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Managerial Economics Project Report On KONE Elevators
Managerial Economics Project Report On KONE Elevators
(Managerial Economics)
Economic Analysis of Elevators designed, manufactured, supplied and commissioned by KONE Elevator India (P) Ltd.
Submitted to Faculty: Ms. Simran Sethi Lal Bahadur Shastri Institute of Management, New Delhi Date of Report submission: 20-08-2009
Submitted by, Group 9, Section-A Dr. Daman Walia (13/09) Koustubha Bhutra (25/09) Ashank Dayal Mathur (29/09) Abhinaw Shrivastava (67/09) Harsh Khemka (117/09) Sunanda Mitra (149/09) Trimester I, PGDM I Yr. (2009-11) Lal Bahadur Shastri Institute of Management, New Delhi
Contents:
1. Acknowledgement
2. Introduction
4. Methodology adopted
1. Acknowledgement
This project, Economic Analysis of Elevators designed, manufactured, supplied and commissioned by KONE Elevator India (P) Ltd. was done as a part of our course curriculum of Managerial Economics at KONE Elevator India Pvt. Ltd, 16, Barakhamba Road, New Delhi- 1 and at various Real Estate companies at New Delhi who are or have been the clients of KONE. We are highly grateful to our Department for sanctioning the grant to carry out this project. We express our sincere thanks to Ms. Simran Sethi, Faculty- Managerial Economics at Lal Bahadur Shastri Institute of Management, for her encouragement and support in pursuing this project. We are highly grateful to the Sales team at KONE Elevator India Pvt. Ltd, New Delhi and the Project Heads of Real Estate Companies at Delhi, for sparing time out of their busy schedules and for giving us important insights into the various factors determining the sales and demand of the elevators and the performance of the elevator industry as a whole.
2. INTRODUCTION
The End-term project of Managerial Economics, Economic Analysis of Elevators designed, manufactured, supplied and commissioned by KONE Elevator India (P) Ltd. was carried out at KONE Elevator India (P) Ltd. The study involved the analysis of the elevator industry in India at present, the sales figures of KONE elevators in India and prediction of sales using demand forecasting techniques, KONEs competitors in the industry, the market type of the elevator industry, and the various factors affecting Demand and Supply of elevators in India. KONE in brief: KONE Corporation is headquartered at Helsinki in Finland. KONE is present in 50 countries worldwide and has eight production units in all main markets and seven global R&D centres. KONEs objective is to offer the best people flow experience by developing and delivering solutions that enable people to move smoothly, safely, comfortably and without waiting in buildings in an increasingly urbanizing environment. It provides its customers with industryleading elevators, escalators and innovative solutions for modernization and maintenance, and is one of the global leaders in its industry. In 2008, KONE had annual net sales of EUR 4.6 billion and approximately 34,800 employees. KONE class B shares are listed on the NASDAQ OMX Helsinki Ltd. KONEs key customers are builders, building owners, facility managers and developers. In addition, architects and consultants are key parties in the decision-making process regarding elevators and escalators. KONE has segmented the markets according to the purpose of the building. The main segments are categorized as residential, office and retail, as well as public transportation and airports. In addition, KONE serves hospitals, leisure centres, hotels and industrial properties. KONE has approximately 250,000 customers worldwide, of which the majority are maintenance customers. Maintenance contracts vary from one-elevator residential buildings with yearly contracts to large international accounts with long-term service agreements.
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During its more than 98 years as an industrial engineering company, KONE has been involved in businesses as different as textile manufacture, medical technology and the design of hydraulic piping systems. The company's main focus, however, has always been the elevator and escalator business.
KONE in India: KONE's presence in India dates back to 1984, when it formed a joint venture called Beacon KONE with Best & Crompton Engineering Ltd., a large and diversified company based in Chennai. Beacon KONE opened a factory in 1987 near Chennai. In 1992 KONE purchased Best & Crompton's interest in Beacon KONE, and KONE India became a 100% subsidiary of KONE Corporation. The Head Office of KONE in India is situated at Chennai. KONE India has regional offices in four major cities in India with 41 branches throughout the country. KONE India also covers the markets of Nepal, Bangladesh and Sri Lanka. KONE India has obtained ISO 9001:2000 Quality certifications for its factory at Chennai and for seven major branches. It is in the process of extending ISO certification to rest of the branches. KONE is the market leader in the industry in India at present. It has an installation base of more than 18,000 elevators, escalators and autowalks. It offers a variety of People Flow solutions to its clients in India. Some of KONEs projects in India include the Delhi Metro Rail Corporation, the Hyderabad airport, Cochin Airport and major residential and commercial buildings of real estate developers like DLF, Omaxe, Parsavanath, ILD etc.
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Elevator from KONE was chosen as the product for our Economic Analysis project. The choice was made because of the following reasons: i. Elevators have become a necessity in all the multi-storeyed buildings being constructed because the constraint of space and increasing population has made it imperative for the various real estate builders to construct high rise buildings which require elevators. With the increase in population, the demand for housing has increased tremendously, especially in urban areas. As the elevator industry is dependent on the growth of real estate industry, it has led to an increase in the demand for elevators too. There are multiple players present in the market; five of them apart from KONE are major ones. There are 600 odd small elevator manufacturing units from all across the country. The complexity of the market scenario necessitates the study of the product. Certain trends like urbanisation increase in infrastructure spending and income levels of consumers have led to increase in the demand for elevators. The study entails an analysis of these long-term trends and their effects on demand and supply of elevators.
