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Nancy Sagar  –  Final  Exam,  Marketing  Strategy  &  Policy  (Management  472a)  -­‐  December  5,  2009  

KONE:    The  MonoSpace  Launch  in  Germany   Multinational  elevator  manufacturer  KONE  has  an  exciting  opportunity:    An  innovative  new  product  for   the  mature  elevator  market.    It  has  been  tested  and  launched  with  varying  success  in  the  Netherlands,   the  UK,  and  France.    Now  they’re  ready  to  launch  in  Germany,  but  they’re  concerned  about  their  pricing   strategy  and  launch  plan,  especially  due  to  extreme  price  pressure  that  has  led  to  losses  for  their  new   elevator  division  and  those  of  their  major  competitors.    Can  they  afford  to  price  the  product  to  reflect  its   entire  package  of  economic  benefits,  and  to  whom  should  they  sell  the  product?   The   challenge   is   to   target   customers   who   gain   the   largest   proportion   of   the   MonoSpace’s   economic   benefits.     At   this   time,   architects   of   low-­‐rise   residential   properties   comprise   the   most   logical   and   strategic  segment  because  they  make  40%  of  elevator  decisions  and  play  a  direct  role  in  designing  the   plans  for  the  buildings.    In  terms  of  pricing,  KONE  should  follow  a  similar  model  successfully  used  in  the   Netherlands,   where   they   priced   the   MonoSpace   at   1.5%   higher   than   their   next   most   expensive   unit.     However,  since  KONE  had  more  market  power  in  that  country,  a  slightly  more  conservative  strategy  is  to   price   the   MonoSpace   equal   to   that   of   their   highest   product   –   80,000   DM   –   and   build   a   brand   that   represents   innovation   and   creates   strong   value   for   developers,   architects,   and   inhabitants   of   low-­‐rise   residential  properties.  

SITUATION ANALYSIS   COMPANY:     Established   in   1910,   KONE   is   a   global   manufacturer   of   elevators   and   provides   services   to   existing  units  across  several  continents.    Unfortunately,  its  revenue  and  profits  from  new  units  has  been   declining  for  the  last  three  years,  and  they  project  zero  profits  and  negative  profits  in  the  years  ahead.     Until  recently,  the  company  had  a  competitive  advantage  in  markets  in  which  it  had  high  market  share   of  elevator  unit  installations  because  service  revenues  are  on  the  rise  and  are  potentially  more  lucrative.     However,  new  competition  for  service  business  is  a  challenge,  and  large  manufacturers  are  selling  new  


units as  a  loss  leader.    Still,  KONE  is  a  respected  and  known  entity  that  has  access  to  a  great  proportion   of   new   elevator   job   bids   (for   example,   they   get   96%   of   the   low-­‐rise   residential   bids   from   general   contractors  in  Germany).    This  access  is  tremendously  valuable  and  gives  them  a  built-­‐in  market  for  their   products   and   services.     Yet   if   they   begin   losing   money,   they   lose   the   ability   to   use   new   elevator   installations  as  a  loss  leader,  a  strategy  many  of  their  competitors  are  employing.   COMPETITION:      In  Germany,  KONE  is  not  a  powerhouse,  with  only  9.2%  of  the  new  elevator  market,   behind  Schindler,  Otis,  and  Thyssen.    They  also  have  only  4.9%  of  the  lifts  in  service.    Since  the  market  is   mature,   there   is   intense   pressure   from   general   contractors   to   bid   low,   and   large   competitors   with   substantial  cash  (e.g.  Otis)  have  more  cushion  to  bid  low  and  increase  market  share.   CUSTOMERS:      KONE  serves  customers  with  25  local  sales  branches  in  Europe,  and  customers  vary  by   installation   type.     Typically   they   bid   new   installation   jobs   to   general   contractors   (representing   50%   of   decisionmakers  for  their  products)   who  have  finished  plans  in  hand  and  just  want  the  best  price  for  the   elevator.     Contractors   select   vendors   through   a   bidding   process   –   they   issue   an   RFP   to   major   manufacturers,   winnow   down   the   responses,   meet   with   finalists,   negotiate,   perhaps   require   a   second   bid,   and   then   select   a   winner.     Interestingly,   contractors   earn   their   revenue   as   a   percentage   of   the   total   construction   cost   of   the   job,   so   any   bid   that   reduces   labor   costs   may   not   appeal   to   them.     They   care   most  about  the  actual  cost  of  the  product  itself.       The   customer   holding   the   purse   strings   for   these   residential   multifamily   products   is   the   property   management   firm.     If   the   firm   plans   to   flip   the   property,   the   decisionmaker   is   looking   to   keep   construction   costs   as   low   as   possible.     If   the   management   firm   plans   to   hold   the   property,   their   motivation   is   long-­‐term   value.     KONE   has   no   real   relationships   among   this   customer   group   since   they   likely  make  the  elevator  decision  in  only  10%  of  cases.   Finally,   architects   represent   another   customer   category,   making   40%   of   the   decisions   about   new   elevators   in   low-­‐rise   residential   buildings.     They   care   about   aesthetics,   and   they   also   want   to   give   property  developers  the  most  compelling  design  that  has  the  most  saleable  square  footage.    Architects  

