Annika Jansen Case Analysis: KONE The MonoSpace Launch in Germany IBUS-301-001 International Marketing Professor Khilji March

ch 22, 2004

By 1996, the financial situation of KONE Aufzugs elevator business in Germany had worsened as compared to previous years. Since predictions did not indicate an improvement in the near future, the business director, Raimo Hatala, hoped for the launch of the companys newest and revolutionary product MonoSpace in Germany to enhance the companys financial position. However, as early test markets began, concerns about the products ability to conquer the German market were raised. Hatala began to contemplate about a successful entry strategy for MonoSpace that would position the product properly and allow the company to leave a lasting impression on the market. With Germanys reunification in 1988, its construction industry experienced an upsurge that eventually turned the country into continental Europes largest elevator market. In 1995, the elevator industry had reached its ultimate peak. Despite the intense competition, KONE generated revenues of DM 216 million and profits of DM 12 million. During that year though, the market saturated, as the construction boom ended abruptly and demand for elevator equipment was expected to fall by 15 percent. Traditionally, the elevator industry was split into two sectors: new equipment and service. Therefore, competition for new elevator installations was intense, as the large companies often sold their equipment at or below cost to price-sensitive customers. Service contracts were usually closed with companies that initially installed the elevator. In 1995, six major companies dominated the German market, with KONE being fourth behind Schindler, Otis and Thyssen. Approximately 30 additional mid-size players, and 150 small, local companies influenced the industry as well. The market itself was fragmented. While the four largest construction companies controlled 20 percent of the market, nearly 20,000 small contractors competed for contracts in the remaining market. In 1995, KONE reported that 48 percent of its sales originated from the residential market. The proportion of elevator units installed in residential buildings in the entire market came to 74 percent and was not expected to change significantly over next five years. Property developers consistently used the bid process to pressure contractors for price reductions. With its well-established image in the market, KONE was never forced to directly communicate with property developers, since customers usually initiated contact by sending elevator specifications and a request for a bid. KONEs policy foresees for a sales person to follow up each customer inquire and review the logistics.

Considering the saturated elevator market, the intense global competition, the price-sensitive consumers, as well as the companys goal to enhance its financial situation, Hatala recognized that immediate, favorable results from the German launch were vital to KONEs success. The pricing and product positioning strategies he set for MonoSpace in Germany would have a significant impact on the long-term prospects for KONE. As elevator prices fell five to seven percent in 1994 and 1995, leading elevator companies Schindler and Otis reported losses due to turnover of approximately 11 and 13 percent. Symptoms of such nature indicated that while Schindler focused on gaining share, it enabled the company to become the market leader in hydraulic elevators. Contrary, Otis professed objective to eliminate losses in the new elevator business had caused it to lose market share. The cause of this pricing and positioning challenge resulted from the abrupt end in the construction boom, as well as the declining demand for elevators. At first glance, it might be obvious, which pricing strategy KONE should embrace. Several factors, such as the legal approval for MonoSpace to be installed in every state throughout the country, the companys objectives for differentiation and brand building, the fact that the government does not subsidize the elevator industry, as well as the headquarters suggestion to price the MonoSpace above existing prices if KONEs market share was less than 15 percent, indicate that KONE should implement a skimming pricing strategy. Results from similar markets, such as the Netherlands and France, signify this to be a successful strategy. However, there is also evidence counteracting those outcomes. Despite KONEs strong market share in the United Kingdom, a skimming strategy failed to have the same impact as in the Netherlands and in France due to price sensitive consumers. Given this fact, it is clear that a skimming pricing strategy would fail in Germany, where consumers are also extremely price-sensitive due to market saturation. Rather, KONE should price the MonoSpace similar to products offered by Schindler and Otis, but emphasize MonoSpaces benefits, such as being the most energy efficient, not requiring oil and therefore eliminating fire and environmental hazards, as well as its lower installation time. These factors are more likely to appeal to German consumers who are not just price sensitive, but also quality, efficiency, and customer service oriented.