive. The combined proposition of less price and more value will not only allow MonoSpace to capture the bulk of the Germany market (which is inherently driven by low-rise elevators), but also ensure that competitors cannot engage an effective price war since MonoSpace is largely differentiated with significant benefits, both tangible and intangible. Cost benefits, in particular, are highly valued by the specific decisions makers such as contractors and developers. Therefore, MonoSpace should not only be positioned as a substitute for the hydraulic system but also as a system that gives buyers more for less. Although Kone Aufzug will still be competing on price, its product differentiation will create a more inelastic demand and as a result, Kone Aufzug will have more control over its pricing strategy. 5.2. Pricing
The production cost of the MonoSpace is estimated to be comparable to the hydraulic elevator but there are other cost savings that should also be factored in: Cost of hydraulic system: 108% x 60,000DM = 64,800 DM Cost of the machine-room: 20% x 64,800 DM= 12,960 DM Cost savings, lower construction & installation cost: 5% x 64,800 DM= 3,240 DM Production cost of MonoSpace= 64,800DM- 12,960DM- 3,240 DM= 48,600 DM ($33,986) MonosSpace should be priced at 56,000DM, around a 15% mark up from its production cost and approximately 7% cheaper than the hydraulic elevator. At 56,000 DM, the MonoSpace is very competitively priced in the industry. In addition, architects may choose different materials and features for the elevators if they wish to add aesthetic flavour. The basic price will always be 56,000 DM and a
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minor change of adding mirrors in the elevator will cost 1,700 DM. Packages that allow the architect to choose the interior paneling material and colours are priced between 3,000 and 15,000 depending on the type of materials and quality of paint requested. 5.3. Threat of cannibalization
Given that Kone’s market share largely resides in the low-rise residential market, it is unavoidable that cannibalization will occur. However, cannibalization in the low-rise residential segment should be encouraged and not feared. As all the elevators sold in this segment are sold at a loss, the substitution of any elevator with the MonoSpace will be favourable to the company. Each MonoSpace contributes 8.400DM to Kone’s revenues but a hydraulic elevator and traction elevator cause 4,800 DM and 3,875DM in losses respectively. This translates to 8% of every PH sale and 5% of every PT sale in comparison to a 15% profit on each MonoSpace sold. It has been considered if Kone Aufzug should increase its prices of hydraulic elevators and traction elevators. However, with full awareness of the price sensitivity in the market, it is not advisable to increase prices. Not only will there be a steep drop in demand, the company will have to deal with excess inventory and the costs involved. Kone Aufzug should aim to capture 30% (2,065) of the hydraulic elevator market and 15% (688) of the geared traction market at the end of 1996. That will bring total profits up to 23,125,200DM for the year. Assuming that 65 % (409) of the market share of Kone Aufzug’s hydraulic elevators and 30% (16) of the geared traction elevators are cannibalized by MonoSpace, Kone Aufzug stands to gain 2,025,200 DM in forgone losses. The net benefit of MonoSpace’s launch in Germany for the first year is 25,150,400DM. 6. Marketing Efforts 6.1. Target Market
Kone Aufzug will focus its marketing efforts in primarily attracting the contractors and architects. Energy suppliers and developers will make up the secondary target market. Although contractors and architects are the key decision makers, energy suppliers and developers may be their key influencers. 6.2. Selling points
Contractors Contractors are most concerned over the cost of their projects so the product and installation cost savings should be presented in a very quantitative manner. The elimination of the machine room and the lower construction and installation cost savings amount to 25%, of which 10% will be passed on to the buyer.
