1.

Introduction

Kone is currently facing a precarious financial situation in an industry that competes

on price rather than differentiation. Should the situation persist, losses for 1996 will
be imminent. With the launch of Kone MonoSpace in Germany, however, the
company hopes to make profits as it expands its product line in this very critical
market. Germany’s elevator market is the largest in continental Europe and with a
market size of 15,500 units in 1995, it is more than the market sizes of the
Netherlands, France and the UK combined. The German market is, thus, critical
because of its sheer market size and its potential to bring Kone back into a profit
making business.

This report seeks to address the key considerations of the MonoSpace launch in
Germany, its launch strategy and implementation process.
2. MonoSpace’s Value Propositions

Currently, MonoSpace can only be used in low-rise buildings because it can not
operate on buildings with more than 12 levels.

Value propositions of the MonoSpace include:

1. Machine-room-less
A machine room is typically 25% of the total elevator cost for geared traction and
slightly less for hydraulic elevators. Without the machine room, developers will have
more area to rent out or sell.
2. More comfortable ride
“ EcoDisc” offers a more comfortable ride as compared to a gearless traction elevator,
the most expensive option for an elevator.

3. Extremely energy efficient

The energy saved is considerable, ranging between one third to half of other elevator
systems. In addition, electrical fuses required for the MonoSpace were $42 a year,
significantly cheaper compared to $559 a year for geared traction elevator fuses and
$1,119 a year for hydraulic elevator fuses.

4. No oil required
Potential fire and environmental hazards are eliminated, as is the cost of oil.

5. Shorter installation time

Requires 60 hours less time compared to the simplest traditional elevator

6. Lower construction and installation cost

Cost savings can amount to 5% of savings for the construction company (should you
quote this


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3. Situational Analysis
3.1. MonoSpace Market Analysis

When MonoSpace was introduced in the Netherlands, France and U.K, it was met
with varying degrees of adoption rate. It was a great success in the Netherlands but
fared very poorly in France and the U.K. A comparison study of the markets can give
Kone Aufzug considerable insights to the MonoSpace launch in Germany.

Price of Price of Price of Price of No. of

PH PT PU Monospace Monospace sold
in a year
Netherlands $40,625 $38,750 $42,500 $43,125 630
France - $30,000 - $36,000 160 (estimate)
UK $24,308 $$46,154 - $47,308 45 (estimate)
Netherlands: 40% x 2100 x 75% = 630, France: 40 x 4= 160, UK: estimate based on poor adoption rate

For all markets, MonoSpace was priced at a premium as compared to the PH, PT and
PU. As all products are used in the low-rise residential market, MonoSpace can be
considered as a substitute to the existing products. In the Netherlands, MonoSpace
was priced 6% more than the PH and 11.3% more than the PT. In France, MonoSpace
was priced 20% more than the PT. In the U.K, MonoSpace was priced 95% more than
the PH and 2.5% more than the PT.

Pricing MonoSpace at a premium can denote that it is a novel product of superior

quality, thus shifting the competitive landscape away from pricing and focusing more
on differentiation. However, if priced too high, the potential benefits of this new
technology may be outstripped by the cost of purchasing a MonoSpace. Pricing is
especially crucial because the 2 groups that the MonoSpace will be marketing to in
Germany, the developers and contractors, are very price sensitive.

Good pricing, along with a strong emphasis on relationship-based selling efforts,

could have been a reason for MonoSpace’s success in the Netherlands market. A
premium of between 6% and 11.3% is not high enough to outstrip the potential cost
savings and decision makers may have found the price reasonable. However, the
MonoSpace was definitely priced too high in the U.K. At a 95% premium, the
MonoSpace is almost twice as expensive as a hydraulic elevator. Kone had neglected
the fact that the U.K low-rise market is price sensitive and, on the contrary,
emphasized Kone’s technological leadership. Kone’s weak marketing efforts in the
U.K also contributed to the dismal adoption rate. Only 3 presentations were made in
the U.K to a guest list of 500 as compared to approximately 3500 guests invited for
one-to-one presentations in the Netherlands and around 600 guests invited for 20
breakfast talks.


