KONE was founded in 1910. At the time, the company specialized in the repair and sale of rebuilt electrical motors. KONE expanded over the years and in 1995 cleared away from its core business and became the third largest elevator company in the world (behind Otis and Schindler). KONE’s elevator business has 2 divisions: the new equipment division and the services division.
At the time of the case (1995-1996), the price competition in the elevator industry was constantly increasing and the profit margins were decreasing as the products offered by competitors had little differentiation. As a result of the fierce competition, KONE was experiencing a decrease in operating income and expected that its after tax income would be 0 in 1996, and would worsen in the future if the company did not implement significant changes.
KONE is present in several countries but this case focuses on KONE Aufzug, (which has the largest elevator market in continental Europe) as KONE Aufzug is preparing to launch its new revolutionary product: the Monospace. Germany is the largest market of residential low- rise elevators in Europe and the successful launch of the new product is crucial to help KONE brighten its financial future.
II. DECISIONS TO BE MADE
KONE Aufzug’s CEO must decide how to price and position the Monospace to ensure a successful launch. The CEO must also avoid cannibalization of current KONE products with the MonoSpace.
KONE released the Monospace in 3 different countries before planning the Germany launch (France, the United Kingdom and the Netherlands) and different strategies were used in those countries. The CEO of KONE Aufzug has two main options in order to avoid cannibalization of other KONE products while differentiating new product from competitors’ products. He can decide to position the MonoSpace above gear traction elevators and thus price it higher by putting an emphasis on its distinctive attributes. He can also price it lower to match Schindler and Otis products while again putting an emphasis on why the MonoSpace is a better product.
The MonoSpace is the most energy efficient elevator in the market; it also requires the lowest installation time and eliminates fires and environmental hazards. For those reasons, the MonoSpace is a superior product when compared to its competitors, and KONE should be able to position it above the geared traction elevators and price it higher. By doing that, the company should be able to avoid cannibalization if it still offers lower end models with features similar to the competition.
However, as it is stated in the case, the elevator market is very saturated and competition is fierce in that department. Although German customers appreciate quality and customer service, they are also extremely price sensitive and might not be willing to pay a premium to get a MonoSpace elevator. Moreover, KONE adopted a price skimming strategy in its 3 test markets (France, the United Kingdom and the Netherlands) and the company was only successful in selling the MonoSpace in the Netherlands. This suggests that pricing the MonoSpace at premium might be too big of a risk to take for KONE Aufzug considering the company’s current financial situation.
The second alternative is that KONE prices its MonoSpace at similar levels than Otis and Schindler. By doing that, the company is likely to compete with its current products but can
easily convince the customer to buy the MonoSpace rather than the competitive products as it is a superior product offered at the same price. KONE can also slightly lower the price of current products so that the MonoSpace does not cannibalize those products’ sales.
V. RECOMMENDATION RATIONALE
KONE Aufzug should price the MonoSpace around Schindler and Otis elevators’ prices. The company should market the MonoSpace as being in between the hydraulic and the geared traction elevators.
KONE Aufzufg should also put an emphasis on the superior qualities of its product. The company will not make as much money per elevator sold. However, it will end up selling more units in a market such as Germany were price is such an important factor, by offering more value to the customer. The company will have a lower profit margin on the MonoSpace but will end up making more money by selling larger volumes and obtaining more service jobs as a result. This decision is the best for KONE to improve its financial situation.