KONE: The MonoSpaceoLaunch in Germany

Das Nat'ayamdas and Gordon Sws'ttz

In Nover.nber 1996 Rairno Hät:ilä, clirector of KOi\E Aufzug's new elevator busi-ness, was in the midst of planning the launch of his firm's latest product. The interimfinancial report he had just received in the rnail confirmed that region-wide construc-tion slumps and lou-differenti:rtion among corlpetitive offerings had led to significantprice competition ancl rnargin erosion in the industry. KONE's operating income for

the first eight months of 1996 u'as 6.0% of turnover, which compared with 6.77" forrhe same period in 1995.' lhe report also projected that, absent significant changes.after-tax income for 1996 would be zero and worsen in the future.

To pull the firm out of the commodiry- rut Hätälä and other KONE managerswere looiring to dre company's nell'est, revoludclnary product, MonoSpace. Nthoughnews of the MonoSpace product had init iallv led hirn to exclairn to his colleagues."With this, we can conquer the Germirn rnarketl," early test market and productlaunch results had p;iven Hätä1ä cause for concern.

What, Hätälä u.ondered, was thc size of the MonoSpace opportunity in Germanr-iHou' should he price and position -N{onoSpace? To what extent might MonoSpacecannibalize sales of KONET existing low-rise elevätors? What would be needed tc'ensure a successful launch? \A/ith morc questions than answers before him, Hätäläbegan to revier,r h is opt ions.

Significant restrl lctlrring and consoiidation in the late 1970s and 1980s found th.worldwide eievator indr,rstrv clon-rinated in the early 1990s byfive companies: C)tisof the Uni ted States; Schindler of Su' i tzer land; KONE of Finland; MitsubishrElectric of Japan; and Thyssen of Germany (see Exhibit 1 for more details on eachcompetitor). Nthough they competed g'loballv, these ccimpanies generally remainecsrrongest in their domestic or rcgional markets. Tosl-riba and Hitachi of Japan an.:Goldstar of Korea r.l.ere irnportrrnt cornpctitors in the fäst grou'ing Asian market.

Gordon Sr.artz of,\ ' lrrkct ßriclee arcl Proftssor lJrs \rrrvanchs and preparecl this case. TIBS cascs arc dcvelopecl soieh

as the brsis for class cliscussion. (l:rses are rrot intencled to scrl-c is cndorscrncnts, sorLrces of prinan' t lata, or i l lustntion.

of effectivc or ingflective nanigcincnt.

CJopvrightO200l Presii lcntrnciFelios,soflTrn'all( ir l lcqc.'I 'oordercopiesorrequestpernissiontoreproiluccm:rterials,caL

1-800-545 7(185,writeHan-ardBusincssSchoolPublishing,Boston,\ ' lA0ll63,orsotohtqr://q'ww.hbsp.haward.edu. Nopar

of this publication nar. bc rcproducecl, storecl in r rctric\.r] s\rstcnl, rLscd in l sprcaclsheet, or trarsmitted iu an]. tbm or by rnv

rneans-electruric, nccJruic,rl, photocopting, rccorcline, or odrcruise without dre pemrission of Ilanard llusiness School.

554

Case 8 KOI,{E: The MonoSpace@ Launch in Gennany 555

EXHlBlr 1 | BRIEF DEscRrproNs oF KoNE's Mruon GLoenL corupenroRs

Otis

Founded in 1853, Otis, a wholly owned subsidiary of the lJnited Technologies Cor-poration' was the global market share leader in the manufacrure, sales, and iervice ofelevators. In L995 it sold more than 30,000 elevators and had 730,000 under mainte-nance contract. Otis employed 68,000 people worldwide in 17 production units andmore than 600 sales offices in 45 countries. Revenues for 1995 were $5.3 billion. uol4o/" from $4.6 billion in1994, and operatingprofits $511 million, up 21% from $42jmillion in 1994.Industry analysts attributed this increased profitability to aggressiveand wide-reaching process re-engineering in the early 1990s (Otis had closed-Äctoriesand reduced headcount). The conipany invested approximately 1.6% of annual rev-enues in R&D.

Otis was dominant in Europe, the United Stares, and Canada, with market sharein these regions close to 30%. Its market share in Asia was approximately 20%.Thecompany's aggressive, new-market entry strategy had made it the first foreiqn eleva-tor company in the emerging markets of Asia and Eastern Europe.

Schindler

The Swiss engineering firm Schindler was ranked second in qlobal elevaror sales.Manufacture and sale of elevators and escalators accounred for 87"Ä of the SchindlerGroup's 1995 revenues. Service accounted for 60Yo ofthese revenues, reflectinsthe company's shift during the 1990s from equipment sales ro service. Althougf,Schindler's toral revenues had been flat in 1994 and r995, approximately SFr {7billion ($4.0 billion) in both years, its 1995 after tax profits o?-SF 78 miliion ($67million) were only one-half those of 1 994. Most of Sihindler's 2 0 production sitesin 15 European countries had been converted from manufacturing to assemblv. Thecompany also operated more than J0 sales, mainrenance, and instal lat ion faci l i t ies in23 countries.

Schindler's expressed strategy was to expand its position in elevators and escala-tors and a-chieve an equal market split among its operations in Europe, America, andAsia/Pacific (the latter market requiring an aggressive growrh plan). Schindler's profitstrategy was to maintain its margins over volume and, to that end, avoid price wars.

ilIitsubishi Electric

rn 1995,60 years af ter i t began producing elevarors, Mitsubishi Electr ic wasJ"p1r'r leading elevator manufacrurer, controlling more than 36"/o of the Japanesemarket. Turnover in 1995 wasY27 52 bil l ion ($zz.s bil l ion), operating profrtutTTbillion ($1.8 billion). Revenue broke down among the company's fivä äirririor6 u,follows: consumer Products, 22"/o;Data Processing, 2|"/o;Iemiconductors, 207o;.Industrial Equipment and Automation, 18%; and Heary Electrical, includinq eleva-

1o_1s, e-scllators, conveyors, and transformers,24"/o. Particularly aggressive in Asia,Mitsubishi was rhe market leader in many Asian markets. tn töqo it opened a newAsian factory, doubled proäuction in two existing Asian factories. and launchedtwo ioint ventures.