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Architects The architects will be presented with a whole host of ideas that can be implemented to create a more aesthetically pleasing elevator. Packages available were mentioned under ‘pricing’. Energy Suppliers and Developers
Energy suppliers are very strong supporters of MonoSpace because of its energy efficient capabilities. They will not be in direct contact with either the contractors or architects but are in close contact with the developers. Energy suppliers can teach the developers about the energy and cost benefits of using the MonoSpace and if convinced, the developers can request that the contractors use a MonoSpace. Developers need to know that the energy savings in monetary value of using MonoSpace is approximately 39,077 DM a year. In addition, the opportunity cost of renting the space that would have otherwise been the machine room is estimated to be 7,200 DM a year. In total, developers stand to gain 46,277 DM a year. However, developers are not the main decision makers when it comes to elevators in Germany and energy suppliers are only effective influencers when it comes to convincing developers of the energy cost savings in this technology. Only developers are concerned over the cost of maintenance and operations. Energy suppliers do not have influence over contractors or architects because energy cost savings are not one of their concerns. 6.3. Marketing programme budget
In order establish awareness in the German market and enter it with impact, Kone Aufzug requires an extensive marketing programme budget to reach out to as many companies as possible. Although the price of MonoSpace is competitively priced, it is essential that buyers are educated on its benefits and see the product beyond its price tag. When the launch of the product is done well, subsequent marketing efforts need not be as aggressive as the adoption rate increases and word of mouth marketing kicks in. Breakdown of marketing programme budget: Item
Cost
1. Email blasts to 30, 000 companies
The artwork for the email blast:
2. Trade press and journal advertising in a free monthly journal with circulation of 25,000 3. 6 road shows 4. 8139 sales visits 5. Showroom at Kone Aufzug’s HQ, opened 5 and a half days a week. Cost of brochures, refreshments and sending invitations costs approximately 430 DM a day
200DM
3,000 DM 131,250 DM 3,255,600 DM
113,520 DM
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6. Dubbing of video into German. The video can be viewed in the company’s website and will be screen at road shows and in the showroom. 50 videos are needed.
20,250 DM
The marketing programme budget is 3,523,820DM for year 1996. 6.4. Marketing programme
The marketing programme is focused on personal selling and establishing relationships with buyers. Where advertising is engaged, the main purpose will be to invite buyers to the show rooms and road shows. Email blasts
Target Audience: Contractors, Architects, Developers and Energy Suppliers Target Number: 30,000 Expected viewership: 3,000 Cost: 200DM Purpose: Create awareness and invite industry players to the road shows and show room. Instead of sending direct mailers the traditional way, Kone Aufzug should spread awareness of the MonoSpace via email blasts, a much cheaper alternative. The traditional method would have been very ineffective, response being only 120 out of the 30,000 who were sent the mailer, and expensive. The only significant cost involved in the email blasts is the artwork that will be outsourced. The email blast will contain information on the MonoSpace and an invitation to the road shows and show room at the headquarters. Trade press and journal advertising
Target Audience: Contractors and Architects Target Number: 25,000 Expected viewership: 20,000 Cost: 3000DM Purpose: Educate contractors and architects on the superior technology specifications and invite them to the road shows and show room. The advertising cost in the free monthly journal is relatively low and it has the highest circulation size. In the advertisement, technical information on the MonoSpace will be given but more importantly, it should invite the contractors and architects to the road shows and showroom. Advertising alone will not give the readers any impetus to purchase an elevator so an opportunity has to be created for Kone Aufzug to personally explain the MonoSpace to the readers. Showroom
Target Audience: Contractors, Architects, Developers, Energy Suppliers Target Number: 15,840 Expected turnout: 9,504 8
Cost: 113,520 DM Purpose: Engage industry players in familiarizing with MonoSpace and create networking and personal selling opportunities. The Kone Aufzug’s Headquarters will have a MonoSpace installed for people to experience the comfort of riding in a MonoSpace. There will also be a showroom set aside with information panels that explain the technology in detail and an area for salespeople to network with the guests. By inviting the guests to the company’s HQ, Kone Aufzug can also create a deeper impression of its brand and create more touch points with MonoSpace. Road shows
