Value Selling At Skf Service Marketing Essay

SKF, founded in 1907 in Sweden is the largest producer of ball bearings, controlling a global market share of almost 20%. The dilemma that SKF is facing is that its biggest client Steelcorp has invited the company to participate in a reverse auction where the lowest priced bidder will win the order. This is an offer that SKF would have generally disregarded since its value for quality will be undermined, but in this case refusing this offer from Steelcorp would mean that they would not only lose out on their $4 million annual orders, but also on the part of the business that they do with Industrial Technology Corporation (ITC), the SKF distributor serving Steelcorp. In this assignment we will analyse the SKF business environment and decide if (i) SKF need to change their strategy, (ii) if they decide to change their strategy what problems they would face and how they should overcome them..

THE BUSINESS ENVIRONMENT

The diagram describes the components of a business environment.

(Johnson, Scholes and Whittington,2008)

Analysis of the Business Environment

The environment, in which the organization operates, plays an important role in the strategy that the company adopts. The external forces that act can affect the product, service, its marketing strategies and relationships with the buyers and suppliers.

The Macro-Environment:

There are many factors that influence the business strategy in some way or the others such as political, economic, socio-cultural, technological, environmental and legal factors. From the information provided in the case we can see that SKF is performing considerably well and is leading the international market with global shares of almost 20%. Even on the technological front SKF is ever developing, the company invented the self-aligning ball bearing and since then it has been growing. Now the service division of SKF has begun using the Documented Solution Program (DSP), a tool to measure the end users value from using SKF’s bearings. According to a DSP case study SKF was able to generate a return of nearly 500% in 54 months on an investment of $2.29 million.

The Industry:

Bearings have a variety of uses ranging from automobile industry, medical instruments, oil and gas, construction equipment to food and home appliances. The function of bearings is to reduce friction between moving machinery in order to conserve energy and because of this the bearing industry will always enjoy active demand in domestic as well as international markets.

The Competitors:

On the global front SKF is facing stiff competition from the German company Schaeffler, followed by Timken, an American company and Japan’s NSK. Although they do not match the wide variety of services and product offered by SKF, low cost companies from Eastern Europe and China also pose a significant threat.

The Organisation:

The SKF Group is divided into three business divisions to serve specific customer groups. The industrial division serves customers within the industrial segment, while the automotive division served the automobile industry as well as manufacturers of home appliances and power tools. The service division provides the industrial end users with after sales services and replacement bearings. SKF has 110 manufacturing sites and sales companies in 70 countries, and provides service through 7000 distributors across the world.

The Bain Mason Industrial Organisation Paradigm

The Bain mason Paradigm is a systematic model for assessing the nature of competition in an industry and also helps to assess the performance of a company in the industry.

Industry Structure – Industry structure was defined as the relatively stable economic and technical dimensions of an industry that provided the context in which competition occurred. The bearing industry was estimated at $40 billion, with 40% demand from Asia followed by Europe and North America. SKF led sales in Western Europe with 51%, Asia with 19%, followed by North America and Latin America. In the United States SKF faced major competition from the Native American company Timken, which owned 30% of the market compared to 12-13% of shares of SKF. At the global level SKF competed with German Company Schaeffler which was its strongest competitor with an estimated global market share of about 16-18%. Among its other competitors were American company Timken with about 9-11% of the market and Japanese company NSK with approximately 10% of the global market share. SKF is also facing strong competition at the international level from new low-cost production companies, in Eastern Europe and China.

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Conduct (Strategy) – Conduct is the key decision variables in a firm’s strategy. These could include aspects of advertising, capacity, quality and pricing. Conduct is sometimes considered as the economic dimension of the company’s strategy. SKF is a brand reputed for its quality and technological excellence. SKF believed that the price of their product was comparable to the price value, hence as a general rule the company did not do business with those customers whose decision was solely based on the price of the product

Performance – Porter (1981) broadly defined performance as profitability, cost minimization or technical efficiency and innovativeness. SKF has been innovative since the beginning when they invented the first self-aligning ball bearing. Since then the company has had net sales of $8.2 billion, and controls almost 20% of the global market share. The company upholds the quality of the product and the value of the customers’ money. Hence SKF service deployed the Documented Solutions Program (DSP), which is a computer based sales tool which measures the end-user value from using SKF’s bearings and services. A DSP case study performed on the petrochemical industry showed that in 54 months SKF’s bearings and services were able to generate about 500% from savings related to reduction in pump failures.