(continues)

556 Case 8 KOlrlE: The MonoSpacea I'aunch in Gennany

EXHIBIT' I Bruer DescntploNs oF KONE's Mruon GLoenl CouprrtroRsCONTINUED\

Thyssen

Thyssen Aufzüge, the world's fifth largest elevator manufacturer, was owned by

Thyssen AG (1995 net sales of DM 10.1 bil l ion ($7.1 bil l ion)). Thyssen Aufzüge's

1995 revenues were DM2.2 bil l ion ($1.5 bil l ion),up 5.2"/" ftom 1994. A decentral-

ized operation, its subsidiaries exercised considerable autonomy over product ranges

and sources. Thyssen Aufzüge manufactured only its most strategic components' out-

sourcing all others. Strong in Europe, with greater than 15% market share in 1995,

but weak in North and South America, with a mefe 2yol the company was investing

heavily in Asia, having established manufacturing facilities in China and sales offices

in China and Korea.

SOURCE: KONE

Numbers and types of elevators sold varied dramatically across the globe (see

Table A), reflecting factors such as urbanization, population density, and government

support For publ ic housing.The elevator industry business was traditionally split into two sectors: new equip-

ment and service that accounted for approximately $9 billion and $13 billion in global

sales in 1995.The traditional separation of product and service had generated interesting com-

peritive dlmamics in the elevator industry. Competition for new elevator installations

was fierce leading to new elevator equipment often being sold at or below cost by

the large competitors. Competition for elevator serwice contracts, on the other hand,

was traditionally more orderly. Equipment suppliers usually had an advantage in win-

ning contracts to service their installed bases. By tacit agreement, elevator companies

maintained high margins on annual service contracts that were roughly equal to 5%

ofthe purchase price ofan elevator.Low entry barriers due to the relatively simple electro-mechanical technology,

steady demand and high margins in the serwice market had recently attracted many

new competitors. These included small, local service-only providers that often enjoyed

TABLE A I EsnunreD DEMAND BY REGIoN FoR 1996 (ut't!Is)

Residential OtherLow-rise Low-rise Mid-rise Hieh-rise Total

Europe, Middle East,and Africa

North and SouthAmerica

Asia and Australia

Total

Current Total ElevatorInstalled Base,

65,000

18,000

50,0001 3 3,000

8,500

10,500

10,00029,000

4,ooo

10,000

20,00034,000

500

1,500

10,00012,000

78,000

40,000

90,000208,000

>5,000,000

SOLIRCFI,: Company records

Case 8 KONE: The MonoSpace@ Launch in Germuny 557

an advantage over the bigmanufacturers in terms of price, proximityand speed toseryice, important factors in the award of service contracts.bespite this t.Äd. th"la^rge equipment suppliers had continued to do well given that appro*imately ä1oLof service contracrs still flowed automatically from näw equipm.rri r"ler. Ho*e1r.r,there was some doubt that this situation would last for

""ry iong given the .rrrr"rr,

economic environment.

F.levator technology varied dramatically with respect to travel height, traveling speed,ride comfort, machine room requirements, drive system, controlsl cabin size, InLriorfinishing, and price. Selecting an appropiate elevator technology often involved mak-ing multiple trade-offs that were alllelated to the rype of drivJsystem used to lift theelevator cabin.

Drive mechanisms - The primary elevator drive technologies were: gearless (high

speed) or geared (medium speed) tracion (also called or "rope"); and hydrauli.. b"i.,

Jry ,y-p., slbject to significant variations by region and country , *rrc iTvo for gear-

less, 30% for geared traction, and 607" for hydraulic . Gearless traction elevators,"usedprimarily in commercial buildings, employed large, low-speed electric morors con-nected directly to drive pulleys to deliver the greatest ride comfort, travel height, andspeed (2-12 meters per second). They were generally the only option for high-risebuildings (more than 25 floors). Being gearless, wear and tear and replacem"rit.ort,were less than for geared traction elevators. Geared traction elevators, which employeda reduction gear between the motor and the drive pulley to move the cabin, prärriäedmoderate ride comfort, low to moderate travel height, and low to moderate speed(1 .0-2.0 meters per second). Their speed was inadequ ate for high-rise buildings. Gedonly in low-rise buildings (less than 6 floors), bydrautic elevarors offered minimal ridecomfort, limited travel height, low speed (<0.6 meter per second), and could be pricedas much as 50''/o below substitutable geared traction elevators. Each hydraulic elevatorneeded 200+ -liters of oil that some elevator consultants considered to be a potentialfire or environmental hazard.

Based on their performance characteristics and cost/benefit analysis, hydraulicelevators were suitable only for low-rise applications, gearless elevators for high-rise.Geared ffaction elevators had the widest application, primarily in mid- and low-rise,but occasionally in high-rise, buildings.

Machine room requirements The appendage-like shape of machine rooms, an in-evitable component of elevator construction, made them difficult and costly to inte-grate into many buildings. They either occupied potentially useable building space inthe basement or sat atop the shaft, rising above and marring the roofline. (Exhibit 2depicts the various machine room configrrrations.) In general, the taller the building,the larger the required machine room.

Gearless elevator machine rooms, always located on the roof above the shaft,ranged in size from 11 to 15 square meters per elevator. Geared traction eleva-tor machine rooms averaged 11 square meters per elevator and offered three fixedplacement options. The most Common and least expensive, on top of the shaft (termedPT). The next most common location, on the lowest floor next to the shaft (termedPU), was generally more expensive because of more complex roping arrangements.

