“Under pressure, everything will be liquid”

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Casper van Yperen

July 2011

Parts of this report have been erased due to confidentiality

“Under pressure, everything will be liquid”

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Master Thesis Page 2 of 72

“Under pressure, everything will be liquid”

Towards a framework for introducing new hydraulic products into new or

existing markets

Master Thesis Technology Management

Student:

Name: Casper van Yperen

Address: W.A. Scholtenstraat 37

Postal code: 9711 XB

City: Groningen

Student nr. : 1729861

E-mail: c.l.van.yperen@student.rug.nl

Company:

Name: Uniparts Kavee b.v. Address: Aaltenseweg 62 Postal code: 7051 GV

City: Varsseveld Supervisor: E. Vlug, director

University:

Name: University of Groningen Faculty: Economics and Business Study: Technology Management Address: Nettelbosje 2

Postal code: 9747 AE City: Groningen

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Preface

This thesis has been written for my degree in Master in Science in Technology Management at the University of Groningen. In the year 2009 I started with my Master in Science after finalizing my Bachelor in the same year. I performed my Master in Science research project at Uniparts Kavee b.v. located in Varsseveld in the Netherlands.

During the Master of Technology Management, a lot of attention was given to the process of developing new products, improving existing production facilities and entering technical innovations into marketplaces while keeping in mind all stakeholders and circumstances. The root cause for this research involves entering new or existing products into new or existing markets. This subject relies on a more marketing-like approach which seems to be a good complement to the standard program of the Master in Technology Management.

As said earlier, this research has been commissioned by Kavee. The result of this research is a framework which can be used to overcome the challenge faced by Kavee that concerns about which method Kavee should use to map out different markets or market segments and retrieve the desired market information regarding its (new) products. In addition to the development of the framework, the framework has been tested in order to stress its functioning. Moreover, while performing the test, results and actual market information have been gathered that can be used as an input for Kavee while trying to overcome their challenge.

I would like to seize this moment to thank several people from Kavee that helped me during my research. First of all, I would like to thank Mr. E. Vlug, the director of Kavee and my company supervisor. Not only do I want to thank him for the opportunity to perform my research at Kavee, but also for his assistance during the process. In addition, multiple employers from Kavee have helped me throughout my research and I would like to thank them for the time and effort they have devoted to me.

Finally I would like to thank my university supervisor, Mr. Flip Wubben, whose assistance during the whole experience has been of great help. Not only could I rely on a guiding hand when I had questions. Also when I did not have questions or problems I had to deal with his advices and guidance which I experienced as very comforting.

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Summary

Uniparts Kavee b.v. is a manufacturer of hydraulic actuators and systems for mobile and industrial applications. Traditionally the linear actuators (or cylinders) were made from steel. A few years ago, Kavee started encountering clients asking if it would be possible to fabricate cylinders containing less weight. This resulted in a new type of cylinder which properties differ from the steel cylinder not only regarding its weight.

The aluminum cylinder has been developed before focusing on a particular market segment. A market for the application of this new product hasn’t been determined yet. The main cause for this research to take place is the fact that Kavee wants to translate the knowledge and experience they have about aluminum cylinders into a marketable product for a specific market. At this moment, the ‘technology’ and the ‘form’ are already available. The root cause for this research is the fact it is unknown whether or not the ‘need’ or ‘value’ element (Crawford and Di Benedetto, 2008) for this product is also available.

The objective of this research is to answer the question which method Kavee should use to map out different markets or market segments and retrieve the desired market information regarding its (new) products. This is translated into a framework with the model of Crawford and Di Benedetto (2008) as a foundation. Creating additional value for the customer by adapting the products to their specific needs is proposed as the solution for the ‘value’ problem Kavee is facing.

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Master Thesis Page 5 of 72 Kavee should be mapped out. When all steps of the framework have been performed, a foundation for the Unique Selling Proposition has been proposed enabling Kavee to add additional value to their product in order to gain a competitive advantage.

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Index

1. INTRODUCTION 7

1.1 KAVEE, THE COMPANY 7

1.2 HYDRAULICS, THE TECHNIQUE 7

1.3 THE ALUMINUM CYLINDER 8

1.4 INTRODUCTION TO THE PROBLEM 9

2. PRELIMINARY RESEARCH 10

2.1 THE NEW PRODUCT CONCEPT 10

2.2 MARKET STRATEGY 11

2.3 UNIQUE SELLING POINTS 13

2.4 POSSIBLE MARKETS 13 3. RESEARCH STATEMENT 15 3.1 MOTIVATION 15 3.2 PROBLEM STATEMENT 15 3.3 RESEARCH APPROACH 16 4. THEORETICAL BACKGROUND 18 4.1 MARKET STRATEGY 18

4.2 UNIQUE SELLING PROPOSITION 23

4.3 MONITORING COMPETITION 24

4.4 DEFINING THE MARKET 28

5. FRAMEWORK DESIGN 33

5.1 FRAMEWORK FOR KAVEE 33

5.2 RESEARCH METHODOLOGY 39

6. RESULTS 43

6.1 EXECUTION OF THE FRAMEWORK 43

6.2 CONCLUSION ABOUT THE RESULTS 59

7. CONCLUSION 60

8. DISCUSSION AND RECOMMENDATIONS 61

8.1 DISCUSSION 61

8.2 RECOMMENDATIONS 62

9. REFLECTION 63

10. REFERENCES 64

APPENDIX I, LIST OF COMPANIES 68

APPENDIX II, DUTCH LETTER 69

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1. Introduction

This chapter is dedicated to map out the area within which this research is performed. First the company is introduced, followed by a brief description of the technology of hydraulics and finally an introduction to the aluminum cylinder.