SWOT ANALYSIS

Strengths

SKF is an established brand, serving an estimated 2 million customers, and well known companies in diverse industries.

The company is in the market for over a century now, has had net sales of $8.2 billion, and its global market shares are approaching 20%.

Focus has always been on developing technically superior bearings.

Weakness

SKF bearings commanded a significant price premium varying from 10% to 50% depending on the application.

Opportunity

Implementation of the computer based sales tool, DSP was proving to be a good move.

Threats

With the recession SKF was losing its customers to companies offering a lower price for moderate quality products.

Competition was arising from low cost producers from China and Eastern Europe.

PORTERS FIVE FORCES

Porters five forces are shown in the diagram below.

(Johnson, Scholes and Whittington, 2008)

Competitive Rivalry:

Rivalry in the market is measured by the percentage of market share held by the companies. When a large percentage of shares is held by a number of firms in the market the competition is more. In this case SKF controls almost 20% while Schaeffler comes close with an estimated 16-18%. While in the US market, SKF owns 12-13% and faces major competition from Timken who is protecting its 30% of the market.

Potential Entrants:

The existing rivals are not the only threat; new firms also pose a considerable threat. Although in reality there are certain barriers, rather certain characteristics of the industry that protect the high profit firms from the new entrants.

Buyers:

Buyers can have a significant impact on the industry depending on how much power they have. SKF’s buyers are ITC, who is a major supplier for Steelcorp, because SKF does not do business directly with end users. Since Steelcorp decided to have a reverse auction to counter its downturn in sales, SKF is facing a problem. For if they accept, the value of their superior product is undermined, but if they decline they lose out on annual orders of $4 million.

Substitutes:

According to Porter new entrants bring in new capacities that put pressure on the prices, costs and the rates of investments. A threat of a substitute product is engendered because of the change in price of the other product. To counteract the threat the firms need to either hold down prices or increase investments. As more products become available the customers have a wider choice for a lesser price, hence this affects the industry through price competition. Threat is significant when the entrant is diversifying from another industry because of their existing capabilities (Porter, 2008). SKF was losing its customers to products sold for a lower price and of ‘good enough’ quality.

Suppliers:

The power of the suppliers, those who supply the raw material can also play a significant role, although the case does not mention any threat from the suppliers.

GENERIC STRATEGIES

Every company positions itself on its strengths, which fall into two major categories- cost and differentiation. By applying these two in either the broad or narrow market, three generic strategies, not dependent on the firm or industry were identified by Porter. These are shown in the diagram,

Cost Leadership Strategy:

When a company produces a certain quality at a lower price, it is called cost leadership strategy. Some companies can gain cost advantage by improving processes, gaining access to lower cost supplies or cutting unnecessary costs. Although SKF seems to have applied this strategy early on by producing high quality bearings, it still maintained the high price in a market where lower cost products were available. This strategy is at the risk of improving technology which is also available to the competition. Besides those companies using a focus strategy could also gain a lower cost advantage within their segment of the market.

Differentiation Strategy:

This strategy calls for the product to stand out from other products or services that is valued by the customer and perceived to be better or different from that offered by other companies. This strategy is currently being pursued by SKF, where they are selling their superior quality bearings for a higher price, and they face the risks of imitations or changes in customer tastes. Although in this case the lower priced lower quality products are gaining the benefits. The introduction of the DSP tool is also a service strategy to make the customer aware of the savings from using SKF products.