558 Case 8 KONE: The MonoSpacea Laanth in Gerun.any

EXHIBIT 2 | ElrvnroR Mncstrur Roolt CorurtcuRAnoNs

PT- Georless or Troction PS -Iroction PU 'Troction PH-Hydroulk

SOURCE: KONE

The PU design was usually selected only if the machine room could not be placed ontop of the building. The most expensive and least common selection, slightly abor.the top floor and to the side of the shaft (termed PS), involved the most elaborate rop-ing arrangements. Hydraulic elevator machine rooms (termed PH), which averaseü5 souare meters. could be olaced on the lowest floor within 10 meters of the shaft.

Total elevator cost was roughly half equipment and half construction of the shaft ancmachine room and installation costs.l The geared traction elevator machine room npi-cally represented approximately one-quarter oftotal elevator cost, hydraulic slighdy less.

.I!e*E/S_u:Igr,f,gl.hu:"Tg ?-e-_.,,,:r9l- __ _** "" _ _______ _"The complexity of elevator purchase decisions varied with building type and desie:-Generally, the taller, costlier and more complex a building, and thus the elevator sr:-

tem, the larger the number of people involved in the decision and factors to be con-

sidered. Selection of a high-rise commercial building elevator system? for exampl.might involve the properry developer, bui ld ing owner. construct ion contractor, arc i . -

tect, elevator consultant, and major tenants.Priorit ization of features and properties varied among individual participan:..

even within a class. Owners' decisions, for example, reflected their post-construcn' .

purpose. Owner/developers who intended to sell a building upon completion, tendr:to be most concerned about up-front costs. Owner/landlords were likeiy to care Incr::

about life-time costs, but, unless they could command a premium from their teflänl:litde about ride comfort and aesthetics. Owner/tenants, being involved throughout ,..

elevätor's life cycle, usually considered most factors.A low-rise residential elevator purchase decision might involve from one to as mi:'

as five parties, the latter typically being property owner! construction company ml-.-

ager, architect, constmction company purchasing agent, and building sen ice manas.:

lElevators were qpically installed bv the general contractors that either used in-house talent or hired specialized

sub-contractors such as elevator installers or elevator constructors to do the iob.

Case 8 KO|,{E: The MonoSpace@ Launch in Gutnany s59

K.NE (pronounced k6'-ne and meaning ,,machine,'in Finnish) was estabrishedin 1910' originally focused.on the repaii and sale orreb,rilt.tectrical motors, itexpanded its business activities o.,.. ,h" years to include the manufacture and saleof steel, maritime rggt!-T:"r' cranes, wotd handti"; ilr.i; and clinical chemis-try analyzerc.. By 1995 KONE had divested it, .rorr-"T"*.o, u.rrir"rr.s and become,

H::*t:i:fi,!f.tn ".n"*itions, the world,s thi.d l",ge,i J;;;, company, behiniKONE's elevaror b,":il.r_r was organized as two divisions: New,trquipment, calledv1; and serwices, caredv2. rn 1995 ftoxo generated ."rr.n,r", of $2.2 bilion fromsales of 16,500 newunits and service.ont

".1, for 425,Il|.rrritr. vt accountecr for38"/",V2 for 627o, of these revenuds. Within vz,

-"int.nrrr." .o.rrru.rs accountedfor 7 8"/o of revenues, modernization of existing elevators for 22oÄ . (Exhibit 3 presentsKo\lPk organizarional chart. Exhibit 4 summarizes the financials.)

KONE manufadured and sord a broad.rine.f .q"i;;;;i,ä.r"ai"g standardizedlow-rise passenger elevators, medium-rise .r"""r- ryii.;;,;;h-;;r" elevator systems,scenic elevarors, hospital :r-.l3r9t:, freight erevarors, escarators-and autowalks, and ere-vator componenrs (see exhjbl_s for elamples of KoNE products.) Low_rise elevarorsaccounred for approxim atery 7 5%" of KONE's

^eq,rip-"rrt'rr1"i -ia-.ir" and high_riseelevators for r5o/o and 107o, respectivery. In 1995 KONIE spent approximatery 1.5% ofrevenues on new product development.

with90% of its sales.outside Finland, KONE operated two headquarters, one inHelsinki and the other in !russ.e]s^.. sfes by market iÄ if,gs *"r",-ily" ErJ; 4o/orest ofEurope; 29% North America; r0% Asia and Austraria and.4yo orher counrries.

KONE Aufzug, which operated in Germany, continentar Europe,s largest erevatormarket, generated t..r.rrrr", of approximately DM 206 million ,ii pronr, of DM 13million in 1995. The size of thÄ German market and the "o];; of KoNE,,s saresof Europe made KoNE-4r?yg'r financial performance..nrr"t.o KoNE,s overalsuccess (See Table B for KONE Aufzug's ,.r*_ury financials.)

K.NE Aufzug was organized as a äatrix of business divisions and geographicalregions. The business divisi,ons incruded vl (ne.w.r.y"r.rrl, ii'ö.*i..1, finance, andpersonnel; the three regions were North, south, "rrd

n"rt.'Th.i. -"r.25

local saresbranches within the three regions. Each saiesperson reported to a branch manager who,in tu-rn' reported to both the regional director and the business division directors.rn 1996 K.NE Aufzug eÄployed 23 fu'-time and 2o h#ii-. ,rt"rp.opre invl sales. Full-time s"respeo-pre "rr..ug.d

four to five half-day sares cails per week andspent the remainder of their time präparing prooosars, answering queries fiom cur_rent and potential customers,_a"a ptärp"ä-g.'rn"i.ü-r;;:?i"rp.ople dividedtheir time equally berween v1 sales anä their other responsibilities; 13 were arsobranch managers and seven also worked as v2 salesp."pi.. \4,h;; describing theirselling activities, branch managers were quick t";.;;;;'rh"r,öiir"rr,r, otis,, andSchindler's sales forces .a.h o.ign,r-b"r r^ by rour or hve to one.,,Forty-eight percent of r99\ sales were residential. of these, 92yo were pH; 6%PT; and 2"/o PlJ. Average prices for KONE's.standard 4-flool-io*-.ir., residentiar,volume-range elevaror were: DM 60,000 for hydrauric pH, DM 75,000 for traction