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3.2. Key Take-aways from European Marketing Learning Points

1.In the eyes of the contractors, the elimination of the need for a machine room and a
simplified installation process are benefits that are not unique to MonoSpace.
Ultimately, they are most concerned over the construction costs so emphasis on the
elimination of a machine and simplified installation process without stating the actual
cost savings is not compelling enough for them.

2. Energy suppliers have been recommending MonoSpace because they find the
energy savings very favourable. Kone Aufzug should consider if it wants to target
energy suppliers in its marketing efforts.
3. In order to mitigate product risks, consumers will usually sample a product before
purchase. Unfortunately, in the elevator industry where investments made are rather
substantial, there is no chance to experience a ride in the elevator before purchase.
The installation of a MonoSpace in the Kone office will give potential buyers a
chance to experience a MonoSpace, reduce perceived product risks that they may
have and create a greater incentive to purchase MonoSpace.

3.3. The German Market

Market Analysis

Although Kone Aufzug has access to the entire demand for elevators in the German
market through the bidding process, its market share is the fourth largest behind its
main competitors Schindler, Otis and Thyssen. As can be seen from the table below,
the market share in PH, PT and PU are only 9.1%, 2.7% and 0.46%.

Germany’s Market 15, 500

Size (1996)
Germany’s low-
rise residential 11,470 (74%)
Market Size
Germany’s Market
PH PT PU
Size in each
6,882 (60%) 1,529 (27%) 3,059 (13%)
segment
Kone’s Market
1,426
Share
Kone’s Market
Share in the low-
684 (48%)
rise residential
market
Kone’s Market
PH PT PU
share in each
629 (92%) 41 (6%) 14 (2%)
segment
Market share
9.1% 2.7% 0.46%

The weak market share presents an opportunity for Kone Aufzug to increase its
market share substantially. As the country with the largest market, Germany is


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ironically Kone’s weakest market in comparison to France (14%), U.K (20%) and the
Netherlands (40%).
Schindler’s market share is the highest in the German market, at 19.4%. However,
Schindler had suffered losses of around 11% of turnover because of its aggressive
pricing efforts. As the selling process is largely dependent on bidding, it is inevitable
that the industry competes on competitive pricing. With Kone Aufzug only fourth in
the industry, it is reasonable to conclude that its prices were not as competitive as
Schindler’s, Otis’ and Thyssen’s.
Another key takeaway from the market penetration table is that Kone has significant
market share in PH over the rest. This has important implications since the
introduction of MonoSpace could potentially cannibalize sales of PH. Subsequent
decisions will need to take into account such an effect.

Key Decision Makers

The key decision makers in the elevator industry are the developers, contractors and
architects. In Germany, contractors and architects make the final purchase decision
90% of the time and are concerned over different aspects of the elevator.

Developers Contractors Architects

Final Elevator
Purchase 10% 50% 40%
Decision
Key Concerns Overall cost Price Aesthetically
pleasing
Quality No changes to
architectural
Timeliness drawings

MonoSpace’s Machine-room-less *Machine-room-less

Value
Propositions Extremely energy Lower construction
efficient and installation cost

No oil required *Although in the

Netherlands
Lower construction machine-room-less ?
and installation cost technology did not
seem unique, it
helps to reduce costs
substantially and
should still be
considered as a
value proposition.

As can be seen from the table, there are many ways to reduce the price for the
contractors but currently, there are no value propositions that meet the architects’


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concerns. Kone Aufzug should look into adding some aesthetic elements to its
MonoSpace elevators in preparation for the launch.
5. MonoSpace Germany Launch Strategy
5.1. Positioning
The MonoSpace should be positioned as a substitute to the hydraulic elevators
because 1) it has the biggest market size in the low-rise residential segment and 2) it
will give buyers the largest value.
In 1996, the demand for hydraulic elevators would be 6,676 (assuming the market
size will shrink by 3% annually) in the low-rise residential segment, still making up
60% of the market size, or 20% more than the demand for geared traction elevators. If
Kone’s average price of hydraulic elevators is a fair indication of the approximate
selling price of each hydraulic elevator in Germany, the market will be worth around
$280,111,888. Clearly, the hydraulic elevator industry is highly lucrative.