1.1 Kavee, the company

Uniparts Kavee b.v. (Kavee) is a manufacturer of hydraulic cylinders and systems for mobile and industrial applications. The company has been founded in 1960. Kavee used to be part of the Kramp Groep but in January 2007 a joint venture with the Uniparts Group in India has been established. Since then the name Uniparts Kavee b.v. has been used. The products made by Kavee are used primarily in the Agriculture segment of the marketplace. The market segments which can potentially be served by Kavee also are the Mobile, Earthmoving, Shipping and Industrial segments of the market.

1.2 Hydraulics, the technique

In many situations or industrial processes objects or substances have to be moved from one location to another or forces have to be applied to processes such as holding, shaping or compressing a product. These activities are being performed by the ‘workhorses’ of our modern society, known as prime movers (Parr, 1999). There are different kinds of prime movers, each with its own advantages and disadvantages; electrical systems, pneumatic systems and hydraulic systems. The word hydraulic finds its origin in the Greek words ‘hydra’ and ‘aulos’, which mean respectively ‘water’ and ‘pipe’.

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Master Thesis Page 8 of 72 Figure 1, basic hydraulic system

1.3 The aluminum cylinder

Traditionally the linear actuators or cylinders as mentioned in the previous paragraph were made from steel. This material was selected because of its ease of use during manufacturing, its strength and its price. Overall, in industrial application, steel is a very common material to use. A few years ago, Kavee started encountering clients mentioning if it would be desirable to fabricate cylinders containing less weight. As a result, the R&D department of Kavee started developing a new kind of cylinder based upon the use of a different material instead of the commonly used steel; aluminum. This resulted in a new type of cylinder which properties differ from the steel cylinder not only regarding its weight. A picture of the new cylinder is illustrated in figure 2.

Figure 2, aluminum cylinder

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Master Thesis Page 9 of 72 shipping industry. Within the food-industry, the use of steel is highly restricted and often stainless steel is used instead. Aluminum could be used in these situations instead of stainless steel. Finally, electronic detection of the position of the aluminum cylinder can be executed very easily against low-costs compared to its steel competitor. In the next chapter, the unique selling points of the aluminum cylinder will be mapped out more thoroughly.

1.4 Introduction to the problem

The aluminum cylinder has been developed without a particular market segment in mind at forehand. Therefore, a market for the application of this new product hasn’t been determined yet. In addition, the aluminum cylinder contains several advantages compared to traditional steel cylinders. Which of these advantages should be focused on and what does this focus mean for the proposed market segment to approach? This research should provide Kavee with a framework which can be used to make market segment decisions based upon the properties of a new product and the properties of the market segments that can be approached.

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2. Preliminary Research

Before the actual research can be started, it is important to perform preliminary research to identify different aspects of the research. Based upon this preliminary research, the research statement will be mapped out within the next chapter.

2.1 The new product concept

The initiator of the creation process during this research is the quest for a lighter cylinder by Kavee. However, as presented in figure 3, it is important not only to focus on ‘technology’ aspects, but also on the ‘need’ and the ‘form’ aspects of a product (Crawford and Di Benedetto, 2008). A firm envisions a form of product, which is created by the use of the technology and given to the customer to see if it has any benefit.

Need (Value) Form Technology Form-Technology Concepts Need-Technology Concepts Need-Form Concepts New Product

Figure 3, the new product concept

2.1.1 Technology

In most cases innovation is based is upon one clear technology, the one that served as the technical dimension of the focus-arena. Sometimes there are two technologies (Crawford and Di Benedetto, 2008). In the case of this research, the technology on which the new product concept is based is the technology of hydraulics and the material aluminum. Those two elements combined were the initiator of the creation process.

2.1.2 Form

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Master Thesis Page 11 of 72 used. The cylinder could be sold as a part for other products or even as a product ready for use built in-house.

2.1.3 Need/Added Value

The product has added value only as it provides some benefit to the customer that the customer sees a need or desire for (Crawford and Di Benedetto, 2008). For the product considered during this research, it is unknown whether or not it delivers any value to the customer. This is one of the aspects this research will have to deal with.

2.1.4 Conclusion

Based upon the model of Crawford and Di Benedetto a new product should contain all three elements; the ‘technology’, the ‘form’ and the ‘need’. Since this research considers an already present product the use of this methodology serves another goal namely as an aid in mapping out the scope of the project. As mentioned in the previous paragraph, the main question is whether or not a ‘need’ can be attached to the product in order to make it viable. In addition, the ‘form’ aspect of the product has to be determined. The aluminum cylinder could be used as a part of a bigger end-product, all manufactured in-house at Kavee. For this research, the ‘form’ of the new product will be based upon the cylinder sold as a half-product or part and not as an end-product.