560 Case 8 KONE: The MonoSpace@ Lauttch in Germunl

KONE OncarutznloN CHARrEXHIBIT 3

fit]m0nResourcescnd Quo i1yi. ltovuori

Europe andLolin Americcl.P. Ihouvotie

IIjROPE AND I,AIIN AMERIIAl.P. Chouvorie

BrozilW.M. Borbom

ArgentinoA.L. Pettine

Venezuelo0. Alconloro

MexkoR. Demotio

SOURCE: KONE

Case 8 KONE: The MonoSpacea Launrh in Germany 561

EXHIBIT 4 | KONE Frvr-Yrnn Frrunrucrnl Sullunny

fvlill. HMProf i rs l99l-1995

ffi*ffi| Income ofter Flnonciol ltems

[IIl Neflncome

Milt. us $- 100450

-50

I 993 t99 4 I 995

SOURCE: KONE

type PT; DM 80,000 for traction type PU; and DM 120,000-DM 200,000 for trac-tion qpe PS.2 KONE's losses on new equipment sales averaged approximately 8% ofsales for hydraulic, and roughly 5% ofsales for traction elevators.

A commerciallyviable, machine-room-less elevator had long been a compelling notionto elevator manufacturers, as it would yield significant additional usable space forrevenue-generating purposes, and greater architectural freedom. In 1992 Otis Japanintroduced a protor!?e machine-room-less elevator based on a linear induction motor,but its price premium exceeded its construction cost savings and revenue-generatingpossibilities and it was not a commercial success.

Building on the induction motor concept, a KONE, R&D team in 1993 rede-signed the motor geometry and used new materials to develop extremely thin, light-weight permanent magnets that eliminated the need for bulky, expensive components.Ilnlike comparable geared traction systems, that required a gearbox, KONE's newmachine, the "EcoDisc," controlled speed by varying the frequency of alternatingcurrent supplied to the motor, as was commonly done in modern high speed gearlesselevators. The EcoDisc thus offered ride comfort comparable to that of a gearlessdrive system. The need for a machine room was eliminated by placing the EcoDisc

1992

rAverage 1995 D^,1/$ exchange rate was DM 1.43i$1.00.

562 Case S KONE:The MonoSpacea Launch in Gennaryt

EXHIBIT5 | PRooucrExnuplrs

iiilii::ii{;:ä':::iü!::i'iri::.

ii!::äi:!t:i:i:i;;;i1;;;rU,ii*i_iri :

ffi,', ' i i r t . 'n ' i r tß t l

{ rrt t r l r ' l t ta Fä'r,re*i :r*ar: gaa*'t lqr ' .

*@,,

SOURCL,: KONE

rnelr e I KONE Aurzuc SultvnRv Ftrunmctnls (Frcunrs tru DM 1,000s)

t993 t994 t995

V1 Revenue

Vi Profit

V2 Revenue

V2 Profit

Totai Revenue

Total Profit

88,001-+,328 (4.9%)

17+,7l817,140 ( t+.9%)

202,721

12,812

87,876-1,886 (2.2u/o)

776,7 6218,140 (15.5%)

20+,638

16.25+

86,852-6,300 (7.3o/o)

1 18,628

t9,086 (16.r'/")

205,480

12,786

SOURCE: Company rccords

Case 8 KONE: The MonoSpace@ Launch in Getmany 563

machine at the top of the shaft between one of the guide rails and the shaft wall; theentire elevator was thus said to occupy a "Mono" Space. The EcoDisc and Mono-Space are depicted in Exhibit 6.

The EcoDisc power unit also was extremely energy efficient, consuming onlyhalf the energ'y of comparable geared traction, and one-third of the energy requiredby comparable a hydraulic system. This and lower peak current translated into lessexpensive electrical wiring and fuses. Moreover, unlike hydraulic elevators the Mono-Space required no oil, eliminating potential f ire and environmental hazards. Itsinstallation time was approximately 190 hours, 60 hours less than for the simplesttraditional elevator. (Exhibit 7 compares the different drive systems.)

' Theoretically, the EcoDisc was applicable to elevators across KONE's existingproduct line. But as elevator load and speed increased, so did the size of the machine,being eventually too large to fit within the shaft. With current EcoDisc technologya 16-person cabin required a machine room. Consequently, based on the most com-mon cabin sizes KONE, engineers had developed MonoSpace systems for 8-personand 13 -person elevators with operating speeds of one meter per second that could beused in buildings of 12 floors or less. Concurrently, they were working to extend thecapabilities of the EcoDisc machine and the MonoSpace product line.

EXHIBIT 6 | KONE'S MoNoSpAcE ANp EcoDtsc

SOURCE: KONE

564 Case 8 KOI/E: The MonoSpaceo Lnuttch in Gennanl

EXHIBIT 7 I A Colupnn|soN oF HYDRAULIC, TRACTIoN, AND ECODISC DRIVE UNITS

Feature Hydraulic taction EcoDisc

Speed (mtrs/s)

Load (kg)

Motor size (k\Ä)

Main fuse size (amp)

Energy consumption (k\Ä/y)

Thermal loss (kW)

Oil requirements (Liters)

Weight (kg)

Machine room (m2)

0.6363011

50

7,5004.3200650

5

1.06305.5355,0003.03.5+30il

1.0630

3.5I52,5001.00190

0

SOURCE: Company records

NOTE: kWy-kilo watt years is a standard measure for comparing energv consumption of equipment.