With the aim of capturing the largest segment of the market, MonoSpace should be
positioned on a lower price as compared to PH. The production cost of MonoSpace is
lower than that of PH because it is a machine-room-less system, giving it a superior
cost advantage. Additionally, 60% of the decision makers are highly price sensitive.
The combined proposition of less price and more value will not only allow
MonoSpace to capture the bulk of the Germany market (which is inherently driven by
low-rise elevators), but also ensure that competitors cannot engage an effective price
war since MonoSpace is largely differentiated with significant benefits, both tangible
and intangible. Cost benefits, in particular, are highly valued by the specific decisions
makers such as contractors and developers.
Therefore, MonoSpace should not only be positioned as a substitute for the hydraulic
system but also as a system that gives buyers more for less. Although Kone Aufzug
will still be competing on price, its product differentiation will create a more inelastic
demand and as a result, Kone Aufzug will have more control over its pricing strategy.

5.2. Pricing

The production cost of the MonoSpace is estimated to be comparable to the hydraulic

elevator but there are other cost savings that should also be factored in:

Cost of hydraulic system: 108% x 60,000DM = 64,800 DM

Cost of the machine-room: 20% x 64,800 DM= 12,960 DM
Cost savings, lower construction & installation cost: 5% x 64,800 DM= 3,240 DM

Production cost of MonoSpace= 64,800DM- 12,960DM- 3,240 DM= 48,600 DM

($33,986)

MonosSpace should be priced at 56,000DM, around a 15% mark up from its

production cost and approximately 7% cheaper than the hydraulic elevator. At 56,000
DM, the MonoSpace is very competitively priced in the industry.
In addition, architects may choose different materials and features for the elevators if
they wish to add aesthetic flavour. The basic price will always be 56,000 DM and a


 5

minor change of adding mirrors in the elevator will cost 1,700 DM. Packages that
allow the architect to choose the interior paneling material and colours are priced
between 3,000 and 15,000 depending on the type of materials and quality of paint
requested.
5.3. Threat of cannibalization

Given that Kone’s market share largely resides in the low-rise residential market, it is
unavoidable that cannibalization will occur.
However, cannibalization in the low-rise residential segment should be encouraged
and not feared. As all the elevators sold in this segment are sold at a loss, the
substitution of any elevator with the MonoSpace will be favourable to the company.
Each MonoSpace contributes 8.400DM to Kone’s revenues but a hydraulic elevator
and traction elevator cause 4,800 DM and 3,875DM in losses respectively. This
translates to 8% of every PH sale and 5% of every PT sale in comparison to a 15%
profit on each MonoSpace sold.
It has been considered if Kone Aufzug should increase its prices of hydraulic
elevators and traction elevators. However, with full awareness of the price sensitivity
in the market, it is not advisable to increase prices. Not only will there be a steep drop
in demand, the company will have to deal with excess inventory and the costs
involved.
Kone Aufzug should aim to capture 30% (2,065) of the hydraulic elevator market and
15% (688) of the geared traction market at the end of 1996. That will bring total
profits up to 23,125,200DM for the year.
Assuming that 65 % (409) of the market share of Kone Aufzug’s hydraulic elevators
and 30% (16) of the geared traction elevators are cannibalized by MonoSpace, Kone
Aufzug stands to gain 2,025,200 DM in forgone losses. The net benefit of
MonoSpace’s launch in Germany for the first year is 25,150,400DM.

6. Marketing Efforts
6.1. Target Market

Kone Aufzug will focus its marketing efforts in primarily attracting the contractors
and architects. Energy suppliers and developers will make up the secondary target
market. Although contractors and architects are the key decision makers, energy
suppliers and developers may be their key influencers.
6.2. Selling points

Contractors
Contractors are most concerned over the cost of their projects so the product and
installation cost savings should be presented in a very quantitative manner. The
elimination of the machine room and the lower construction and installation cost
savings amount to 25%, of which 10% will be passed on to the buyer.


