Case analysis #12: The Value Chain - sales

2.3.3 Sales and marketing

2.3.3.1 Marketing:
Marketing is an activity that addresses the brand success factor that was identified in the previous market analysis section.


WE segment: Two dominant brands, Crown Equipment and Raymond Equipment, have strong brand identities. Both products are at the above-average or the premium price level. Raymond positions itself as the industry innovator. Most industry innovations were implemented by Raymond first. Crown Equipment positions itself as a highly reliable and durable product in the industry. Crown Equipment is usually a bit slower in regard to innovations, as it prefers to adopt a new design only after this innovation has gained industry acceptance and proves to be reliable. Both companies actively employ marketing as a tool to create market positioning and therefore maintain their current level of differentiation. The majority of users in WE are large accounts the nature of whose operations requires high customization and performance. Raymond addresses these points by innovative design, and Crown stresses reliability. Performance is addressed by the marketing of both brands.

LT segment: The wide presence of many brands (Toyota, Caterpillar, Nissan, Mitsubishi, Komatsu, TCM, Daewoo, Yale, Hyster, Linde and others) seems to create “white noise” brand perceptions, and therefore contributes to further commoditization of the industry segment as mentioned in the market analysis section. The dealer or manufacturer has fewer tools to withstand price pressure from a price-sensitive customer by applying brand management. The expensive LT products have very little leverage in facing extremely price conscious customers, who therefore pay less attention to the brand. Most of the industry players in LT segment don’t actively use brand management. Toyota is one of the few exceptions in its active use of brand management. The fact that Toyota has one of the biggest market presences, combined with its moderate price, suggests that to some extent, strong “brand” performance combined with a competitive price could compete on the price-dominated market.
The value chain analysis findings support the conclusion from Porter’s market forces analysis that suggests price, brand and dealer’s expertise are important factors in the WE segment, and that price and to some extent brand dominate the LT segment. The analysis of the LT market also suggests that from the dealer’s equipment perspective, choosing the right brand with a balanced price becomes one of the successful factors that will allow competing in the very cost-sensitive market.

2.3.3.2 Sales
The nature of sales in the material handling industry is a consultative process to ensure that the selected equipment matches the client’s working application and requirements. The following considerations are important in a successful sales approach:
The consultations usually require “face to face” interactions between sales and the users; thus, to be efficient, the sales force needs to be located as close to the customer’s site as possible.
The sales process usually requires certain time; therefore the sales force needs to have constant access to the potential customers.
E-commerce still accounts for only 2 to 3 percent of total sales, despite its fast growth; thus human involvement is still a crucial factor in making the sale.
The sales force needs to stay with the customer long enough to preserve and build the relationship, which imposes a time factor on sales activities.
The need to have a sufficient sales force, maintaining a long-time presence close to end users, makes the sales process for equipment manufacturers extremely expensive and forces them to outsource sales activities to equipment vendors that have constant and quick access to clients. Only about 10 percent of all sales activities are performed by manufacturers “in-house”; the remainder is outsourced to equipment vendors.
A small fraction of sales activities is still performed by manufacturers, as they need direct access to some strategic or key accounts. Three major reasons for “in-house” sales activities exist:
Scale of repeat businesses: Accounts like Coca-Cola, Wal-Mart, Costco and other multinational retail and distribution chains require special attention from equipment manufacturers. These accounts become too important for manufacturers to leave them with dealers only.
Direct access to market: As manufacturers have direct access to the market through serving key accounts directly, these key accounts provide vital market information directly to manufacturers; thus market information and customer feedback will directly impact development of new products and services. Most material equipment manufacturers have their factory’s personnel overseeing such accounts.
Training and market feedback: Other reasons why equipment manufacturers need to have at least some part of sales activities performed in house is that manufacturers employ regional managers to supervise, consult and provide sales expertise to the personnel of regional dealers and distributors. This manufacturer’s sales channel is used also to collect market and competitive information from dealers and to have indirect access to local markets.