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physically design  the  building,  and  since  the  MonoSpace  does  not  require  a  machine  room,  the  architect   can  easily  create  a  plan  with  a  more  exciting  roof  deck  or  more  rentable  space  per  floor.  

MARKETING STRATEGY   The  new  elevator  market  is  mature.    The  market  for  new  elevators  in  Germany  is  mature  with  stiff  price   competition;  companies  are  often  selling  new  elevators  at  below  cost  in  order  to  secure  service   contracts  that  represent  about  5%  of  the  product  cost.    General  contractors  who  exert  the  most   influence  on  the  buying  decision  bid  out  projects  and  negotiate  incessantly  for  low  prices  –  elevators   seem  to  be  practically  a  commodity.    The  one  bright  spot  is  that  KONE’s  service  revenues  and  profits  are   increasing,  but  there  are  low  barriers  to  entry  on  the  service  side,  and  a  crop  of  new  competitors  have   appeared  and  threaten  that  side  of  the  business  as  well.       MonoSpace  is  a  major  innovation  and  it  poses  challenges.  KONE  is  fortunate  to  have  an  innovative  new   product  at  the  early  stage  in  the  product  lifecycle.  As  with  many  new  innovations,  it’s  disruptive  because   it  forces  property  developers  and  architects  to  design  new  low-­‐rise  residential  properties  without  the   machine  room.    KONE  will  need  to  work  closely  with  prospective  customers  to  ensure  that  new  building   plans  incorporate  the  MonoSpace  –  which  also  means  those  customers  are  committing  to  the   MonoSpace  very  early  in  the  project  process,  which  may  create  resistance  until  the  product  is  more   established.    An  added  challenge:  KONE  doesn’t  have  relationships  with  property  management  firms   since  they  believe  those  firms  only  control  10%  of  the  decisions  for  elevator  purchases.       Size  of  the  market:    Low-­‐rise  residential  properties  comprise  74%  of  the  German  elevator  market  –   11,470  units.    Yet  KONE  is  not  a  market  leader  here;  three  competitors  are  significantly  ahead  of  them  –   Schindler,  Otis,  and  Thyssen.    Their  market  share  in  the  total  German  new  elevator  market  is  relatively   weak  –  they  have  just  9.2%  share  of  new  units  and  8.5%  of  the  value.       Segmentation:  Who  gains  most  from  the  MonoSpace  in  a  new  development?    Developers,  then   architects.    The  customer  for  low-­‐rise  elevators  can  be  a  property  developer,  generator  contractor,   and/or  architect.    A  property  developer  cares  most  about  cost  because  it  impacts  the  value  of  their  