2.2 Market Strategy

When entering new markets or market segments several ways of entering these markets can be applied. In addition, when entering new products to markets, new decisions have to be made. Kavee is facing the challenge to introduce a new variant on a product into an existing market and into new markets. For Kavee several elements play a role in the decision on how to enter these markets. Before deciding what the best way to enter the market is, it is important to map out the position of Kavee in relation to their customers. In this paragraph, preliminary research on business marketing and the buyer’s perspective is done to assure the right mindset during the research statement.

2.2.1 Business Marketing

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Master Thesis Page 12 of 72 must ensure they offer the best value to their targeted customers. This is illustrated by the ‘need’ element (Crawford and Di Benedetto, 2008).

It is important to state that a customer-oriented approach is not the same as a consumer-oriented approach. At first sight, it seems there should be many similarities. However, between the two there are big differences (Tetteh, 2008). In literature, many differences are mentioned. The most important differences found are;

- Distribution channels within business marketing are much shorter than with consumer marketing. In addition, the contacts between the different actors are more direct;

- The negotiation process between the supplier and its customers is more direct and personal within business marketing compared to consumer marketing;

- Business marketers tend to spend less on advertising than consumer marketers.

Since Kavee is dealing with other organizations that resell their products or use them and not with direct customers these differences between the two types of marketing imply a certain mindset for Kavee.

2.2.2 From a buyers perspective

As dozens of companies have already learned, supply and demand patterns can be upset virtually overnight. Therefore it is important to take in account the buyers’ perspective (Kraljic, 1983). Until the introduction of the aluminum cylinder, Kavee operates mainly in the agricultural segment, a relatively stable environment. However, the complexity of the supply market which Kavee is part of cannot be characterized as a market of high complexity. Besides Kavee, there are competitors delivering the same products or services. For the buyer, the complexity of the supply market and the value involved are two important variables influencing their opinion about the supplier (Kraljic, 1983) or in this case Kavee. This is illustrated in figure 4.

Leverage items

Exploitation of purchasing power

P ro fi t Im p a c t H ig h L o w Supply Risk High Low Strategic items

Diversify, balance or exploit

Non-critical items

Efficient processing

Bottleneck items

Volume assurance

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Master Thesis Page 13 of 72 Within this matrix, there is an obvious tension between the buyer and the supplier. The supplier would like to shift its products from the left side to the right side of the matrix while the buyer would like the products he has to buy to shift from the right to the left. The products currently produced by Kavee are located more to the left side of the matrix. However, when introducing the new aluminum cylinder, their position shifts to the right side of the matrix because of the high innovativeness of the product and therefore the lack of competition. This is an important factor to realize since their position changes dramatically in the eyes of their buyers. Once the buyer is committed to Kavee, a strong relation or dependency will emerge. When introducing the aluminum cylinder to the market, it is important not to ignore this fact.

2.3 Unique Selling Points

This part of the report has been erased due to confidentiality.

Table 1, SWOT analysis results

2.4 Possible markets

At the moment, Kavee operates mainly in the Agriculture market with Kramp as their main outlet. However, because of the new aluminum cylinder, opportunities arise to enter new markets. Besides entering new markets, the possibility to enter existing markets with a different geographical location also exists. For now, this is not focal point. In order to map out possible new markets to enter, a brainstorm session will be held. The Unique Selling Points are used as input for this session.

2.4.1 Brainstorm sessions

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2.4.2 Results

The brainstorm sessions have resulted in an extensive list of different opportunities. However, due to the limited time available for this research and to make sure the research will have a high level of quality not all these options will be investigated. In consultation with Kavee, a selection will be made in order to delineate the scope of this research using the Unique Selling Points. The results of the brainstorm sessions are presented in table 2.

Table 2, results from the brainstorm sessions

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3. Research statement

Within this chapter, the motivation for the research will be mapped out. The problem statement contains the objective of this research. The research question and its sub-questions will be derived from the objective. Proceeding to that, the theme and scope of the research have to be determined to ensure a proper delineation. The final paragraph of this chapter contains the research approach by which this research will be conducted.

3.1 Motivation

When trying to compose a problem statement it is often more easy to start looking at the root causes of the problems studied. When doing so, mapping out the problem statement becomes a more structured process. Looking at the root causes is done performing preliminary research (van Aken et al., 2009). The preliminary research needed for the problem statement to be composed can be found in the previous chapter.

The primary motivation for this research is the fact that Kavee wants to translate their knowledge and experience about aluminum cylinders into a marketable product. At this moment, the ‘technology’ and the ‘form’ are already available, as mentioned earlier. The question or ‘root cause’ for this research is the fact it is unknown whether or not the ‘need’ element for this product is also available (Crawford and Di Benedetto, 2008). Therefore, Kavee needs a method to be developed by which new markets can be mapped out and explored, resulting in market information regarding this new product. This method should deal with not only different market segments as treated in the paragraph about brainstorming in the previous chapter, but also with markets differing geographically.

3.2 Problem statement

The problem statement of this research consists out of different elements which will be considered in this chapter. The main subject of this research is the fact that at the moment it is unknown for Kavee which method to use when introducing new products into new markets. This is the root cause for this research as can be derived from the research question.

3.2.1 Objective

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3.2.2 Research question

The main research question for this research is:

“Which method should Kavee use to map out different markets or market segments and retrieve the desired market information regarding its (new) products?”

