Transcript SKF Services * Should we go Downstream?

SKF SERVICES – SHOULD WE GO DOWNSTREAM?
ALEKSI HALTTUNEN, TAMARA HÜBER, JAVIER ORTIZ, LARI PELANNE
AGENDA
1. KEY ISSUES
2. INDUSTRY ANALYSIS
3. STRATEGIC ALTERNATIVES
4. RECOMMENDATIONS &
IMPLEMENTATION PLAN
AGENDA
1. KEY ISSUES
2. INDUSTRY ANALYSIS
3. STRATEGIC ALTERNATIVES
4. RECOMMENDATIONS &
IMPLEMENTATION PLAN
CURRENT SITUATION
SKF is known for excellence and quality in production of bearings.
 High prices, but the best quality in market.
 Competitors are becoming low cost producers and prefered , with “enough” quality, but never as SKF.
 In long term could be harmful
Key partners in U.S. are ITC (Channel) and SteelCorp (End Customer)
 Growing distributors and end users.
 Mainteinance engineers lost influence and now end users prefer good enough but not that expensive.
 End Users demand discounts and preferences when purchasing
 Impacting on producer margins, and even bypassing distributors.
MARKET SHARE
$31,8 Bn
80%
$6,81 Bn
17%
$8,2 Bn
20%
$1,39 Bn
Competitors Market
SKF Market Share
Rest of the world
United States
In U.S. represents only the 12%
of the Mkt share. The big
competitor is Timken, with 30%
of Mkt Share
PROBLEM
 Reverse aution: Lower Price bidder will won.
 Price of selling v/s quality.
 SteelCorp and ITC distributor are large customers
 Relations may affect in a recessive market.
 So, Accept or reject the offer?
 Insight of changing market, so the solution has to be long term oriented.
AGENDA
1. KEY ISSUES
2. INDUSTRY ANALYSIS
3. STRATEGIC ALTERNATIVES
4. RECOMMENDATIONS &
IMPLEMENTATION PLAN
BEARING INDUSTRY
Price-oriented market in turbulent state
BEARING INDUSTRY – FIVE FORCES
Substitution
threat
Supplier
Power
Compe
tition
New
entrant
threat
Buyer
Power
Distributors and end-users
are concentrating
Attaining more power
New Chinese low-cost
producers are entering
the market
BEARING INDUSTRY – FIVE FORCES
”Good enough” mentality is
replacing quality
 Market demand is shifting
towards lower priced products
Supplier
Power
Empowerment of
those two forces
fierce the rivalry in the
market and lower the
margins of bearing
producers
Substitution
threat
Compe
tition
New
entrant
threat
Buyer
Power
Distributors and end-users
are concentrating
Attaining more power
New Chinese low-cost
producers are entering
the market
AGENDA
1. KEY ISSUES
2. INDUSTRY ANALYSIS
3. STRATEGIC ALTERNATIVES
4. RECOMMENDATIONS &
IMPLEMENTATION PLAN
TWO ALTERNATIVES AND THEIR CONSEQUENCES
GO to Reverse Auction
Don‘t GO
 Fear reputation damage
 Reputation and brand image will be obtained
 Competing on price is against SKF‘s strategy
 Probably serious long-term ramifications for the
relationship with Steelcorp
 Two possible outcomes
1.
Win the auction with lowest price and low margins
2.
Lose the auction
Potential loss of $4 million of orders to
lower-priced competitor
MEASURING THE DOWNSTREAM OPPORTUNITY
Downstream Opportunity
Attractiveness of Downstream Business
•
•
Competing on price: Not very attractive
Life cycle activity as multiple of product cost: high
Importance of Customer Relationships
•
•
ICT important key account
Technology/ performance lead
Power of Distribution Channel
•
•
Degree of Channel Concentration: medium/ high
80% of service sales indirectly: Power
of distributors high
Rel. unattractive/
unimportant
Potentially
troublesome
Attractive/
imperative
MEASURING DOWNSTREAM OPPORTUNITY
Conclusion of
the framework
Going downstream might be troublesome or not be a good choice
BUT: Take the current industry situation into account
 Industry standard might change towards auctions
 Potential loss of market share if reverse the proposal (competitors join the reverse auction)
 Don‘t risk to loose position in the US market
AGENDA
1. KEY ISSUES
2. INDUSTRY ANALYSIS
3. STRATEGIC ALTERNATIVES
4. RECOMMENDATIONS &
IMPLEMENTATION PLAN
PRICING STRATEGY
Example pricing
 The initial price of the product could be lowered
to win the auction
 The high margins could be gained from the
solutions
 Higher proportion of services would actually
create also a better margin overall
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Service
Product
Initial pricing
*assuming same margins
Solution pricing
IMPLEMENTATION
1. Step: Immediate actions
 Meet with ITC and Steelcorp to
show the value of services.
Conduct CNA.
 If the auction is still taking place,
bid on product price and gain the
margin from services afterwards.
 Make sure Steelcorp buys the
service
 Leverage on Total cost of
ownership model
 See the auction as an opportunity
to test new pricing model of the
integrated solution
2. Step: Mid-term
 Teach end users and distributors
of the benefits of acquiring the
entire solution
 Increase the amount of incentives
for sales people (now 80%)
 Avoiding reverse auctions in the
future
 Concentrate on training the staff
to sell solutions, not only the
product
 Invest more in DSP development
to create more value for the
customers
3. Step: Long-term
 Change the dynamic of the
industry toward integrated
solutions
 Maintain high overall margins by
selling more integrated solutions
 Be the number integrated solution
for the customers
 Develop a service platform for all
bearings in the industry?
‘’DSP is our last defense in a commoditizing market’’
RECOMMENDATION
 Go to the auction  Gain market share in bearings
 Concentrate on service sales - surpass the distributors
 Investigate new possibilities for DSP