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investment, and  the  developer  doesn’t  actually  gain  any  benefit  from  the  energy  cost  savings,  ride   quality,  or  reduction  in  fire  hazard.    However,  the  developer  does  benefit  from  the  25%  savings  in   installation  cost  when  a  machine  room  is  unneeded,  and  the  developer  also  gains  more  saleable  square   footage.  Unfortunately,  KONE  and  other  elevator  companies  have  seldom  met  with  property   developers  for  new  projects,  since  contractors  and  architects  make  90%  of  the  elevator  decisions.   The   danger:   General   contractors   make   the   elevator   decision   in   50%   of   cases,   but   they   gain   little   benefit   from   not   building   a   machine   room   because   their   fee   depends   on   overall   construction   costs.     They  certainly  gain  no  benefit  from  energy  savings,  either.    Fortunately,  four  large  contractors  control   20%   of   the   construction   market;   however,   the   rest   of   the   market   is   extraordinarily   fragmented   with   20,000   small   contractors   vying   for   small   jobs.     Once   a   building’s   plans   are   finalized,   these   contractors   issue  bids  to  elevator  suppliers  and  tend  to  negotiate  heavily  and  go  for  the  lowest  bid.       KONE  has  96%  access,  so  at  least  they  get  to  bid.    KONE  is  on  the  list  of  bidders,  so  nearly  all  contractors   send   bid   opportunities.   KONE   then   sends   a   salesperson   to   meet   with   the   contractor   or   architect.     However,   at   this   point,   the   plans   are   quite   finished,   and   a   major   redesign   to   use   the   machine   room   may   add  time  and  cost  that  neither  party  may  be  interested  in  incurring  at  that  point  in  the  project  process.   TARGETING  DECISION:    Architects  that  specialize  in  new  low-­‐rise  residential  properties  make  the  most   attractive  immediate  target  because  they  A)  design  the  building,  B)  make  the  decision  in  40%  of  cases,   and   C)   realize   a   large   subset   of   the   total   value.     In   the   residential   market,   architects   typically   select   the   elevator   for   cosmetic   options,   and   KONE   believes   that   they   will   make   the   decision   in   40%   of   their   cases.     Architects  do  derive  economic  value  from  the  MonoSpace  because  it  won’t  obscure  the  roofline  of  their   buildings,  creating  more  space  for  attractive  roof  decks  OR  giving  more  saleable  square  footage  to  the   property   developer.     They   also   WORK   FOR   THE   PROPERTY   MANAGERS,   so   they   can   help   convey   the   cost  savings  for  the  installation  to  the  ultimate  beneficiary  of  that  benefit.       Architects  also  provide  entre  into  the  property  developers,  since  they  meet  with  multiple  developers  in   the  course  of  a  year,  and  KONE  has  no  relationships  with  developers  at  this  time.    The  challenge   will  be  

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for KONE  (who  has  fewer  salespeople  than  other  competitors)  to  get  in  front  of  architects  quickly  during   launch.   The  conversion  market  is  also  attractive  in  the  future.    Ultimately,  another  strong  target  for  KONE  is   conversions  in  existing  properties,  particularly  those  that  have  slow,  oil-­‐guzzling,  bumpy  hydraulic  lifts.     The  management  firms  and  residents  of  these  buildings  don’t  necessarily  gain  from  the  cost-­‐savings  and   rental  value  of  the  incremental  square  footage  without  the  machine  room,  but  they  do  gain  a  faster,   more  pleasant,  energy-­‐efficient,  and  safe  elevator  (no  fire  hazard).    However,  the  sales  cycle  for   conversions  is  likely  long  given  there  is  no  immediate  need;  thus,  KONE  should  focus  on  new   construction  that  absolutely  must  install  an  elevator.   POSITIONING   STATEMENT:   “For   German   architects   who   design   innovative,   low-­‐rise   residential   properties,   the   elevator   industry’s   newest   innovation,   the   MonoSpace,   is   a   new   drive   system   that   requires  no  machine  room  to  hog  valuable  square  footage  or  ruin  gorgeous  rooftop  views.    Relative  to   standard   hydraulic   and   traction   units,   the   MonoSpace   is   costs   25%   less   to   install,   offers   superior   ride   quality   and   speed,   and   reduces   energy   usage   and   oil   that   create   dangerous   fire   hazards   in   residential   buildings.”  

IMPLEMENTATION –  THE  MARKETING  MIX   PRODUCT   AND   BRAND   RECOMMENDATIONS:     KONE   is   a   known   brand   in   the   marketplace,   although   they  are  not  necessarily  known  for  high-­‐end  innovative  products.    They  must  create  this  brand  for  the   MonoSpace  and  communicate  it  throughout  the  marketing  mix  –  especially  during  face-­‐to-­‐face  meetings   between  sales  reps  and  customers.   PRICING   SCENARIO   –   Unfortunately,   the   EVC   is   divvied   up   among   parties.     The   major   challenge   in   pricing  MonoSpace  is  that  different  parties  gain  different  pieces  of  the  total  economic  value  (see  Exhibit   A  for  eye-­‐opening  estimate).    When  you  combine  the  25%  construction  savings,  the  potential  increase   in   saleable   square   footage,   the   energy   savings,   the   reduction   in   fire   hazard,   and   the  