3.2.3 Sub questions

To be able to answer the research question several sub questions have to be answered. These questions are:

1. What aspects of a product are fundamental to achieve a competitive advantage? 2. Which market strategy should be pursued by Kavee in order to enter new markets? 3. What are the influences of competition when entering markets?

4. How should different market segments be identified and ranked?

3.2.4 Theme

The theme of this research is a marketing research. During the first interviews at Kavee it became obvious there were several opinions on the angle of incidence of this research. In the beginning, it seemed Kavee was mainly interested in the actual market information regarding the aluminum cylinder. However, during the interviews it became obvious the real interest of Kavee was of a higher level. The real question is what should be done to map out the different markets and possibilities of a new or existing product. Therefore, the theme of this research is a marketing research resulting in a method for Kavee which can be used to explore (new) markets or segments regarding their (new) products.

3.2.5 Scope

This research is being performed within a certain limit of time. In order to ensure a high level of quality of the end-result it is important to determine a proper scope for this research. Since this research is about developing a framework for Kavee to use this framework is the first limitation of this research. In addition, the framework will be tested using specific cases regarding the aluminum cylinder in certain market segments. Therefore, the scope of this research is developing the framework itself and afterwards executing this framework to test its functioning regarding the aluminum cylinder in the geographical region of the Benelux and the north of France.

3.3 Research approach

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Master Thesis Page 17 of 72 in literature, but they are all very similar (de Leeuw, 2005; van der Zwaan, 1990; Wijnen et al., 1984). The stages usually involved in the research process are;

1. Clarifying the Research Question; 2. Proposing Research;

3. Designing the Research Project; 4. Data Collection and Preparation; 5. Data Analysis and Interpretation; 6. Reporting the Result.

However, research does not require the completion of each step before being able to go to the next. In addition, steps can be dropped or performed multiple times. They can be carried out simultaneously or out of sequence. Even though many variations are possible, the idea of a sequence remains useful for developing a project. Also, it keeps a project orderly as it unfolds (Cooper and Schindler, 2008). Based upon this knowledge, a sequence for this research project will be mapped out within this paragraph. It is important to adjust the stages of the research process to the actual research performed. The process should be customized to each individual project, since no project is the same (de Leeuw, 2005).

For this project, a sequential process involving clearly defined steps will be used to ensure an ordered trajectory. At the beginning of this project, preliminary research has been performed to ensure a proper mindset. Based upon the knowledge gathered and the cause for this research the research statement has been mapped out. This description of the research process facilitates the process needed to perform the project as described in the research statement.

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4. Theoretical background

Based upon the research statement a theoretical background is mapped out. This theoretical background can be found in this chapter. This theoretical background has been composed using different sources of literature. The methodology used of mapping out a theoretical background based upon the research statement before performing the actual research itself is the methodology as described by de Leeuw (de Leeuw, 2005).

The first subject of this chapter is the market strategy of a company to gain general understanding in the matter of business marketing and different market entry strategies which can be used followed by a brief insight in the unique selling proposition of a product. After this, theory on how to monitor and map out competition is elaborated on and the last subject of the theoretical background is about defining the market a company is acting in.

4.1 Market Strategy

The theme of this research is a marketing research. In the case of Kavee, the relation between them and their customers is based upon a business to business relationship. To gain general understanding on this matter, the theory on business marketing mapped out during the preliminary research will be extended. In addition, different value-adding strategies will be discussed. It is important to determine the context Kavee has to operate in because this may have implications for the way the aluminum cylinder should be entered into the market.

4.1.1 Business Marketing

Business marketing is about developing strategic plans concerning marketing. The contents of these plans involve for example the idea, the costs of these ideas and the allocation of resources needed. After the plan has been composed it needs to be executed by the organization in order to reach its desired effect. The targets of business marketing are other organizations that can use their products or services in several ways. They could be resold, used as components within their own products or services or they can be used internally to support their own organization (Tetteh, 2008). In short, business to business marketing refers to the marketing operations of businesses whose mission is to serve other businesses (Tetteh, 2008).

When being involved with business to business marketing, it is important to realize the business served are in fact the ‘consumers’ of your business. These customers can be divided into four broad categories;

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Master Thesis Page 19 of 72 - Resellers (for example an industrial distributor);

- National and government agencies;

- Institutions like schools, hospitals, churches etc.

The influence and importance of business to business marketing has grown during the last decades. This is because of the volume of transactions that is involved in industrial or business markets. The size of these transactions has been rising dramatically since the 1970’s and nowadays in industrialized countries, more than 50% of all transactions in industrial countries is related to business to business transactions (Tetteh, 2008; Gupta et al., 2010).

4.1.2 Adding Value

When buying products, services or features, customers are looking for value (Tetteh, 2008). This is why suppliers seeking for competitive advantage must ensure they offer the best value to their targeted customers. This is illustrated by the ‘need’ element (Crawford and Di Benedetto, 2008). Not only should a product deliver a technology in some kind of form, the value of the product aspect goes beyond the actual product. For example, value can also be delivered by a value of choice, a value for attention or a value for knowledge (Lawer et al., 2008). Knowing which product to choose has become a major concern within customer markets. The increase in choice, uncertainty about choices, confusion and complexity of the markets all contribute to this (Mitchell 2001; Willmott and Nelson 2003). Helping your customer to make the right decision saves them time. This is strengthened by the value of attention. Increasingly, customers are searching for suppliers providing them attention, for example during decisions on what products to buy. This phenomenon is strengthened by the need of companies to build relationships with their customers in order to gain loyalty, lower costs and superior profitability (Christopher et al., 1991). In addition, switching between suppliers or between products purely based on a decision powered by differences in functionality is becoming increasingly difficult for consumers (Gupta et al., 2010). The importance of adding value to products or services becomes of even higher importance. As a company, it is important to gain knowledge about your customers. What do they want and why do they want it? Knowledge about customers is one of the most important elements of business marketing. The companies need to know their customers and understand why they behave the way they do. In addition, they should know how their organization behaves. Finally, it is very important to know what the customers perceive to be of value (Tetteh, 2008).

