1. What exactly is Michelin’s Fleet Solution offer?

Shortly present MFS (as opposed to Michelin’s

traditional tire-selling business model).

Michelin is a worldwide leader in the tire industry and in 2000 launched the Michelin Fleet Solutions
(MFS). Instead of selling a physical product (tires), the company shifted to sell a service focused on
the ability to drive (fleet management solutions). The target were the large European transportation
companies.

The MFS was initially offered to fleets with more than 200 vehicles the management of their tire
assets during a three to five-year period. The MFS was strategy to develop long-lasting relationships
with growing transport players and ensure that clients would experience the full value of Michelin’s
tires. Lastly, this was a way to escape the commodity trap by differentiating themselves from
competitors.

The pricing was based on a monthly fee, which depended on the number of kilometers driven per
vehicle. Michelin’s profit from this service relied on their ability to optimize tire management
activities (4-lives program) and to control costs.

Opportunity: Road transportation has a big share in the European market: 44% of European goods
are transported by trucks and there is expected a 3% yearly growth for freight road transport.
Michelin could secure a first mover advantage before Goodyear and Bridgestone enter the market.

Threat: Transportation companies suffer from a negative image, as they are associated as a main
source of CO2 emissions.

2. Why should Michelin move toward solutions? Investigate internal and external drivers.

 Growth by developing innovative offer (+ more jobs, higher salaries, better returns)
 Brand (Michelin’s reputation creates recognition and awareness in the marketplace)
 Customer focus that creates permanent revenue (purchase process of service and post-
purchase follow-up)
 Serving stakeholders (investors, employees, business partners and suppliers)
 Environmental: Michelin driven to be sustainable (reusage of tires and reduce of damage to
environment)
 Technological advance (holding licences as core to the business)
 Services are attractive because they provide continuous revenue streams, have higher profit
margins and require fewer assets than manufacturing

3. Why would customers go ahead with MFS?

The customers could expect to gain peace of mind, achieve better cost control (less breakdowns,
lower fuel expenses, better operations management, less administrative expenses) and benefit from
Michelin’s continuous innovation. Customers could also rely on Michelin’s image and reputation in
case of major emergencies (i.e., road accidents).

Michelin’s pricing system allowed customers to gain in flexibility and productivity by offering a
predictable monthly fee based on the number of kilometers driven.

4. What causes the difficulties encountered by Michelin in deploying its solution offer?
External:

The salesmen were not capable of efficiently selling this offer. Their expertise in the field could hardly
help them to sell the service, the product edge is no longer at the heart of the offer, clients don’t see
the real value of the service and are reluctant to pay the high price for it, and it was hard to list all
benefits to clients to inform them well about the program.

From the customer’s point of view there were downsides such as high upfront costs, increased
dependence or high switching costs.

Internal:

The management of the fleets was unprofitable because the costs were underestimated and the fees
were low. Correctly assessing the fee was very complex and the long-term implications of contractual
agreements were often underestimated.

There were disagreements between the MFS and the product sales teams. There was a market
cannibalization between different units within the same company.

The external consulting company identified 4 marketing issues:

 Segmentation:
o Problem: Not enough value captured from customers. Different willingness to
pay according to different segment
o Solution: Design customized bundles to address the specific customer
 Sales:
o Problem: Complex selling process that led to longer sales cycles
o Solution: Massive training campaigns that provided sales force with new tools
that focused on the clients instead of on the tires
 Contracting:
o Problem: Confusion and complexity due to many different contract versions
o Solution: Streamline the contract structure around a small set of simple and
comprehensive standards, with fee estimates to facilitate people’s job and
increase the probability of the contracts signed
 Relationship management:
o Problem: Fear of distributors by entering the same market as them and taking
market share away from them
o Solution: Foster stronger relationships with distributors to motivate them to
cooperate with MFS as true service providers

5. Would you recommend pursuing / repackaging / abandoning Michelin’s solution offer?

Sales:

 Training programs were successful and the contract signed were expected to be more
profitable
 The conflict of interest between replacement and MFS sales was still active. Both areas
aimed at the opposite objectives

Operational excellence:
  Capitalizing too much on service providers was both positive and negative: Upon them relied
the success of performing services on Michelin’s behalf, but at the same time they could
become competitors

Distributor’s new role as service providers:

 The close relationship with the service providers could become a strategic advantage and
increase Michelin’s bargaining power, where both parties depend on each other.
 However, relying on such extent on third-party providers was a risk because they do not
always complied with contract settings. It was hard to guarantee the consistency of the
service throughout the country. A large investment was required in quality control, reporting
tools and training of service providers.