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Architects
The architects will be presented with a whole host of ideas that can be implemented to
create a more aesthetically pleasing elevator. Packages available were mentioned
under ‘pricing’.
Energy Suppliers and Developers
Energy suppliers are very strong supporters of MonoSpace because of its energy
efficient capabilities. They will not be in direct contact with either the contractors or
architects but are in close contact with the developers. Energy suppliers can teach the
developers about the energy and cost benefits of using the MonoSpace and if
convinced, the developers can request that the contractors use a MonoSpace.
Developers need to know that the energy savings in monetary value of using
MonoSpace is approximately 39,077 DM a year. In addition, the opportunity cost of
renting the space that would have otherwise been the machine room is estimated to be
7,200 DM a year. In total, developers stand to gain 46,277 DM a year.

However, developers are not the main decision makers when it comes to elevators in
Germany and energy suppliers are only effective influencers when it comes to
convincing developers of the energy cost savings in this technology. Only developers
are concerned over the cost of maintenance and operations. Energy suppliers do not
have influence over contractors or architects because energy cost savings are not one
of their concerns.
6.3. Marketing programme budget
In order establish awareness in the German market and enter it with impact, Kone
Aufzug requires an extensive marketing programme budget to reach out to as many
companies as possible. Although the price of MonoSpace is competitively priced, it is
essential that buyers are educated on its benefits and see the product beyond its price
tag. When the launch of the product is done well, subsequent marketing efforts need
not be as aggressive as the adoption rate increases and word of mouth marketing kicks
in.

Breakdown of marketing programme budget:

Item Cost

1. Email blasts to 30, 000 companies The artwork for the email
blast: 200DM
2. Trade press and journal advertising
in a free monthly journal with 3,000 DM
circulation of 25,000
3. 6 road shows 131,250 DM
4. 8139 sales visits
3,255,600 DM
5. Showroom at Kone Aufzug’s HQ,
opened 5 and a half days a week. Cost
of brochures, refreshments and sending
invitations costs approximately 430
DM a day 113,520 DM


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 6. Dubbing of video into German. The
video can be viewed in the company’s
website and will be screen at road
shows and in the showroom. 50 videos
are needed. 20,250 DM

The marketing programme budget is 3,523,820DM for year 1996.

6.4. Marketing programme

The marketing programme is focused on personal selling and establishing

relationships with buyers. Where advertising is engaged, the main purpose will be to
invite buyers to the show rooms and road shows.
Email blasts

Target Audience: Contractors, Architects, Developers and Energy Suppliers

Target Number: 30,000
Expected viewership: 3,000
Cost: 200DM
Purpose: Create awareness and invite industry players to the road shows and show
room.
Instead of sending direct mailers the traditional way, Kone Aufzug should spread
awareness of the MonoSpace via email blasts, a much cheaper alternative. The
traditional method would have been very ineffective, response being only 120 out of
the 30,000 who were sent the mailer, and expensive. The only significant cost
involved in the email blasts is the artwork that will be outsourced. The email blast
will contain information on the MonoSpace and an invitation to the road shows and
show room at the headquarters.
Trade press and journal advertising

Target Audience: Contractors and Architects

Target Number: 25,000
Expected viewership: 20,000
Cost: 3000DM
Purpose: Educate contractors and architects on the superior technology specifications
and invite them to the road shows and show room.

The advertising cost in the free monthly journal is relatively low and it has the highest
circulation size. In the advertisement, technical information on the MonoSpace will be
given but more importantly, it should invite the contractors and architects to the road
shows and showroom. Advertising alone will not give the readers any impetus to
purchase an elevator so an opportunity has to be created for Kone Aufzug to
personally explain the MonoSpace to the readers.
Showroom
Target Audience: Contractors, Architects, Developers, Energy Suppliers
Target Number: 15,840
Expected turnout: 9,504


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Cost: 113,520 DM
Purpose: Engage industry players in familiarizing with MonoSpace and create
networking and personal selling opportunities.