4.1.3 Customer-oriented Approach

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Master Thesis Page 20 of 72 should be used. A value-based strategy differs from more traditional market strategy such as mass marketing in the fact that it is a targeted strategy. Specific customer segments are selected in order to provide a high valued product or service for that particular segment while keeping in mind the profitability for the supplier (Tetteh, 2008). This type of customer approach is called a customer-oriented approach. As a result, the value offered to the customer becomes higher. Even when the costs of this process imply a higher price, the value of the product can still be perceived to be higher than the competitor’s product (Tetteh, 2008; Lawer et al., 2008). Several advantages occur when managing a customer-oriented approach;

- Since the approach is based on additional value, the company achieves a competitive advantage over their competitors. This advantage is difficult to imitate because of the nature of the approach;

- Since the customers perceive higher value because of the approach, the reputation of the company rises. The services or products delivered are of higher quality resulting in a more positive view from the customer over the supplier;

- The value perceived by the customer can be seen as value for the supplier. On the long term, customers will appreciate the value delivered resulting in a more profitable situation because of a growth in market share.

It is important to state that a customer-oriented approach is not the same as a consumer-oriented approach. At first sight, it seems there should be many similarities. However, between the two there are big differences (Tetteh, 2008). In literature, many differences are mentioned. The most important differences found are;

- Distribution channels within business marketing are much shorter than with consumer marketing. In addition, the contacts between the different actors are more direct;

- The negotiation process between the supplier and its customers is more direct and personal within business marketing compared to consumer marketing;

- Business marketers tend to spend less on advertising than consumer marketers.

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Master Thesis Page 21 of 72 not only as an outlet for their products, but also as an input for their business marketing strategy (Tetteh, 2008). In literature, it is often suggested that companies should follow a repetitive sequence of steps in order to achieve a competitive advantage. For example, the following five-step sequence is suggested to facilitate organizations competitiveness (DeBonis et al. 2002);

- Identify your target customers and the values they expect;

- Based upon the values found, select a number of values on which your organization is able or wants to compete;

- Analyze your organizations ability to compete on the values selected;

- Once the organization is ready to deliver the value, start communicating the value to the target customers in order to start delivering the value;

- Finally, start the distribution of the actual value to the target customers and modify your organizations value model to the new situation.

The first step of the sequence involves selecting a target group of customers. This is important because no customer is the same and they all have different needs. A company is unable to satisfy the needs of all customers available. Or, when it is able to, it should drop certain customers in order to gain value for the remaining customers to ensure their competitive position in the market. This is why selecting the target customers is one of the most important strategic decisions a company has to make (Shapiro, 1988). As mentioned earlier, such a sequence should not be a one-time event. It should be repeated infinitely in order to facilitate higher value to be delivered to the customer in the future. It is important to highlight the importance of a customer-oriented approach when performing such an approach in your organization. Without the input of the customer it becomes impossible to perform the steps mentioned. Not only does the involvement of customers facilitate the ability to add value to ones products or services, when the market strategy of the organizations becomes more aligned with the customers’ need, this can positively influence the attractiveness of the company to the customer resulting in higher loyalty (Day, 2006). This is why during the last decade empowering business to business relationships has become a very important role of business marketing. By offering products or services which are differentiated from the competition, the relation between the organizations and the customer gets strengthened (Ringberg et al., 2007). It is important to state all efforts mentioned earlier do not only provide additional value for the customer. On the long term, both the customer and the organization itself profit from successfully managed relationships (Dwyer et al. 1987).

4.1.4 Value-Based Strategies

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Master Thesis Page 22 of 72 product. The value perceived by the customer depends on more than just the product. The question raises how a company’s strategy should be altered in order to facilitate this superior value and how it should be provided to the customer. Different strategies aiming for different affects are described in literature. Most of the literature agrees on a partition based upon three main types of strategy namely product leadership, customer intimacy and operational excellence (Anderson et al., 2009). Each of these categories will be discussed during the following paragraphs.

Product Leadership

The strategy of product leadership is based upon constant innovation of a company’s products or services. The company is able to compete against the rest of the market based upon outstanding performance of their products or services. Constantly innovating and trying to incorporate new technologies into their organization makes sure the competition is absolutely obsolete in the eye of the customer because of the immense difference in delivered performance excellence (Anderson et al., 2009). Because of the lead these kinds of organizations have on their competitors when developing new products or services they should not focus on the competition but on their own products. These organizations are continuously trying to compete themselves within the same market in order to enhance performance and to make sure their products become obsolete because of their own organization instead of a competitor. Within the current marketplace, most products sold by firms using a product leadership strategy have a relatively short life cycle (Burgelman et al., 2009).