Focus:

The focus strategy attempts to use either the cost leadership or differentiation strategy within a narrow market segment. Generally focussing on a certain segment tends to lead to a better served consumer hence increased loyalty to the brand. Although firms that follow a differentiation focussed strategy may be able to sell higher priced products to the customers within the segment. According to the case SKF does not seem to be following the focus strategy since it does not focus on any market segment in particular.

CORE COMPETENCIES

According to Prahalad and Hamel (1990), core competencies are the skills behind the products, the organisation of work and the delivery of value. It is not about being able to outspend the competition. The service division is using the DSP in an effort to build core competency. Using the customer data the DSP calculates the estimated savings and returns for the customer on a package of SKF products and related services. When customer data was not available SKF uses a database case study of a similar industry and an application guide. SKF’s distributors also learned that this tool could also boost sales of SKF products and educate buyers on the total cost of ownership.

RESOURCE BASED VIEW

According to the resource based view, all firms do not have access to the same resources, these resources should be acquired at an efficient price and should continue to produce valued market products. A significant positive relationship is seen between differentiation and market share, and differentiation is another method of establishing a low cost market position (Hill,1988).

A resource based view accentuates the utilization of a firm’s resource and capabilities to create an advantage that ultimately can results in superior value product. To create this advantage the firm should have superior resources and capabilities as compared to its rivals. The resources should be firm-specific assets to create either a cost or differentiation advantage, while a capability is the ability to utilize these resources effectively. At SKF the DSP software enabled the company to put a financial number on customer value, by measuring end user benefits. DSP was able to calculate for any application what an end user could expect from SKF products and services in terms of total savings and return on investment. Another service was condition monitoring, which allowed factory workers to assess a rotating machine and take preventive measures to avoid costly breakdowns.

The analysis of the company’s service division shows that the strategy the company is using has not become obsolete as was thought earlier, since the mission statement of the company seemed to be the achievement of low total cost, using high quality products.

COMMANDER MODEL

If the service division at SKF decides to change its strategy, it would first have to adopt a new strategy. Bourgeois and Brodwin (1984) describe five process approaches to strategy implementation. In the first approach economic and competitive analysis is used to plan resource allocation in order to achieve certain objectives, this was known as the commander model. The second approach is generally concerned with the adoption of a new strategy, therefore called the change model, and deals with the implementation of a strategy using the organisational structure, control systems and incentive compensation. The third approach is called collaborative model and is about taking decisions at senior levels. It involves the management in the strategy formulation process, from which emerges a negotiated outcome. The fourth model is called cultural model and tries to implement a strategy by infusing a corporate culture, by inculcating a set of work related values within the organisation. The fifth approach is called the crecive model since it involves ‘growing the strategy from within’, by developing day to day opportunities, rather than dividing the firm into developers and implementers.

SKF should follow the commander model to the implementation of a new strategy. It involves two approaches

The systems model

The incremental approach

The systems model involves identification of the objectives to determine the course of action to help meet the objectives, these are then evaluated for economic efficiency and one is chosen for implementation. The incremental approach identifies the existing strategy and evaluates the opportunities and threats and modifies the current strategy to meet the changes in the market conditions (Bourgeois and Brodwin, 1984).

The commander model however has its limitations; these could be some problems that SKF would face if they intend to adopt a new strategy.

It requires that the CEO have a lot of power to make decisions, Implementation can be easily achieved if the strategy does not pose a significant threat to the organisational members.

Accurate information should be available and the environmental change should be slow.

The model cannot accommodate personal bias and political influence.

The firm is divided into ‘thinkers’ and ‘doers’

According to Bourgeois and Brodwin (1984), the best conditions to implement this model are:

The objectives of the strategy formulator and implementer should match.

The current system in the firm should not hinder changes made by the strategy.

The use of top down approach.

Mostly succeeds when only a slight change is required.

Environment should be stable, with low degree of diversity.

At SKF the change would mean that either they would have to change their motto and sell the higher quality product for a lower cost to maintain its market share or they would have to find another alternative of maintaining the quality and cost.