KONE had targeted MonoSpace directly at Europe's largest new-equipment market

segment, low-rise residential elevators. By the time Hätälä began developing a launch

plan for Germany, MonoSpace had been test marketed in the Netherlands and offi-

cially launched, with varying degrees of initial success, in the Netherlands, France, and

the lJnited Kingdom. KONE managers selected the Netherlands because the market

was dominated by low-rise elevators, KONE was the market leader, and the countn-!

regulatory authorities, being relatively progressive, were likely to view the MonoSpace

as a new elevator solution rather than one not in compliance with existing codes.l

Market Launches

Although construction was relatively stagnant in the three countries in which the Mono-

Space was first officially launched, residential building accounted for roughly half of all

constmction activlty (see Table C for more details on market size and KONE's market

share in each countq/ market). Approximately 90% of the units sold in France and 70or:

of those sold in the United Kingdom and the Netherlands were low-rise elevators.The U.K. market was unique in being dominated by one-star (low quality con-

struction) and five-star (high-quality construction) buildings with little in between.

driving demand for top-of-the-line and rock-bottom elevators. Many low-qualinresidential elevators were installed in the United Kingdom simply to meet regula-

tory requirements for access, particularly for elderly and handicapped persons. The

preponderance of t!vo- and three-star (medium-quality) buildings in France and the

Netherlands drove broad demand for mid-range, mid-quality elevators.

rBecause existing elevator codes had been written for installations with machine rooms, the

MonoSpace, by definition, was not in compliance. Efforts were underway to promote EIJ

standards, but the difficulry of modif ing regulations varied dramatically from country to

country. For example, because elevator regulations were part of Italy's constirution, to change

them to allow a "machine-room-less" elevator would require an act of the Italian Parliament.

Case 8 KONE: The MonoSpace@ Launch in Gennany 565

TABLE C I Ururr Snlrs AND MARKET SHnRrs tN 1995

Units KONE Otis Schindler Thyssen Others

France 7,000United Kingdom 3,300Netherlands 2,100

r4%20%+0%

4t%

30%19%

20%

10%13%

18%

10%6%

7 "/o30%22%

SOURCE: KONE's Director of Marketins Communications.

Sixty to seventy percent of all elevators sold in the Netherlands were geared trac-tion, a consequence of an anomalous market situation that had led to geared tractiontype elevatorr b.itrg about 5% less expensive than hydraulic elevators. iVith substirut-able, low-rise geared traction elevators costing nearly twice as much as hydraulic eleva-tors in the United Kingdom, hydraulic elevators accounted lor 90Y", geared tractionelevators only 107o, of low-rise sales in that market. The French market was in-between,with 80% of low-rise elevators hydraulic and the remaining 20o/o geared traction.

Given KONE's differentiation and brand building objectives, the MonoSpace wasgenerally priced in line with equivalent (and more expensive) geared traction eleva-tors. Managers at KONE's Brussels headquarters suggested that the MonoSpace bepriced above existing prices if KONE held less than I5"/" market share and in linewith existing price levels if KONE otherwise (see Table D).

The premiums exacted on the MonoSpace in the Netherlands and Francewere based on the KONE branch managers reasoning that a significant portion ofthe savings of not building a machine room would accrue to either the owner orconstruction company, motivating them to specify the MonoSpace. In France theMonoSpace's energy costs would be FF5,000 per year less than that of a comparabletraction elevator, effectively repaying a FF30,000 premium in six years. The price inthe United Kingdom was dictated primarily by the 915,000 rransfer price to KONE,U.K., which put it near the PT price.

KONE viewed formal launches and articles in national and local specialist buildinEand architecrural iournals as but a preamble to [ace-to-Face, relarionship-based sell ing,

TABLE D I Pnrce Leves ron KONE Low-Rrsr Elrvnrons, 1996a

PH (Hydraulic) PT (Traction) PU (taction) MonoSpace

Netherlands

France

United Kingdom

DG 65,000?I '15,800

DG 62,000FF 150,000g 10,000

DG 68,000??

DG 69,000FF 180,000s 30,750

"Average 1995 currency exchange rates were: DG 1.60/$1.00, FF 5.0/$1.00, and I 0.65l$1.00.

566 Case 8 KONE: The MonoSpacee Launch in Germarry

the activity it most relied upon to drive sales. To foster initial market acceptance, theMonoSpace was touted as a new drive system all other elements of which were iden-tical to other KONE low-rise eievators. The style and scope of KONE's marketingactivities varied according to the MonoSpace's projected sales success in the respec-tive markets.

The Netherlands The MonoSpace was marketed in the Netherlands primarilythrough indiv idual customer rn. . t ingt . Approximarely 3,500 archi tects, construc-tion companies, owners, and consultants were invited via mail ings to compare inone-on-one presentations a working MonoSpace with hydraulic and geared tractionlifts. More than 100 such presentations were made within the first year of Mono-Space sales. MonoSpace-related articles published at the rate of approximately oneper month subsequtnt to the launch each generated from 40 to 60 inquiries. Build-ing specifications for the MonoSpace, supplied on disk to enable contractors and ar-chitects to "drop" this section into a building's plans, were due to be approved andincluded on the official Netherlands Building Design CD ROM, a resource used formost Dutch bui ld ing designs.

France Letters announcing the MonoSpace to KONE's 22,000 existing Frenchcustomers requested that they watch a television program that was to include a fea-ture on the elevator. Concurrently, a MonoSpace advertisement was placed in aspecialist building newspaper. The main market launch took the form of a series ofbreakfast meetings held in large cities across the country to which each of6ce invited20-30 guests, primarily architects, developers, building owners) owners or manag-ers of smaller construction companies, and safety officials. Approximately 20 suchbreakfasts were held during the first three months of sales. KONE salespeople alsomade individual on-site presentations at each of the country's six largest constructioncompanies.

The United Kingdom Given the price sensitiviqy of the U.K. low-rise market, theMonoSpace was launched "to remind people that KONE is a technology leader." Theunderlying technology rather than low-rise elevator application was emphasized in aseries of three presentations made at London's Science Museum. Five hundred con-struction companies, developers, quantity surveyors, consultants, and architects wereinvited; of220 who accepted, 80 attended at least one presentation.

