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KONEThe MonoSpace Launch in Germany

Jeramy Hebebrand Ryan Mackie Zeynep Orhon DigVijay Singh

TEAM 9 1

The German Elevator Market

German elevator market is dominated by residential construction New elevator market;

8,000 buildings in 1988 15,500 buildings in 1995 Expected 13,175 buildings by 2000 (expected to shrink by 15%) 60% of the elevator units is hydraulic and 40% is traction. Two thirds of the geared traction units are PU type.

In 1995, expected demand for elevator units =11,470 units In 1996, expected demand for elevator units =11,125 units

based on 74% of the residential buildings would install elevators based on ~ 3% annual shrinkage in the residential construction market
TEAM 9 2

The German Elevator Market by Type

German Elevator Market
Geared Traction PU

-222 units -20 units 1996 1995 -128 units

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000


Geared Traction PT

Hydraulic PH

Hydraulic PH 1996 1995 6660 6882

Geared Traction PT 1510 1530

Geared Traction PU 2930 3058

New Units Solds

TEAM 9 3

The German Elevator Market Competition

The Majors - 1995 Market Share

New Elevator Market
Schindler 19% 35% 12% 6% 6% 9% 13% Otis Thyssen KONE Haushahn Schmitt&Sohn Others
3% 49% 12% 5% 6% 14% 11%

Lifts in Service
Schindler Otis Thyssen KONE Haushahn Schmitt&Sohn Others

Total Turnover Value

Schindler 25% 21% Otis Thyssen 4% 6% 7% 18% KONE 19% Haushahn Schmitt&Sohn Others

TEAM 9 4

The German Elevator Market Competition

The Mid-Size Players Approximately 30 mid-size players, with new equipment sales ranging from 100 to 300 elevators per year Operated regionally Produce few key components, mostly outsourced manufacturing The Cowboys Small local companies, numbers about 150 Usually operated within a single city Focus on the purchase and assembly of components and, installation and service
TEAM 9 5

The German Elevator Market Low Rise Elevator Customers

Property developers, general contractors and architects are involved in purchase decisions

Property developers are concerned with the overall costs, in which choice of elevator has little impact. Thus, KONE and other other companies seldom communicate directly with them. Property developers use the bid process to pressure contractors for price reductions. General contractors exert the greatest influence on elevator purchase. Four largest German contractors control 20%, however construction market is highly fragmented (about 20,000 small contractors). Contractors use a competitive bidding process to procure specialized building systems, occasionally two-stage bidding.

Residential buildings are usually built by small contractors, often relied on architects to select elevators. For mid-size hotels and offices generally built by larger contractors, where the higher end residential elevators are typically used, architects select only elevators cosmetic TEAM 9 options. 6

KONE Aufzug - Overview

Generated DM 216 million and profits DM 12 million in 1995 TABLE B page 5 Organized as a matrix of business divisions (V1, V2, Finance, Personnel) and geographical regions (North, South, East)

TEAM 9 7

KONE Aufzug - MonoSpace

Regulatory approval of the new technology is a precondition of the launch. MonoSpace have been approved in all German states

TEAM 9 8

KONE Aufzug - Sales Efforts

25 local sales branches, 23 full time, 20 half time salespeople in V1 sales Full time salespeople four to five day sales calls per week and spend the remainder of their time in preparing proposals, answering queries from customers and prospecting. Half time salespeople divide their time between V1 sales and other responsibilities, 13 were also branch managers and 7 worked as V2 salespeople.
Kone Aufzug`s Residential Sales in 1995 by Type

6% 2%

48% of 1995 sales were residential

Hydraulic PH Geared Traction PT Geared Traction PU


TEAM 9 9

KONE Aufzug - Selling Process

KONE being one of the major players, had access to the entire demand for elevators in the German market From start to finish, procurement process takes 8 to 15 months. Selling process steps are;

96% of the purchases are from contacts initiated by the customer by sending elevator specifications and a request for bid to a local KONE branch Customer inquiries are followed by a visit from a KONE Aufzug salesperson to the customer contact - usually the construction company manager or the architect Salesperson reviews architect`s drawings, design specifications and special requirements and details elevator options in the form of a sketch or drawing Once the elevator specifications are negotiated, a contractor`s purchasing manager becomes the main point of contact and discussion shifts to payment terms and price.

TEAM 9 10

KONE Aufzug - Pricing

Average prices for KONE`s standard 4-floor, low rise, residential, volume range elevator were;

DM 60,000 for Hydraulic PH DM 75,000 for Traction type PT DM 80,000 for Traction type PU DM 120,000 for Traction type PS

KONE`s losses on new equipment sales averaged approximately 8% of sales for hydraulic and roughly 5% of sales for traction elevators.

TEAM 9 11

KONE Aufzug Pricing Strategy for Monospace Launch

KONE should use
Competition Oriented pricing for New Equipment sales (V1 segment ), using Machine Room less feature as product differentiator, and Value based pricing for Services (V2 segment)

TEAM 9 12

KONE Aufzug Pricing Strategy for Monospace Launch

Major source of KONEs revenue and profit was Services and is projected to remain so in the future
The market for Services is such that the Equipment suppliers have an advantage in winning the contracts to service their installed bases Major competitors (Schindler, Otis) are likely to react to low price of MONOSPACE by lowering the price on their new equipment as losses can be covered up by getting service contracts KONEs sales force in V2 market is outnumbered by the sales force of major competitorsTEAM 4-5 to 1. by 9

KONE Aufzug Pricing Strategy for Monospace Launch

Production costs of MONOSPACE is expected to be same as for a comparable Hydrolic elevator
Therefore, MONOSPACE in Germany should be priced at DM 60,000

TEAM 9 14