Target Audience: Contractors, Architects, Developers, Energy Suppliers Target Number: 600 Expected turnout: 450 Cost: 131,250 DM Purpose: Engage industry players who do not wish to visit the showroom in familiarizing with MonoSpace and create networking and personal selling opportunities The road shows are expensive because they are held comfortably in a hotel and require a lot of logistics. The road shows are meant to complement the showroom presentations because the hotel chosen will be more centrally located as compared to the HQ. Besides presentations, the sales force will be mobilized to reach out to the different groups and in doing so, tailor the message to meet the needs of each group. Everyone present will also be invited to the showroom at the HQ. Sales visits Target Audience: Contractors and Architects Target Number: 6,511sales visits Expected number: 6,511 sales visits Cost: 3,255,500DM Purpose: Engage in personal selling
In 1995, 6,336 sales visits were made in Germany and 1,426 units were sold. This works out to about 4 sales visits per unit purchased. Given the low price of the MonoSpace, training for the sales force and that 20% of the sales will be made at the showroom, the number of sales visits required to sell each unit of MonoSpace will only be 3. 6,511 sales visits are required to sell 2,713 units of MonoSpace, the targeted number for 1996. 175 extra sales visits are required in comparison to the year before. Given that each full time sales person made 192 sales visits in the last year, Kone Aufzug would only have to employ an additional sales person to fulfill the 6,511 sales visits required. The marketing programme budget of 3,523,820DM will be well worth as it is expected to bring in 23,125,200DM in pure profits and increase market share of PH in Germany’s low-rise residential market to 30% and in PT and PU, to 15%.
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6.5 Marketing Kit
The marketing kit will consist of the following: 1. A press kit featuring a CD-ROM and website 2. Concept brochure to supplement existing low-rise line literature 3. Powerpoint presentations, one targeted at contractors with detailed specifications and cost savings; another targeted at architects with detailed specifications of the design options available; another targeted at developers and energy suppliers highlighting the long term cost savings. 4. Building and planning guides, architects will have an option to design the interior of the MonoSpace 5. MonoSpace architectural specifications 6. Total elevator cost comparison form 7. A miniature static MonoSpace model. The marketing kit has been streamlined to focus on what really is essential for each group MonoSpace is marketed at. Architects now have more room to play around with ideas for their designs and information of how their designs can be implemented. 7. Competitive reaction
The competitors reacted with ‘ stunned silence’ initially but the silence will be broken immediately when MonoSpace creates an impact on the industry. Kone Aufzug’s market share in the low-rise residential segment is expected to increase to 24% within the first year, as compared to 12.4% at the start of the year. Assuming the demand for Kone Aufzug’s elevators in the non low-rise residential segment is constant at 742 per year, Kone Aufzug’s total market share would have increased by 13.1% to 22.3%. As compared to the 1995 market share figures, Kone Aufzug would have a larger market share the current market leader, Schindler. Schindler may continue to compete on price and in doing so, suffer even greater losses. Other industry players may follow suit and lower their prices because there is nothing else to compete on, making the elevator industry extremely unprofitable. Otis would be Kone Aufzug’s biggest threat because it focuses on aggressive and widereaching process re-engineering efforts. Based on its strategy, it is likely that Otis will develop a similar technology as the MonoSpace and compete with Kone Aufzug based on product differentiation and price. Smaller industry players may also develop their own technologies to compete with the MonoSpace, however, with their limited financial resources and economies of scale, their technologies may not be as sophisticated or cost effective. What the smaller industry players may successfully develop is a niche market for very specialized elevators, instead of competing with the six major players in a losing battle. Competitors may also adopt spoiling tactics and play down the benefits of MonoSpace. However, nothing significant can be said about MonoSpace’s