WE segment: In the WE segment, the sales process is usually performed before manufacturing. Since most equipment requires physical configuration and customization, the process of manufacturing actually takes place only after the sale is performed and all the technical details and specifications are clear. In addition, the customization process requires more skilled sales personnel, since they need to be experts in the business. The 5- to 15-year repurchasing cycle dictates deeper and longer relationships with the customer, who prefers to deal with the same personnel as it reduces the customer’s uncertainty.

LT segment: The commodity-type equipment in the LT segment doesn’t require the sales person to be an expert. Maintaining customer relationships becomes too expensive in the price-dominated market. Sales in the LT segment are usually performed after the manufacturing process as there is a lesser need for product customization; as a result, the equipment can be sold from stock. The manufacturer can thus enjoy benefits of economies of scale by producing large quantities of equipment in advance for stock purposes.

In summary: The sales activities are one of the biggest segments in the chain where value is created; these activities are performed in most cases by equipment vendors. The WE market requires the sales process to address the need for expertise and customer relationships. Sales activities in the LT industry segment seem to have different approach and scope. As the market is homogenized and dominated by price, an increase in sales expertise will not create a competitive advantage. The dealer cannot rely upon creating customer relationships, either, as this factor is also not very important. Thus, to facilitate the sale, the dealer’s only option is to put more commoditized sales force. To match the price pressure, the dealer’s option is limited to taking advantage of the “economies of scale” effect by applying a more “commoditized” sales force to push commodity-style products. The pay structure for sales personnel in WE should place more emphasis on the base salaries; the sales job is to provide a base for consequent sales. The pay structure in LT needs to include lower salary base and higher commission, as there is no guarantee of future sales in commodity-like market.
Applicability to ATRAC: by applying a similar strategy to serve two different segments, the extremely skilled sales force in the WE market operates inefficiently while selling in LT, and the less-skilled sales personnel from LT can’t provide the expertise level needed in the WE segment. The unified strategy that has resulted from applying two opposite strategies within one company leads to lower pay for the WE sales specialists, who will eventually leave. The replacement sales force with lack of industry tacit knowledge will further deteriorate the existing differentiation.

Porter’s 5 market forces and value chain analysis of the industry segments are completely correlated. The customer relationship and sales expertise level is one of the crucial factors to succeed in the WE segment. The LT segment relies less on these factors, as it is mainly dominated by price.

case strategy equipment industry analysis forklift sales marketing

Case analysis #11: The Value Chain - R&D

2.3.2 R&D

R&D in the material handling equipment industry is performed by equipment manufacturers only. The major R&D within the industry addresses lowering costs and improving efficiency and performance, and most importantly, improving ergonomic design. In the WE segment of the market, the last factors become extremely important due to increased industry demand for ergonomic equipment, as more companies use it to improve productivity, increase quality, and enhance safety. Ergonomically designed material handling equipment drastically improves ease of operation, enables more efficient use, and decreases on-the-job injuries. The new designs, based on a careful consideration of human factors, are expected to enable operators to work for a minimum of eight hours without injuries or fatigue. Seats, tires, control configuration, and steering in forklift trucks are being improved for a high degree of manoeuvrability. In the LT segment, even though all factors are considered, the major emphasis is given to lowering the cost, which is logical based on the extreme price pressure in this segment.

R&D activities are very important to the industry, because a new model will have several years of life cycle; thus “thoroughness” of the new model is considered to be a vital asset. This long life cycle, coupled with a certain degree of inertia in customers’ perceptions, drives lift truck manufacturers to take a conservative approach, selecting and accepting only proven technologies. The Material Equipment market is highly fragmented and as a result, most of the manufacturers have several models in several classes of the equipment in their product portfolio, which results in the need to have a steady pipeline of new models. The long development cycle and need for a pipeline of new developments put financial pressure on manufacturers.
The two industry segments have different approaches to R&D.