Sa/es Resu/ts

KONE's Netherlands managers projected that MonoSpace would account for 709Lof total unit sales, and 100% of the units sold in the low-rise segment, within threeyears. MonoSpace reache d the 7 0% target within the first 10 months of official salesand, within one year, KONE controlled 62'Ä of the Netherlands low-rise market (upfrom 52oÄ the year before) and just under 44"Ä of the overall Netherlands market (up{rom 40"/o). KONE Netherlands was in the odd position of worrying about har-in,egained too much market share and upsetting the market. "We didn't want to conquerthe world with this," observed the Netherlands general manager,

Case 8 KOI{E: The MonoSpace@ Launch in Germarry 567

\Me iust \Manted to maintain market share and get higher profits. We didn'twant to scare the competition, because there is no way for us to eliminate anOtis or a Schindler. We'll have to live with these competitors forever. . . . Otiscould buy KONE for cash . . . and can afford to drop its prices to the pointthat MonoSpace benefits-not having a machine room, energy savings, andso on-become meaningless.

Sales in France and the United Kingdom contrasted with the success in theNetherlands. In France, the first year sales target for MonoSpace was 300 units or70% of KONE's annual residential sales. During the first three months, only 40

\4onoSpace units were sold. In the United Kingdom no units had been sold onemonth after launch.

Customer reactions and ldarning points Notable among customers' generally ex-tremely positive reactions to the MonoSpace were the oft heard "At last there is some-thing new in the elevator industry" and "Why didn't you come up with this earlier?"Some aspects of the MonoSpace were more positively received than expected, othersgenerated unanticipated worries. (Exhibit 8 presents a summary of learning points.)

Competitor reactions Although minor spoiling tactics were encountered, KONE'sdirector of Vl sales remarked that "the competition's reaction was one of stunnedsilence for the most part." One competitor offered to pay for the machine rooms ifcustomers bought its elevators; another competitor told customers that there was noprovision for ventilation with the MonoSpace, which was true, thermal losses beingso low that there was no need for ventilation. In France some competitor salespeopletold customers that KONE had received approval for only 10 MonoSpace elevatorinstallations, which also was true; government authorities were to review the initial l0installations and, ifthey proved acceptable, grant complete approval, standard proce-dure for the approval of any new technology in France.

EXHIBIT 8 | LenRrurruc Porrurs FRoM EURoPEAN MARKEflNG

Sales messages Constr-uction companies, perhaps owing to their emphasis on ini-tial price, proved the hardest sell. Most of the aspects expected to appeal to construc-tion companies-elimination of the need for a machine room and for scaffolding or a.r".r.

"nd simplified installation processes-either were consequent to there being no

machine room to be built, a savings that usually accrued to the owner, or were ben-efits not unique to MonoSpace, i.e., they were offered by the entire range of low-riseelevators.

Netherlands builders stood to save DG 7,000-DG 8,000 if a machine room already inthe budget was not built. Otherwise the builder's savings would be nil. With the low-rise range builders rarely needed scaffolding and used a crane only if it was alreadyon-site. Although less coordination needed between elevator installer and generalbuilders, such process savings were generally not valued in the Netherlands. One-half

ftontinues)

568 Case 8 KO^/E: The MonoSpace@ Launch in Gennany

EXHIBIT 8 | LenRrurruc Porrurs FRoM EuRopEAN MARKEflNc (counuuro)

day saved in the middle of a building process that took a year was considered inconse-

quential by constr-uction companies that reasoned that their workers might spend that

half day playrng cards any'way. In France, however, where union regulations dictated a

high degree of coordination among workers and weekly meetings of the mdtier heads,

any process compression was valued. The situation was much the same in the United

Kingdom.

KONE found that many small items, such as using lower risers, some time/process

savings, etc., taken together, could amount to 57o savings of the construction and

installation costs for the construction company.

Appeal of energy favings The MonoSpace's energy savings were not expected

to be an important selling point in the Netherlands. Energy suppliers, in particu-

lar, however, found that the low-energy consuming MonoSpace didn't dim lights as

geared traction or hydraulic elevators sometimes did as a consequence of the power

surge required for take-off. The electrical fuses required by the MonoSpace were also

much less costly: DG 60 per year for MonoSpace versus DG 1600 per year for hy-

draulic elevator fuses or DG 800 per year for geared traction elevator fuses. KONE

Netherlands found that energ'y suppliers, an influence group it initially had not tar-

geted, were consequently recommending MonoSpace.

Warning label Its drive unit and controller being located in the shaft on the top

floor, the MonoSpace could not be used in buildings with penthouses (public access

was necessary). Because its temperature had to be maintained at between 5"C and

40'C, it was also not suitable for outdoor use. KONE Netherlands discovered that

architects had begun designing all their buildings, including those with penthouses

and outdoor elevators, for the MonoSpace, that is, sans machine rooms. To avoid

repercussions, all publicity for the MonoSpace carried a "warning" explaining these

two limitations.

Construction company surcharge KONE discovered that in both France and the

Netherlands some construction companies had retained the machine room savings br-

exacting a surcharge from the owner/developers. Consequently, all future literature

directed to construction companies omitted the cost savings from eliminating the ma-

chine room and lower running costs of the MonoSpace.

Single supplier worries In all three countries, and particularly in the United Kingdom.

customers worried that leaving the machine room out of building designs would leave

them open to price gouging. Absent other machine-room-less suppliers, customers

feared they had to pay whatever KONE asked. KONE countefed by emphasizing its

interest in long-term partnerships and preserwing its reputation.

Example installations Customers wanted to see an installed MonoSpace before

buying and few were willing to be "guinea pigs." This problem was addressed in the

Netherlands by installing a working MonoSpace in KONE's Netherlands headquarters.