Customer Intimacy

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Operational Excellence

The last value-based strategy to be discussed is the strategy of operational excellence. Companies with this kind of strategy try to become competitive based upon low prices (Burgelman et al., 2009). They try to deliver products or services to customers based upon reliability and ease of use. But most of all at competitive prices. However, the products and services offered are all standard products fulfilling pre-defined needs. This is why these companies are able to be price-competitive. While pursuing this type of competitiveness, these companies are constantly trying to eliminate activities within their organizations that do not add direct value to the products or services offered to their customers (Anderson et al., 2009).

4.2 Unique Selling Proposition

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Master Thesis Page 24 of 72 customer group and why are these customers buying these products instead of another offering are the key questions of a company’s Unique Selling Proposition (Poole, 2007).

When trying to create Unique Selling Proposition it is important to start looking at your own organization. What characteristics distinguish your company from the competition? Why should the customers buy your product or service? In literature, many frameworks have been composed which can be used to identify a company’s Unique Selling Proposition. Most of these frameworks are based upon four topics (Poole, 2007);

- Know the customer; - Know the competition; - Know the channels; - Know yourselves.

When defining your Unique Selling Proposition, it is important to realize a certain strategy should be kept in mind. What are we trying to compete against? Which characteristic of the product or service can our company exploit to convert it into a distinguished competitive advantage? Is the organization able to specialize in certain products? Or should the organization focus on design? Or should we provide additional customer service? No matter that strategy is chosen, it is important to make a decision and to ensure the decision is turned into actions. The Unique Selling Proposition should be used as a tool to determine what has to be done in order to provide additional value to the customer and how the awareness of the customer should be reached.

4.3 Monitoring Competition

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Master Thesis Page 25 of 72 that market is. However, the weaker the forces are, the higher the potential profits are. The strongest of the five competitive forces determines the overall profitability of the industry within that marketplace. When formulating its strategy, it is this force the company should take into account the most. In the next paragraphs, each of the five forces will be briefly discussed.

Rivalary Among Existing Competitors Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products Threat of Substitute Products

Figure 5, the five forces that shape industry competition

4.3.1 Threat of entry

When new companies enter a specific market place, the possibility that the opportunities within that marketplace have to be shared with more competitors rises. New entrants put a pressure on the prices of the products within that market and also on the costs to be made and eventually on the return on investment (Porter, 2008). Existing organizations that are already present in other markets and enter ‘your’ market because of diversification form an extra pressure because they can rely on existing resources. The potentially available profit within a market is therefore capped by the threat of entry (Porter, 2008; Burgelman et al., 2009). Fortunately for companies already present in markets the threat of new entrants is being moderated by the entry barriers. The height of the entry barriers determines the potential risk of new entrants. The barriers are advantages the existing organizations have opposed to the new entrants (Porter, 2008; Burgelman et al., 2009). There are seven sources of entry barriers;

- Supply-side economies of scale;

- Demand-side benefits of scale, also known as network effects; - Customer switching costs;

- Capital requirements;

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Master Thesis Page 26 of 72 In addition to these seven possible entry barriers is the retaliation the new entrant expects to derive from the existing organizations. If they expect to encounter high retaliation, the expected profitability of the entrance should overcome the costs involved by overcoming such a situation.

4.3.2 The power of suppliers

The more power suppliers have within a certain market, the bigger are their possibilities to capture a certain share of the profits made within that market (Porter, 2008). If suppliers become ‘too’ powerful, for example in a monopoly situation, companies start to become a ‘slave’ of their supplier. In this case, the supplier becomes so powerful they can claim all profitability within a certain market industry while the industry is unable to do anything about it because they rely on the supplier and they cannot continue their business without that particular supplier. The higher the power of suppliers is the smaller is the risk for new potentials in the market. This is because in their quest for a piece of the profitability they will be facing the suppliers as a new company without any power which will harden their position compared to existing companies in the market (Burgelman et al., 2009).

4.3.3 The power of buyers

Directly opposite the powerful suppliers are the powerful buyers. The customers within a market determine whether or not a particular market is profitable. As one might expect, the more power buyers have, the less profitable a market will be. The customers within a market will always try to stress profitability of the suppliers in favor of lower prices, higher quality or better service (Porter, 2009). They try to do so by manipulating the market and by playing different organizations within that market off each other. If the market is very tight and there are only few customers for a lot of suppliers to sell to, the power of the customer is high. In addition, the relative size of the customer compared to the organizations selling also influences the power of the buyers. Also the market itself influences the power of the buyers. If all products within a market are exactly the same, the power of the buyer rises since switching from supplier is very easy. However, if a certain organization manages to differentiate their products from the rest of the organizations within a market, the power of the buyers over that particular firm goes down (Porter, 2009). Other examples for diminishing the power of the buyers are switching costs or the threat to integrate backwards making the supplier superfluous.

4.3.4 The threat of substitutes

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Master Thesis Page 27 of 72 recognize. A substitute does not have to be a similar product. For example, viewed over a long period, the mobile phone is a substitute for the carrier pigeon. No one might have expected such a product to emerge but eventually it did. The threat of substitutes within an industry influences the profitability. The higher the threat, the lower the profitability (Porter, 2009). This is caused by a maximum price determined by the threat. The threat of a substitute is high when the potential profitability from that substitute outweighs the profitability of the existing product. In addition, the lower the switching costs from changing to the substitute are for the buyer, the bigger is the threat. This allows for an easy market entrance by the substitute product.