The Kone Aufzug’s Headquarters will have a MonoSpace installed for people to
experience the comfort of riding in a MonoSpace. There will also be a showroom set
aside with information panels that explain the technology in detail and an area for
salespeople to network with the guests. By inviting the guests to the company’s HQ,
Kone Aufzug can also create a deeper impression of its brand and create more touch
points with MonoSpace.
Road shows
Target Audience: Contractors, Architects, Developers, Energy Suppliers
Target Number: 600
Expected turnout: 450
Cost: 131,250 DM
Purpose: Engage industry players who do not wish to visit the showroom in
familiarizing with MonoSpace and create networking and personal selling
opportunities

The road shows are expensive because they are held comfortably in a hotel and
require a lot of logistics. The road shows are meant to complement the showroom
presentations because the hotel chosen will be more centrally located as compared to
the HQ. Besides presentations, the sales force will be mobilized to reach out to the
different groups and in doing so, tailor the message to meet the needs of each group.
Everyone present will also be invited to the showroom at the HQ.

Sales visits
Target Audience: Contractors and Architects
Target Number: 6,511sales visits
Expected number: 6,511 sales visits
Cost: 3,255,500DM
Purpose: Engage in personal selling

In 1995, 6,336 sales visits were made in Germany and 1,426 units were sold. This
works out to about 4 sales visits per unit purchased. Given the low price of the
MonoSpace, training for the sales force and that 20% of the sales will be made at the
showroom, the number of sales visits required to sell each unit of MonoSpace will
only be 3. 6,511 sales visits are required to sell 2,713 units of MonoSpace, the
targeted number for 1996. 175 extra sales visits are required in comparison to the year
before. Given that each full time sales person made 192 sales visits in the last year,
Kone Aufzug would only have to employ an additional sales person to fulfill the
6,511 sales visits required.

The marketing programme budget of 3,523,820DM will be well worth as it is

expected to bring in 23,125,200DM in pure profits and increase market share of PH in
Germany’s low-rise residential market to 30% and in PT and PU, to 15%.


 9

6.5 Marketing Kit
The marketing kit will consist of the following:

1. A press kit featuring a CD-ROM and website

2. Concept brochure to supplement existing low-rise line literature

3. Powerpoint presentations, one targeted at contractors with detailed specifications

and cost savings; another targeted at architects with detailed specifications of the
design options available; another targeted at developers and energy suppliers
highlighting the long term cost savings.
4. Building and planning guides, architects will have an option to design the interior
of the MonoSpace
5. MonoSpace architectural specifications
6. Total elevator cost comparison form
7. A miniature static MonoSpace model.
The marketing kit has been streamlined to focus on what really is essential for each
group MonoSpace is marketed at. Architects now have more room to play around
with ideas for their designs and information of how their designs can be implemented.

7. Competitive reaction

The competitors reacted with ‘ stunned silence’ initially but the silence will be broken
immediately when MonoSpace creates an impact on the industry. Kone Aufzug’s
market share in the low-rise residential segment is expected to increase to 24% within
the first year, as compared to 12.4% at the start of the year. Assuming the demand for
Kone Aufzug’s elevators in the non low-rise residential segment is constant at 742 per
year, Kone Aufzug’s total market share would have increased by 13.1% to 22.3%. As
compared to the 1995 market share figures, Kone Aufzug would have a larger market
share the current market leader, Schindler.

Schindler may continue to compete on price and in doing so, suffer even greater
losses. Other industry players may follow suit and lower their prices because there is
nothing else to compete on, making the elevator industry extremely unprofitable. Otis
would be Kone Aufzug’s biggest threat because it focuses on aggressive and wide-
reaching process re-engineering efforts. Based on its strategy, it is likely that Otis will
develop a similar technology as the MonoSpace and compete with Kone Aufzug
based on product differentiation and price. Smaller industry players may also develop
their own technologies to compete with the MonoSpace, however, with their limited
financial resources and economies of scale, their technologies may not be as
sophisticated or cost effective. What the smaller industry players may successfully
develop is a niche market for very specialized elevators, instead of competing with
the six major players in a losing battle.
Competitors may also adopt spoiling tactics and play down the benefits of
MonoSpace. However, nothing significant can be said about MonoSpace’s


 10

disadvantages. Approval of the MonoSpace can be granted fairly quickly and easily
so buyers need not worry. Even the lack of ventilation in the elevator is not a major
disadvantage because the MonoSpace naturally does not require one.
In any case, whichever competitor that chooses to develop a similar technology will
always be one step behind MonoSpace. Besides already being a follower in the
industry, they would have to spend time developing a technology of comparable
standard. This will set them back by at least half a year.