SOLTRCE: KONE

Case 8 KONE: The MonoSpace@ Launch in Germany 569

Pricing for the MonoSpace elevator in Germany had not been set, but production

costs were estimated to be about the same as for a comparable hvdraulic elevator'

The German Elevator Market

The German construction industry had undergone a rycle of boom and bust since the198B reunification of East and West. With the boom in construction the new eleva-ior market grew from 8,000 units in 1988 to a high of 15,500 units in 1995, when

the construction boom ended abruptly. Demand for new elevator equipment wasnow exDected to shrink bv^l5% bv the vear 2000. The German elevator market was

dominated by residential .onst..,ctiotr. Th" proportion of elevator units installed in

low-rise residential buildings in 1995, 74%",was not expected to change significantlyover rhe following five years. In 1995 hydraulic elevators accounted for approximately60% of the German low-rise residential elevator market, geared traction elevators

making up the rest. Two-thirds of the geared traction units were of the more expen-

sive PU ty?e. Demand for new commercial space, on the other hand, was dampenedby signi f icant over capaciry.

-q:npelil,9t

The majors The six major players in the German elevator marketwere Schindler, Otis,Thyssen, KONE, Haushahn, and Schmitt & Sohn (see Table E). Nl operated through-

out Germany and each maintained 24-hour service networks and new elevator sales and

installation branches and manufacturing facilities both in Germany and abroad.

The mid-size players Approximately 30 mid-size players, with new equipmentsales ranging from 100 to 300 elevators per year, operated regionally, although some

of these produced a few key components (e.g., cars), most outsourced manufacturing.

TABLE E I Genvaru Elevnron lruousrnv: 1995 Mnnrrr Sunnrs

New Elevator MarketLifts in Service Total Revenues

Ijnits ValueValue Units

Schindler

Otis

Thyssen

KONEHaushahn

Schmitt & Sohn

Others

17.7%

t3.8%15.4%

8.5%6.5%

5.4%32.7%

19.4%11.6%

12.9%

9.2%5.8%

5.8%3 5 .5o/"

13.3%

lt .3%t2.4%

4.9%6A%

3.3%+8.2%

21.1%

19.4"/"18.1%

6.7%5.6%

4.4%25.0o/o

SOURCE: Company recorcls.

570 Case 8 KONE: The MonoSpace@ Launch in Germaryt

The ttcowboyst' Small, local companies, termed "cowboys," that usually operatedwithin a single city numbered about 150. Most, lacking internal manufacturing capa-bilities, were focused on the purchase and assembly of components and installationand local service.

Market Performance

With the abrupt end of Germany's construction boom, new elevator prices fellbetween 5%" and 7' '/" in 1994 and 1995. Many small and some mid-size playersresponded by abandoning or sharply curtailing efforts to sell new elevator equip-ment in favor of focusing on service, exerting additional price pressure there as well.Amongst the majors, Schindler's reported losses were approximately ll./", Otis' 1 3 %,ofturnover. Furthqr, Schindler had focused during this period on gaining share andbecome the clear market leader in hydraulic elevators. Otis' professed objective, toeliminate losses in the new elevator business, had caused it to lose market share.

Low-Rise Elevator Customers

Property developers, general contractors, and architects were among those involved inpurchase decisions in Germany's low-rise elevator market. Property developers wereprincipally concerned with the overall cost of developing a new building or renovat-ing an existing propeffy and factors that affected the investment value of their prop-erties, including construction quality, timeliness of completion, and operating costs.Because choice of elevator was viewed as having little impact on overall constructioncosts, KONE and other elevator companies, perceiving property developers to rarelybe involved in the decision, seldom communicated direcdy with them.

For buildings of all types, the general contractors responsible for constructionand renovation according to property developers' and architects' plans exerted thegreatest influence on elevator purchase. Nthough the four largest German contrac-tors controlled approxim ately 207" , the construction market was highly fragmented,with nearly 20,000 small contractors rying for contracts.

Property developers consistently used the bid process, typically inviting bids fromthree or four, to pressure contractors for price reductions. In turn, contractors oftenused a competitive bidding process to procure specialized building systems such assteelwork, elevators, and HVAC (heating, ventilation, and air conditioning) systems.Occasionally, a two-stage bidding process was employed whereby contractors wouldinvite "preliminary" bids, as from elevator suppliers, and incorporate a lorv-priceoffering into their overall construction bid, then, after the construction contract hadbeen awarded, re-open the process and ask suppliers to resubmit bids. If the propertydeveloper and contractor had negotiated an overall price reduction, the contractorwould tq/ to pass on similar price reductions to the system suppliers.

Residential buildings were usually built by smaller contractors who, possessinglittle technical knowledge, often relied on architects to select elevators. Althougharchitects generally did not make the elevator selection for the mid-size hotels andoffices that larger contractors usually built, for which the higher end "residential"elevators were typically used, they almost universally selected elevators' cosmeticoptions (e.g,e side- or middle-opening door, interior paneling material and colors, andso forth). KONE managers believed that in the German residential market the finalelevator purchase decision was made by the general contractor 50% ol the time, br-the architect 407" of the time, and by a property developer 10% of the time.

Case 8 KONE: The MonoSpace@ Launch in Ger-many 571

KONtr Aufzug's selling process for new equipment had become well established overthe years. In most cases (96o/" of purchases) customers initiated contact by sendingelevator specifications and a requesr for bid to a local KONE branch. KONE beingone of the major players, virtually all the customers included the firm in the shortlisiof vendors to whom they sent out rhe request for bid. Thus, KONE had access to theentire demand for elevators in the German market.

, Customer inquiries were followed by a visit from a KONE Aufzug salesperson tothe customer contact, usually the construction company manager or archiiect. Thesalesperson reviewed the architect's drawings, design specifications, and any spe-cial requirements and would detail elevator options in the form of a sketch or CAD(Computer-aided Design) dr4wing.

In general, contractors wanted, at the lowest possible price, elevators that fitplanned shaft dimensions and required no changes to architectural drawings. Pur-chase decisions were also influenced by the quality and relevance of the infoimationthe customer received, level of service, design of the bid document, and the customer'sgeneral impression of the salesperson. Observed one KONE branch manager: "Thecustomer must feel that this salesperson alone is the expert in meeting the customer'sneeds." Once elevator specifications had been negotiated, a contractor's purchasingmanager became the main point of contact and discussion shifted to payment termsand price. From start to finish, the procurement process ran 8-15 months.