4.3.5 Rivalry among existing competitors

The final threat for the profitability of a certain industry is an internal affair. The rivalry among existing competitors influences the profitability of the market. The higher the rivalry, the lower is the potential profitability of the market. The effect of the rivalry amongst competitors on the profitability of that market is influenced by two factors; the intensity with which they compete and the basis on which they compete. Together, they form the level of rivalry within the industry (Porter, 2009). Several factors or characteristics of the companies involved influence the rivalry between them. The rivalry is the highest when all rivals are equal in size and power or when there are many rivals. Without a clear leader, the market is less predictable and therefore the rivalry rises. The growth of the industry also influences rivalry. In a fast growing industry, the need to compete each other for a piece of market share is less necessary than in slow growing industries. Opposed to entry barriers, exit barriers also exist. The higher the costs involved for exiting a certain industry, the longer companies will try to turn their business into a success. When exit barriers are very high, companies accept losses they would never accept if the barriers would be absent.

4.3.6 A Framework for Competitor Analysis

After identifying each of the competitive forces or direct competitors, it is important to analyze each of them. An often used framework for this type of analysis is the framework provided by Porter (Anderson et al., 2009). The framework of Porter consists out of four different elements that should be diagnosed thoroughly. These components involve the future goals of the competitor, assumptions made by the competitor, the current strategy of the competitor and the capabilities of the competitor. For each of the competitors found earlier, these four elements should be mapped out in order to gain understanding in the competition. Each of these elements will be discussed briefly.

Future Goals

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Master Thesis Page 28 of 72 for? What type of strategy will they pursue? Only if answers to these questions are available it becomes possible to react to them and to align the company’s strategy to this information in order to become or remain profitable in the future despite these competitors.

Assumptions

Similar to the assumptions made in an organization, the competition is also making assumptions about certain things in the market and also about itself. The latter is extra important because competitors, as everybody, can make mistakes in their assumptions about their own company but also about their prospected market. When an organization spots mistakes in the assumptions of a competitor these mistakes are called ´blind spots´ (Anderson et al., 2009). Blind spots are events or areas in a market not noticed by the competitor which leaves room for an organization to anticipate on. Often, the amount of success is a reason for blind spots to appear. The more successful a company is the more intrinsically focused companies tend to get, resulting in a higher amount of blind spots.

Current Strategy

Like any organization, the competition also manages its market strategy. It is important to be aware of the competitors strategy based upon three elements; the competitors selected market, the positioning of its offering within this market and the marketing efforts performed to support its market strategy (Anderson et al., 2009).

Capabilities

How strong is an organization? How high is its competitiveness? Before being able to answer this question it is necessary to gain insight into the capabilities of the competition. What are the core competencies of the competition, what capabilities do they possess? This knowledge of the competition should not be based onto a single moment. Especially its properties over a longer period of time are important to see. Are they able to adapt? How fast can they respond to certain changes? The last important thing to investigate is the will of the competition to act in a specific market segment. Are they willing to give up this segment and therefore is this segment an opportunity or will they do anything in their reach to remain active in this market segment (Anderson et al., 2009)?

4.4 Defining the Market

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Master Thesis Page 29 of 72 organization than the market as a whole. In this paragraph, the subject of market segments and a method on selecting market segments for the organization will be discussed.

4.4.1 Market Segments

“If you’re not thinking segments, you’re not thinking” (Levitt, 1983). A while ago, Levitt made this striking statement in one of his writings. Since then, markets have become even more diversified and dynamic. Products’ life cycles have been shortened, markets tend to change faster and everything is constantly on the move (Anderson et al., 2009). Winning customers is all about understanding the pre-segmented markets an organization is functioning in (Weinstein, 2006). Segmenting markets is the process of dividing markets into different groups of customers or firms. Within each of these groups, the firms have similar requirements or demands and preferences for the products or services offered by the organization that is segmenting the market. However, between the groups, different requirements or demands and preferences exist (Anderson et al., 2009). The reason for segmenting the market is to group firms with the same demands in order to be able to adapt your market offering to their specific need. When trying to serve a market as a whole, each of the customers has to accept an offer suited for the whole market instead a more tailor made offer. As mentioned earlier, customers are searching for value. When serving segments of a market instead of the market as a whole, the offers made to those segments contain more value. What characteristics of the customers are used for the segmentation can differ in each situation. In order to pursue a valid form of segmentation, the method for segmentation should be aligned with these four criteria (Robertson and Barich, 1992);

- The segments should be measurable regarding its size, growth and market potential; - The profitability of the segments should be measurable;

- The segments should be accessible. They have to be reachable as a segment;

- The segments have to be actionable. If no actions can be mapped out to ‘capture’ the segment, the segment is not plausible.

4.4.2 Which Segments to Serve?

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Master Thesis Page 30 of 72 segments not to serve is as important or even more than the decision on which segments to serve. Many strategies on how to rank segments in order to make a selection are described in literature. Two of these methods can be used to complement each other; those of Weinstein (2006) and of Dibb (1995). These two methods will be described briefly.