Kone could face similar competitive reactions in Netherlands, France and the U.K.
What Kone should do is continually improve its product offering while also working
on reducing the production costs. Kone’s first strategy should be differentiation so as
maintain its competitive advantage. This would require Kone to continually invest in
R&D and roll out improved versions of MonoSpace every few years. The investment
in R&D can also help Kone seek ways to reduce its production costs. While
differentiation sets MonoSpace apart from its competitors, contractors are still very
much concerned over the price. Improved versions of the MonoSpace should always
be priced on par or below the industry’s average.

Kone Aufzug should remind its buyers that it was the first in the industry to introduce
the MonoSpace technology and establish its brand as one that gives buyers more for
less. Furthermore, it is imperative that Kone Aufzug maintains a strong relationship
with the contractors, architects, developers and energy suppliers. All these groups are
involved in the decision process directly or indirectly and can be an influencer at any
one time. Therefore, although contractors and architects decide on the elevator 90%
of the time, the developers and energy suppliers should also be updated on the latest
technologies and be invited for subsequent marketing initiatives.
In the longer term, it is recommended that Kone invests in creating a MonoSpace
technology for the medium-rise elevator systems and subsequently, high-rise elevator
systems. The expansion into other elevator systems opens Kone up to new profit-
making possibilities and reduces its risks in focusing too much on the low-rise
elevator sector, which makes up 75% of its equipment sales.
8.Beyond Germany: MonoSpace in other markets
Kone should launch MonoSpace in other European markets and the rest of the
markets that it already has a presence in. Although the launch strategy may be a
success, it should not be used in a cookie cutter fashion. Rather, each market should
have a marketing plan tailored to target the right decision makers and position
MonoSpace in a way that will best add value to the customers.

It is also critical to make a few changes to MonoSpace’s positioning and pricing in

France and U.K. In France, the price of PT at $30,000 is already lower than the price
that it is being sold for in Germany, $33,986. Assuming that the price of hydraulic
elevators in France is not anomalous, it will be even lower than $30,000, making it
impossible to price MonoSpace below hydraulic elevators and yet make significant
profits. Therefore, the MonoSpace in France should be positioned as a replacement of
the geared traction elevator instead of the hydraulic elevator. Kone can lower the
price of MonoSpace in France to $32,508, making a 10% profit instead of 15%. As
MonoSpace is priced slightly higher than the geared traction elevators, extra emphasis


 11

has to be placed on the potential cost savings and its key differentiating factors to
justify that the extra cost is worth it. With the repositioning efforts in place inline with
marketing efforts, the number of units sold in France is expected to increase by 80%
to 288 units.

As for the U.K market, MonoSpace is definitely priced too high. The price for
MonoSpace in Germany is between the price of a hydraulic elevator and a geared
traction elevator. In fact, the MonoSpace is 40% more expensive than the hydraulic
elevator. In this case, it is also better to position MonoSpace as a substitute of geared
traction elevators. This way, it is still able to compete based on price in the U.K. low-
rise residential market that is extremely price sensitive. Maintaining the price at
$33,986 for MonoSpace in U.K gives buyers savings of 26% as compared to geared
traction elevators.
9. Conclusion

Kone’s worries of making losses for the coming year can be put to rest with the
successful launch of MonoSpace in Germany, assuming that the launch strategy will
be implemented effectively and that current trends hold. Although capturing 30% of
the hydraulic elevator segment and 15% of the geared traction elevator segment in a
year may seem ambitious, they are in fact highly attainable as MonoSpace is
attractively positioned to give buyers more value for a lower price whilst Kone’s
competitors are making huge losses competing solely on price. The confidence in the
positioning lies largely upon a firm understanding of who the decision makers are and
the concerns that they have.
As Kone presses on, it should not forget the mistakes made in France and U.K, where
pricing was a major reason why the launch of MonoSpace had failed. These lessons
will be very valuable as Kone prepares to expand into new geographical markets and
enhance its MonoSpace technology for the mid and high-rise segments.


 12