Launch Decisions

Hätälä's pre-launch planning began with obtaining regulatory approval for the Mono-Space product. It also included establishing MonoSpace pilot installations in buildingsacross KONE Aufzug's tiree regions. In November 1995 four hydraulic elevator cui-tomers were given the option of converting their existing orders to MonoSpace. Theywere told that they would receive a new, improved drive unit at the previously agreedhydraulic elevator price, but, as the machine rooms for these buildings had alieadybeen designed and constructed, not that the MonoSpace technology eliminated theneed for a machine room. BetweenJanuary 1996 andJune 1996 two salespeople werecharged to arrange 30 more pilot installations. A1l pilor customers were given theoption of switching from geared traction elevators to MonoSpace ar no additionalcost. The benefits of eliminating the machine room and reduced energy consump-tion, and the manner in which the roping worked, with an emphasis on feasibiliry andreliability, were carefully explained. All prospective pilot customers were, however,asked to "keep quiet about the technology."

Having consolidated his knowledge of the German market and lessons gainedin the Netherlands, France, and the {-Inited Kingdom, Hätälä was concentrating onselecting the best marketing resources. He had at his disposal a marketing kit thathad been developed by KONE's Brussels headquarters included the following com-ponents (Exhibit 9 provides details of the marketing kit componenrs and a summaryof marketing resources).

Hätälä knew that German elevator companies, particularly KONE's larger com-petitors, relied on a broäd range of marketing communications that included adver*tising, direct mail, customer and launch events, exhibitions, customer visits, andpublic relations. He wondered which of these were most appropriate for the launch ofMonoSpace.

572 Case 8 KONE: The MonoSpacea Launch in Gennanl,

IEXHIBIT 9 I DErArLs oN rHE MARKETNG Krr ANp SUMMARY oF MARKETNG REsouRcEs

The marketing kit developed by KONE's Brussels headquarters included the follow-ing components:

. A press kit featuring a CD-ROM and web site.

. A MonoSpace concept brochure to supplement exist ing low-r ise l ineliterature.

. Two PowerPoint sales presentations, one directed at builders, architects,and owners, the other a technical presentation for consultants and trainingpurposes

. A 13-minute MonoSpace videotape.

. Trade press releases directed at architects, builders, and property owners/managers.

. Building and planning guides that included dimensional sketches and a fiont-line CAD rendering of the MonoSpace.

. MonoSpace architectural specifications.

. A total elevator cost comparison form.

. A trade media advertisement on CD-ROM; a set of posters; a sample directmail piece; a miniature static Monospace model.

. A sampling of promotional gifts such as pens and mouse pads.

The marketing resources available for the MonoSpace launch in Germanyincluded the Fol lowing:

Advertisements, which appeared mainly in elevator newspapers and journals(national) and architectural newspapers and journals (local and some national),were used primarily by small and mid-size companies. Large elevator companiesseldom advertised. Single ads were most common, campaign rare.

Direct mail was targeted by large companies to architects, investors, and generalcontractors.

Launch events preceded new product introductions. Nl the large players had used

"road shows" between 1993 and 1995. Customers were invited to local hotels forseminars and refreshments and received follow-up telephone calls.

Exhibitions were used mainly by component companies.

Customer visits supported by sales collateral were elevator companies' mostcommon means of communication. Most literature had a technical slant. reflectinsthe average German customer's technical orientation.

Publ ic relat ions act iv i t ies were centered around press releases and pressconferences. Otis and Schindler appeared regularly in the national and local press.Other compafiies generally received notice only in local papers or when somethingout of the ordinary occurred.

Case 8 KONE: The MonoSpace@ Launch in Germnny 573

Launch Options

Direct mail-KoNE's d.irect mail experience was limited. Ready-to-m ail/faxresponse cards had achieved response rates of three to four per tho,rsanä. A mailing of30,000 fax response cards, including list purchase and printing, cosr DM 60,000.Road show-The cost of 12 road shows-including two presentations per day, hotelspace, catering, travel costs, equipment (portable model eco-disc and cai, but Lxclud-ing internal expenses (e.g., employees' time) -was roughly DM 350,000.Sales visit-A sales visit usually required l/2 d.ay of a salesperson,s time. cost of.materials and salesperson's time was roughly DM 500.vid_eo-Dubbing the video into German would cost DM 20,000, each video copyDM 5.

Telemarketing-one, rwo-ro-three-minute telephone call to 30,000 people wouldcost approximately DM 100,000.

Seminar-For an audience of about 70, hotel space, catering, and the printing andmailing of invitations would cost approximately DM 10,000.

"'

Exhibition/Trade show-To appear for three days at,,The Konstructor,', a large,annual construction industry trade show held in ö.r-"ry, would cost about DM

,309'090.. Previously, KONE had found that cost too high relative to the response it

nad elclted.

T."* press and journal ldvertising-Germany hosted approximately 25 architec-

rural journals and about l2 building and consrruciior,lorrrrrdr.

' A black and white, one-page advertisement in a free monthry journal with acirculation of 25,000 would cost about DM 3,000.

' A black and white, one-page advertisement in a weekly journal priced DM3.50 with a circulation of 17,000 would cost DM 2,300.'

' A black and white, one-page advertisement in a weekly journal with a circu-lation of 31,000 cost DM 2,700.

' A black and white,_one-page advertisement in a monthly journal with circu_lation 18,000 cost DM 1,600.

SOURCE: KONE

- fu he pondered these details , lH.ätälä recognized that immediate, fävorable resultsfrom the German launch were vitar to KoNö. yet, he h;J ; k."p in mind that thepricing and product positiodng sffaregies he set for Monospace ii G.r-urry would

lT,,r-tg"to.antimpact on the läng-teÄ prospects for KoNö. with a rot at srake, henao lltüe room for error.