WE segment: Most of the R&D in the WE segment is performed in-house. In-house R&D creates a competitive advantage for warehousing equipment manufacturers, as all the equipment is highly fragmented. R&D is mostly aimed at further differentiation and keeping the brand identity, even though it comes at a high price. To maintain a competitive edge and to keep “know-how” from the competition, most of the WE manufacturers usually perform R&D in house.

LT segment: R&D is designed mostly to minimize the costs of the equipment. The homogenization of the products and market cost pressure force manufacturers to outsource R&D. The most common outsourcing is “cross-brand” outsourcing, when one manufacturer develops a new model that will be brought to market by several manufacturers. For instance, a new forklift model launched by Nissan in 2004 has almost identical “copycat” copies produced by Caterpillar and Mitsubishi; another example is a new model of forklift that is shared by Yale and Hyster. Jointly performed R&D usually contributes to further market commoditization and further lowers the importance of brands. The buyers’ preferences in market analysis seem to confirm this observation.

Summary of R&D section: In the material handling equipment industry, activities performed in the R&D sector are definitely where the value is created. The relative weight of this activity is different for the two industry segments. Generally, R&D in the WE business is designed to further differentiate and support the key factors addressed in the market analysis: price, brand and service. R&D in LT is relatively low in importance, designed primarily to lower the cost of the equipment and mostly addressing the price factor.
Applicability of industry R&D for ATRAC: As the R&D activities in the industry are performed by manufacturers; these activities are outside of the equipment vendor’s control. However, understanding the driving forces behind the R&D becomes important, as the dealers need to address the “compatibility” issue by matching selected brands and company strategies as it is hard to change later.

The “right choice” needs to provide a closer match between the dealer’s business model and the business model of the equipment manufacturer. The sales of the equipment built by manufacturer-differentiator will suffer if sold by a dealer with a low-cost business model that is short of expertise and unable to provide quality service. The opposite is also true. The dealer-differentiator who sells low-cost products damages its “differentiator” reputation and wastes the company’s limited resources by applying premium services to low-cost products.


business case industry analysis value chain forklifts

case analysis #10: The Value Chain

2.3 INDUSTRY VALUE CHAIN analysis

2.3.1 Overview

Briefly, the value chain for the material handling equipment industry looks as follows: Development of new models, sales and marketing, inbound logistics, manufacturing, followed by outbound logistics and after-sales support (Figure 8).



Different intensity market forces suggest possible differences between the two industry segments in regards to how these activities are performed within the industry’s value chain.

Case analysis # 9: Threats of substitute

2.2.4 Threat of substitute: (Low - WE, High - LT)
A threat from substitutes exists if there are alternative products or services with lower prices or better performance parameters for the same purpose. The presence of product and business substitutes limits the price levels and the firms in the industry are likely to suffer lower average profitability.

2.2.4.1 Product substitute:
Palletized product storage, at the moment, has no real substitute. The only potential threat comes from continuous or bulk transporting, in which pallets are not required to carry the products, and therefore doesn’t require equipment to handle the pallets. However, at the moment there are no industrial scale models available which are able to provide end users with the products they need without previously storing the products on the pallet. Thus from a product substitutes point of view, the potential threat to MH equipment industry is very low.

2.2.4.2 Business substitute:
Equipment rental companies offer small customers the possibility to rent forklifts or other equipment as an alternative to buying. The big companies, like United Rentals and Nations Rent, rent limited lines of popular forklifts along with other types of industrial and construction equipment.
WE segment: The need for a high level of equipment customization makes the threat from rental companies irrelevant, as it becomes too costly for rental companies to have all possible equipment modifications available for rent.
LT segment: The LT segment is characterized by a greater number of small clients. Small clients usually don’t require deep technical expertise from a dealer, and in more cases have less use of the equipment. The lower equipment usage and the very basic product specifications required allow users to switch easily between equipment dealers and the rental company. As the cost factor is dominant in the LT segment, the possibility of the equipment user‘s renting equipment increases.