Managing costs:

 Relying too heavily on service providers to perform the services also meant that the optimal
cost structure for Michelin depended on the service providers. Michelin’s profitability
depended on the adequate management of the 4-lives program.
 Furthermore, since the costs were now managed by Michelin, truck drivers could behave less
carefully than usual, which would imply more costs for Michelin for the same profit.

Organizational issue:

 The legal time did not support the idea of committing to multi-year contracts. They would
have to hedge for legal risks involved.
 The administrative people had too much work with the invoices coming from services
providers, even while this unit represented only 5% of the company business
 The geographical expansion could further worsen the existing frictions.

Information system:

 There was official information system in place since the company did not have a thorough
command of the process. That meant that the company faced difficulties analyzing the
incoming information and this could affect the responsiveness and the decision making.

Based on this current information, repackaging would be the strategy to follow. Redesign of the
model has some risks and no guarantee, but as the idea is very innovative, improving it and
implementing in the company could become competitive advantage of Michelin among the
competitors on the market.

Other important key parts

There is an impressive consolidation process in the industry and it won’t stop considering that 80% of
European transportation companies operate with less than 5 trucks. This market is turning hyper
competitive.

Transportation companies have become logistics service providers, with a dedicated logistics division
offering a wide array of services from transportation outsourcing, supply chain management to one-
stop solutions. Some companies were increasingly relying on third-party logistics for their non-
strategic processes targeting higher returns on assets and increased flexibility in their supply chain.

The Truck and Buses tire market is relatively consolidated with Michelin, Bridgestone and Goodyear
accounting for almost 18% of the market each. However, low-cost Asian firms are increasingly
gaining traction, since this industry price is a powerful selling argument, as costumers view tires as
highly commoditized “dirty black things”.

Michelin employs more than 125,000 people worldwide, has 70 industrial sites in 18 countries and a
sales presence in more than 170 countries. Michelin strongly focuses on research and development
and is acknowledged as the industry’s leader in technology, offering premium tires and driving the
market. The Truck and Business division accounts for 25% of overall sales in 2002 and 40% of the
group operating result.

Michelin’s original equipment’s share is 65% in Europe and replacement’s share is 21%, which
accounts for 80% Trucks and Buses tire market.

Michelin addresses the replacement market almost exclusively through professional tire distributors.
TB tires are service intensive: they require constant monitoring, regular maintenance and repair,
tasks which are time-consuming and require professional expertise. As a consequence, distributors
often have a complementary service business performing some tire maintenance activities.

Tire-related breakdowns (e.g., punctured tires) have become the most frequent reason for a truck to
stop. Tires have a strong impact on fuel consumption (20-40% linked to tires), the second most
important factor after personnel.

Longevity of Michelin’s tires is their key selling point (200,000 km vs 160,000 of competitor’s).
However, this longevity only materializes when the tires are properly taken care of. If this does not
occur, then the companies won’t get the most out of the tires and will be reluctant to pay the price
premium.

Michelin designed the “4-lives program”, which maximizes tire performance through optimal
maintenance activities. When the program is correctly implemented, the tires last 2.5 times longer
and the price is justified. However, this was rarely the case, since only rarely this full potential was
achieved due to poor maintenance, which in turn happened due to lack of expertise and weak
logistical command.

Since Michelin’s advantage was the tire’s longevity, revenues coming from tire-related services
should also last longer. The company may end up making more money from this than from the
traditional business of selling tires.