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4. Methodology adopted
The project work was carried out in two stages as mentioned below: i. In order to analyse the performance of KONE in terms of sales of elevators, visits to the companys Delhi office were carried out and information about elevators sales and KONEs current position as an Elevator company was collected by interviewing senior executives from the Sales and Projects Departments. In order to study the determinants of demand and supply, a market research was conducted and questionnaire (refer Appendix) was designed for the purpose. Senior Executives from the Projects Departments of the various real estate companies which are or have been the clients of KONE were asked to fill the questionnaires.
ii.
The analysis of the responses from KONE officials and the Executives from the various real estate companies helped us in studying the growth of sales volumes of KONE apart from identifying the various determinants of demand and supply of the product and the market type of the elevator industry as a whole.
Source: Sales records, KONE Elevator India Pvt. Ltd., New Delhi.
Elevator S ales
1999
2001
2003 Y ear
2005
2007
Source: Sales records, KONE Elevator India Pvt. Ltd., New Delhi.
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4274
2754.6 2851.504
3456.2677 3952.49637
3785.8275 4168.7724
3991.333 4244.613
4077.875 4261.86
480.476
258.589
154.373
89.387
62.020
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KONE ELEVATOR INDIA PVT LTD. Summary of information for completed works year wise for last ten years. Sl.No. 1 2 3 4 5 6 7 8 9 10 Sl.No. Year Ending 31-12-2008 31-12-2007 31-12-2006 31-12-2005 31-12-2004 31-12-2003 31-12-2002 31-12-2001 31-12-2000 31-12-1999 Year Ending Total no. of elevators designed, manufactured and commissioned in each year 4274 4161 3335 2821 1719 1402 1184 825 758 852 Total no. of elevators designed, manufactured and commissioned in each year 4274 4161 3335 2821 1719 1402 1184 825 758 852 Predicted figures through trend analysis
1 2 3 4 5 6 7 8 9 10
31-12-2008 31-12-2007 31-12-2006 31-12-2005 31-12-2004 31-12-2003 31-12-2002 31-12-2001 31-12-2000 31-12-1999
4107.557 3668.788 3230.019 2791.25 2352.481 1913.712 1474.943 1036.174 597.405 158.636
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Fifty percent of the sample has rated Price and payment terms at 4 on 5. Thus, the majority of the people will respond to a small fall in price or more liberal payment term with an increase in demand. Seventy five percent of the people have rated Brand Value at 2 on 5. Therefore, the response of demand to a change in brand value is not significant.
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Determinants of Supply Urbanization: According to a survey conducted by Kone, increase in urbanization is one of the factors which have led to the increase in supply of elevators. The more the urbanization, more will be the quantity supplied of elevators. Population: As the population is increasing, the demand for housing is also increasing rapidly. Due to constraints of space, the demand for highrise buildings is continuously on a rise and hence its an important determinant for supply of elevators. Technology: There is a direct relation between improvement in technology and the quantity supplied of the product in question. Rise in Income Level: As the income of an individual increases, the quantity demanded of the product also increase (other than inferior goods), thus, leading to an increase in supply. Infrastructure Development: A strong infrastructure will lead to construction of more buildings, thus, increasing the demand of elevators and eventually increasing the supply. Note: The above mentioned determinants of supply were given by Kone itself after extensive research.
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Market Structure
The elevator industry exhibits features of both Monopolistic Competition as well as those of Oligopoly. The reason is that although there are a large number of firms in the industry (as is the case with Monopolistic Competition), the market is still dominated by a select few as is the case with Oligopoly. Monopolistic Competition: It is the combination of Monopoly and Perfect Competition. In monopolistic competition, there are a large number of firms producing similar commodities. There is product differentiation and existence of selling costs. Oligopoly: In oligopoly there are a few large sellers of the commodity, producing homogeneous or differentiated products and intensely compete against each other.
Features of Monopolistic Competition: 1. Number of Sellers: In monopolistic competition, the numbers of sellers are large. In the elevator industry, there are a select few Big Companies but there are a large number of smaller, local companies.
2. Degree of Monopoly Power: Monopolistic firms tend to enjoy limited monopoly power because of the presence of large number of firms. Same is the case with the elevator industry.
Features of Oligopoly: 1. Nature of Product: Products offered in oligopoly might be homogeneous or differentiated. In case of the elevator industry, products from companies like Kone, Otis and Schindler are NEARLY homogenous. Whereas there is a clear product differentiation between Kone and Classic, which is a local company.
2. Entry Barriers: There are barriers to entry mainly in the form of huge capital requirements.
3. Price Policy of the firm: Large firms like Kone, in the elevator industry have considerable control over prices. As a result, prices tend to remain rigid.
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4. Size of Market for each firm: Firms like Kone have huge market share. This is a distinguishing feature of Oligopoly where firms have large market share.
Measures of Oligopoly: Four-Firm Concentration Ratio: This measure expresses the market share of the four largest firms in an industry as a percentage. Market forms can often be classified by their concentration ratio. Listed, in ascending firm size, they are:
Perfect competition, with a very low concentration ratio, Monopolistic competition, below 40% for the four-firm measurement, Oligopoly, above 60% for the four-firm measurement, (Example automobile manufacturers) Monopoly, with a near-100% four-firm measurement. In case of the Elevator Industry, the top four companies and their market share are as listed below:
If we add the respective market shares of the top four companies, the total is 78%. Thus, clearly the market is oligopolistic in nature but it also shows some features of monopolistic competition that were mentioned above.
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