2.2.4.3 Summary of threat of substitution:
The threat of substitution in WE segment of the industry is low, due to a higher dependency on product customization and a greater need for sales expertise to select the proper equipment. In the LT equipment segment, the threat of substitution is significantly higher because of the presence of nationwide rental companies that can offer low rental rates resulting from economies of scale, and commoditized working applications that allow the use of a wide range of equipment.

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Case: part 8, Industry Analysis - Supplier's power

2.2.3 Supplier’s power: (Low-WE; Strong-LT)
The supplier’s power is an important factor in industry analysis, as the industry suppliers represent a direct cost that will be further transferred to end users, and therefore have a direct influence on profit level in the industry. In the material handling industry there are three major sides in market interactions: manufacturers, equipment vendors, and users. The supplier’s analysis will be performed from the equipment vendor’s perspective. Economies of scale and scope for equipment manufacturers differ between the two segments:
WE segment: In the WE segment, due to its high fragmentation and higher dependency on customized equipment, economies of scope become prevalent. The economies of scope dictate higher dependence of manufacturers on the distribution network and vice versa.
LT segment: The equipment in the commoditized LT segment is less complex, and there is lesser need for product customization and for direct access to the client; thus economies of scale become prevalent. The economies of scale for equipment manufacturers involve being able to drive cost and price down, which is likely key to competing in an industry dominated by cost. It would be especially important in LT and gives such manufacturers more power.
In summary, the supplier’s power is low in the WE segment and high in the LT equipment segment, due to the latter’s commodity-like products.
2.2.3.1 The globalization process:
The globalization process discussed earlier in the Threat of Entry section makes it easier for an equipment user to locate products from overseas, especially in the LT segment where the product is perceived as a commodity. Viewed from the other side, it becomes easier for manufacturers to reach users by using internet tools, such as e-commerce, and by selling the product directly. The manufacturer has the ability to by-pass existing distributor networks by offering low prices that will attract buyers anyway. The products can be cross-serviced (serviced by other brand service providers). As a result, manufacturers in LT segment have more power over their equipment distributors. The globalization process doesn’t affect the WE segment directly because of the power of the brand, the need for customization, relationships and specialized service.
2.2.3.2 Aging personnel and supply of labour:
Service is an important part of any equipment business. In the material handling equipment business, a service technician, once trained as a forklift engineer, will be an expert in electrical and hydraulic systems, diesel and gas powered engines and much more. Forklift service technicians may use laptop or palmtop computers to diagnose problems or fine-tune forklift truck performance. However, unlike in the car industry, most forklift servicing is done on-site, which means engineers typically spend much of their day on the road taking a mobile workshop to the customer. The working conditions for LT service technicians are usually worse than for their WE colleagues, as LT applications are usually outdoor areas compared to the relatively more comfortable warehouse centres serviced by WE technicians. ATRAC’s service coverage usually depends on the ability of the service technician to cover certain territories. In this context, the company’s ability to provide service depends directly on a sufficient quantity of an available service force.
The average age of the personnel in the forklift businesses appears to be in the 35-to-45-year-old age group. In the US economy, a shortage of labour in some areas is causing a problem in the equipment service industry. A short supply of labour represents extra costs for businesses, as companies compete to recruit from a dwindling pool of talent.
Wages in material handling equipment industry have fallen behind wages in other new economies, making the industry less attractive and further contributing to a labour shortage in the industry. From the company’s perspective, finding sufficient service technicians becomes an issue.
LT segment: From the service point of view, the most significant rival to the LT industry is the automotive market, with higher wages and much easier working conditions.
WE segment: The warehousing segment of the industry usually requires a higher level of service due to the “high capacity storage level and fast product turnover” profile of the clients that requires an appropriate level of service. The higher service requirements of the WE customers necessitate higher skills and qualifications, resulting in higher wages paid to those personnel. The higher wages paid in WE ease the potential labour shortage in the WE market segment, as the WE market seems to be attractive to LT service personnel.
Applicability to ATRAC: The underpayment of WE-skilled service personnel resulting from using pay rates that are relevant for the LT market segment could cut ATRAC’s labour supply. Thus, even though in general the WE segment should not normally have a labour shortage, the inappropriate strategy could artificially trigger the shortage.
2.2.3.3 Summary of supplier’s power:
In the WE equipment segment of the material handling equipment industry, the supplier’s power is limited, as the equipment manufacturers depend on the equipment vendors. A potential service labour shortage is overcome by pay rates higher than in LT. More comfortable working conditions for service technicians in WE also attract labour from the LT segment.
The supplier’s power in the general-use LT equipment segment is higher, mostly due to the commodity-like nature of the products and the better ability of the lift truck manufacturers to bypass equipment distributors. Lower wages and uncomfortable conditions for service personnel may contribute to supplier’s higher relative power.