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comfort/speed/quality combination,   the   MonoSpace   provides   a   multiple   of   the   average   hydraulic   or   traction  elevator’s  value.    But  no  individual  party  gains  the  entire  set  of  benefits.   However,   the   Netherlands   provides   a   strong   case   study   for   pricing   and   launch   strategy   in   Germany.     They  beat  their  ambitious  sales  targets  there  and  increased  their  low-­‐rise  market  share  from  52%  to  62%   (a   19%   increase)   in   just   one   year.     The   UK   market   was   less   promising,   but   it   is   atypical   in   that   it   is   dominated  by  1-­‐star  and  5-­‐star  properties.   MonoSpace   must   be   priced   so   that   it   can   capture   immediate   sales   from   the   bids   it   receives   from   contractors  right  now,  but  without  jeopardizing  its  status  as  a  high-­‐end  product  with  substantial  value   that   is   better   realized   when   pitched   to   architects   and   ultimately   property   managers   (especially   those   who  maintain  control  of  their  buildings).   Cost  structure:    The  MonoSpace  costs  65,217.39  DM  to  produce,  and  KONE  has  only  13%  of  the  low-­‐rise   market  with  three  larger  competitors  ahead  of  it.    If  KONE  were  to  price  MonoSpace  to  truly  reflect  its   total   package   of   economic   benefits,   it   would   gain   little   of   any   traction.   In   the   Netherlands,   the   MonoSpace   was   priced   only   6%   higher   than   the   hydraulic   unit,   11%   higher   than   the   PT   Traction   Unit,   and  1.5%  higher  than  the  PU  Traction  Unit.    However,  KONE  also  had  52%  market  share  as  opposed  to   their  weak  market  strength  in  Germany.   Strategically,  KONE  should  not  price  the  MonoSpace  as  a  loss  leader  because  it  detracts  from  its  value   and  potential  branding  opportunity  as  a  true  innovator  in  the  market.       Instead,   KONE   should   price   MonoSpace   at   the   same   price   (versus   the   1.5%   increase   used   successfully   in   the   Netherlands)   as   the   PU   Traction   Unit   –   80,000   DMs   –   to   reflect   its   premium   positioning   in   the   market.    Doing  so  will  not  win  business  from  contractors  who  care  most  about  low  price,  but  KONE  can   still   present   its   current   product   lineup   to   win   those   projects.     Since   sales   reps   meet   with   contractors   during   the   bidding   process,   those   reps   can   educate   contractors   about   the   benefits   of   the   MonoSpace   and  potentially  get  in  front  of  architects  and/or  property  managers  so  that  for  the  next  project,  they  can   consider  MonoSpace  earlier  in  the  design  process.  

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KONE can  also  consider  employing  a  slow  increase  in  the  price  over  time,  considering  this  initial  price  a   “market   penetration”   strategy.     As   the   MonoSpace   is   incorporated   earlier   into   the   design   process,   it   creates  more  value  and  thus  gives  KONE  the  opportunity  to  gradually  increase  prices.   DISTRIBUTION  STRATEGY:    KONE  will  need  to  hire  additional  sales  staff  (likely  5-­‐10)  to  call  on  residential   multi-­‐family   architects   as   well   as   the   four   major   general   contractors   in   Germany   to   present   the   MonoSpace.    Their  current  model  of  offering  pilot  installations  provides  valuable  information  and  case   studies  to  strengthen  their  story.   THE  PROMOTIONAL  PLAN  must  quickly  reach  architects  via  trade  publications  and  trade  shows.    KONE   should   create   an   elite   launch   event   and   invite   all   of   the   architects,   property   management   firms,   and   general  contractor  who  work  on  large  multifamily  projects.    That  event  can  be  used  to  meet  and  greet   and   give   salespeople   an   entre   for   further   discussions,   presentations,   and   potentially   pilot   installations   with  highly  strategic  partners.       The   key   messages   for   the   campaign   must   focus   on   the   cost   savings   and   revenue   opportunity   for   the   additional   square   footage,   along   with   the   aesthetics,   energy   savings,   fire   hazard   reduction   and   ride   improvement.     Campaigns   should   create   EXCITEMENT   around   this   tremendous   innovation   –   it   moves   people  more  safely,  quickly,  and  creates  more  beautiful  and  less  expensive  residential  environments!   I  would  love  to  create  a  detailed  promotional  plan  for  this  paper,  but  my  time  is  up!  

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EXHIBIT A:  TOTAL  PACKAGE  OF  ECONOMIC  BENEFITS  

 

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Targeting Strategy for a Premium Product in a Mature Market