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disadvantages. Approval of the MonoSpace can be granted fairly quickly and easily so buyers need not worry. Even the lack of ventilation in the elevator is not a major disadvantage because the MonoSpace naturally does not require one. In any case, whichever competitor that chooses to develop a similar technology will always be one step behind MonoSpace. Besides already being a follower in the industry, they would have to spend time developing a technology of comparable standard. This will set them back by at least half a year. Kone could face similar competitive reactions in Netherlands, France and the U.K. What Kone should do is continually improve its product offering while also working on reducing the production costs. Kone’s first strategy should be differentiation so as maintain its competitive advantage. This would require Kone to continually invest in R&D and roll out improved versions of MonoSpace every few years. The investment in R&D can also help Kone seek ways to reduce its production costs. While differentiation sets MonoSpace apart from its competitors, contractors are still very much concerned over the price. Improved versions of the MonoSpace should always be priced on par or below the industry’s average. Kone Aufzug should remind its buyers that it was the first in the industry to introduce the MonoSpace technology and establish its brand as one that gives buyers more for less. Furthermore, it is imperative that Kone Aufzug maintains a strong relationship with the contractors, architects, developers and energy suppliers. All these groups are involved in the decision process directly or indirectly and can be an influencer at any one time. Therefore, although contractors and architects decide on the elevator 90% of the time, the developers and energy suppliers should also be updated on the latest technologies and be invited for subsequent marketing initiatives. In the longer term, it is recommended that Kone invests in creating a MonoSpace technology for the medium-rise elevator systems and subsequently, high-rise elevator systems. The expansion into other elevator systems opens Kone up to new profitmaking possibilities and reduces its risks in focusing too much on the low-rise elevator sector, which makes up 75% of its equipment sales. 8.Beyond Germany: MonoSpace in other markets
Kone should launch MonoSpace in other European markets and the rest of the markets that it already has a presence in. Although the launch strategy may be a success, it should not be used in a cookie cutter fashion. Rather, each market should have a marketing plan tailored to target the right decision makers and position MonoSpace in a way that will best add value to the customers. It is also critical to make a few changes to MonoSpace’s positioning and pricing in France and U.K. In France, the price of PT at $30,000 is already lower than the price that it is being sold for in Germany, $33,986. Assuming that the price of hydraulic elevators in France is not anomalous, it will be even lower than $30,000, making it impossible to price MonoSpace below hydraulic elevators and yet make significant profits. Therefore, the MonoSpace in France should be positioned as a replacement of the geared traction elevator instead of the hydraulic elevator. Kone can lower the price of MonoSpace in France to $32,508, making a 10% profit instead of 15%. As MonoSpace is priced slightly higher than the geared traction elevators, extra emphasis
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has to be placed on the potential cost savings and its key differentiating factors to justify that the extra cost is worth it. With the repositioning efforts in place inline with marketing efforts, the number of units sold in France is expected to increase by 80% to 288 units. As for the U.K market, MonoSpace is definitely priced too high. The price for MonoSpace in Germany is between the price of a hydraulic elevator and a geared traction elevator. In fact, the MonoSpace is 40% more expensive than the hydraulic elevator. In this case, it is also better to position MonoSpace as a substitute of geared traction elevators. This way, it is still able to compete based on price in the U.K. lowrise residential market that is extremely price sensitive. Maintaining the price at $33,986 for MonoSpace in U.K gives buyers savings of 26% as compared to geared traction elevators. 9. Conclusion
Kone’s worries of making losses for the coming year can be put to rest with the successful launch of MonoSpace in Germany, assuming that the launch strategy will be implemented effectively and that current trends hold. Although capturing 30% of the hydraulic elevator segment and 15% of the geared traction elevator segment in a year may seem ambitious, they are in fact highly attainable as MonoSpace is attractively positioned to give buyers more value for a lower price whilst Kone’s competitors are making huge losses competing solely on price. The confidence in the positioning lies largely upon a firm understanding of who the decision makers are and the concerns that they have. As Kone presses on, it should not forget the mistakes made in France and U.K, where pricing was a major reason why the launch of MonoSpace had failed. These lessons will be very valuable as Kone prepares to expand into new geographical markets and enhance its MonoSpace technology for the mid and high-rise segments.
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