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E-commerce for the commodity products (Forklifts)

Dealers unhappy with MCFA factory direct forklifts
HOUSTON, TX, United States
Thursday, 14 September 2006



Mitsubishi Caterpillar Forklift America Inc (MCFA) dealers are unhappy about a website offering factory-direct forklifts, initiated by an MCFA-owned dealership.

Last December, Forkliftaction.com News reported MCFA opened its first factory-direct dealership, Lone Star Lift, in Houston, Texas (Forkliftaction.com News #240).

The website, www.factorydirectforklifts.com, says users can “order Mitsubishi forklifts directly from the factory”, “buy at factory prices” and receive service from a “factory-authorised service centre”.

Lone Star Lift sales manager Chad Pilbeam told Forkliftaction.com News the website selling forklifts to retail customers was a dealer initiative, not an MCFA initiative.

“It is a distribution method for Lone Star Lift customers in our territory. It does not compete with other Mitsubishi dealers.

“When Lone Star Lift is successful, we will communicate to other dealers how we’ve been successful using the internet,” he said.

According to an MCFA note circulated to US, Canadian, Central and South American and Caribbean region Mitsubishi Forklift Truck dealer principals, the website is currently being tested in the territories of Lone Star Lift, Houston, and Daily Equipment, Louisiana, Mississippi.

“Since the site is only being marketed in the two test territories, it is unlikely an end user in other territories will know of and access the site,” the note said.

In an email addressed to Cat dealers, obtained by Forkliftaction.com News, an MCFA employee said the company had received “negative comments” about the circular.

The MCFA employee urged dealers to “keep an open mind regarding MCFA testing new marketing tactics” and assured them MCFA had no intention of stealing Cat dealers’ customers.


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Forklifts - are predominantly commodty (see case analysis)that better sold on web. This is was MCFA is trying to do. Service is better on site, and this is guaranteed by the local dealers. Dealers are pissed off as they loose the new equipment sales comission for the assigned territory. To make them happy, MVFA should just pay reasonable fee to local dealers for every forklift sold directly on a web.
After a while, local dealer shoul concentrate only on service. Forklift sales - is business for factories that is performed mostly through e-commerce.

Bravo, MCFA, You are the first to start.

AY

forklift e-commerce internet sale

Technology: Few U.S. adults say they turn to blogs for news (The Washington Times Daily, 02 Sep 2006, Page A2)

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Few U.S. adults say they turn to blogs for news
By Thomas Hargrove and Guido H. Stempel III SCRIPPS HOWARD NEWS SERVICE
The Washington Times Daily
02 Sep 2006

Despite the press’ fascination with the so-called blogosphere, a national survey finds that only about one in eight American adults uses Internet blogs to get news and information. But these Web logs — personal diaries and observations posted on... read more...

Tech Tags: The Washington Times Daily newspaper Nation