The Strategic Market Definition Framework

During his research, Weinstein (2006) found that each market consists out of several properties such as customer needs, customer groups, competition between organizations, several products within that market and different kinds of technologies. Based upon these ideas, he proposed a market definition model as is illustrated in figure 6.

Figure 6, strategic market definition framework

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Segment Evaluation Matrix

Although the model proposed by Weinstein (2006) provides a solid method for selecting the right relevant markets for an organization, the third level of the method could use some further elaboration. The selection of the segments should be defined more properly to ensure a reliable process. This can be done using the Segment Evaluation Matrix (SEM) developed by Dibb (1995). This method can be used to map out different segments available within the relevant market (Weinstein, 2006) in order to make a selection based upon measurable criteria. The construction of the SEM involves five different steps (Dibb, 1995);

- Select the criteria for both the qualifying and the attractiveness criteria;

- Decide on the relevant importance of each of the criteria selected in the previous step; - Allocate an absolute score to each of the criteria;

- Multiply the absolute score by the relative weighting for each criterion;

- For each segment, enter its rating into a matrix based on the cumulative score of the qualifying and the attractiveness criteria.

When all of the segments are entered into the matrix, it is time to interpret the matrix itself. Each of the quadrants involves a different type of strategy making for the segments falling into that particular quadrant. Figure 7 maps out the matrix and possible implications for the segments when falling into one of the four quadrants (Dibb, 1995).

· Easy to enter

· Highly competitive

· Low entry barriers

· Potentially very lucrative

· Difficult to enter

· Potentially attractive

· High entry costs

· Long term opportunities worth investing in

· Seek scale economies

· Difficult to enter

· Avoid investment

· Use to dispose of spare stock

· Operating costs may not be justified

· Consider re-segmenting

· Easy to enter

· May not be attractive in the long term

· Usefull use of spare capacity

S e g m e n t q u a lif y in g H ig h L o w Segment attractiveness Low High

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4.4.3 Forecasting Market Share

When introducing new products or services into particular market segments a good understanding of the market factors is essential for new product success (Twiss, 1984). This understanding is essential in order to facilitate forecasting. Especially since the need for better forecasting rises because of the way markets have evolved during the last decades. Companies have often become more differentiated and product life cycles tend to be shorter. Markets have become less predictable resulting in a greater need for proper forecasting. This is needed to overcome the environmental changes an organization has to face that influence the rate of growth and the total size of the market for a new product (Twiss, 1984). Unfortunately when forecasting errors can be made. The longer the period involved in the forecast, the more likely it is errors will be made. Most errors made arise out of the following two factors. First, the organization is overoptimistic during the development and over the introduction period of the product. Second, the momentum of past introductions is simply projected into the future even though conditions may not be similar.

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5. Framework design

Based on the theoretical background, a methodology for Kavee has to be developed which can be used to map out different markets or markets segments and to retrieve the desired market information when introducing (new) products. This methodology will be tested performing several cases as mentioned in the research statement. Therefore, in addition to the methodology developed the research methodology also contains theory on how to execute the cases using different types of information gathering.

5.1 Framework for Kavee

This part of the report has been erased due to confidentiality. Figure 8, framework for Kavee

5.1.1 Market Strategy

As mentioned during the preliminary research, choices have to be made regarding the market strategy. Within the theoretical background, the concept of market strategy has been elaborated on. The framework proposed deals with market strategy based upon several different subjects. The most important aspect of market strategy for Kavee is the aspect of creating value for customers. The importance of this aspect is highlighted by the fact this can be seen as the initiator for this framework. The whole exercise is performed in order to create value. How to know that is perceived to be valuable by the customer and how can this value be brought to the customer? This has to be answered by choosing the right strategy which will facilitate these questions to be answered.

5.1.2 Unique Selling Points

Based upon the Unique Selling Points, potential markets can be identified that are suited for the introduction of the product. In order to map out the unique selling points, a SWOT analysis is used as shown in the preliminary research.

5.1.3 Brainstorming

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5.1.4 Segment selection

Within the theoretical background, it became clear customer intimacy can only be reached when a company divides its potential customers in different market segments. While doing so, the company is able to adjust their particular offering for that particular market segment resulting in more value added for the customer. Furthermore, Kavee is faced with the challenge to enter new markets in addition to their existing customer base. This is the agricultural market which is reached mainly through Kramp. In order to be able to properly introduce its products into the selected markets, Kavee should enter these markets not all at the same time. After segmenting the market ‘as a whole’ into different markets, it is possible to enter only those segments that are valuable for Kavee and for whom Kavee is able to add value to their product. Segmenting the market involves several different steps as proposed in the theoretical background. Not all steps mentioned have to be executed, but the general principle is used in order to be able to segment the market properly. The general process can be seen in figure 9.

Figure 9, strategic market definition framework

Level I, the relevant market

The first level of the segment selection process is about defining the relevant market. This is done based upon four different steps. First of all, the geographic market has to be selected. This marks the geographical scope of the project. The second step is the product market identification. Which product is to be placed into the specific market which will be segmented? The third and fourth steps are about selecting the generic and the relevant market. Out of all the opportunities present in the generic market, which opportunities to select and therefore, which market segments to select? For these steps, the information gathered during the brainstorm session is being ranked based upon different criteria. During this research, the following criteria are proposed;

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Level II, the defined market

The result from the previous step is the relevant market. However, the market definition Kavee will be using is not the same as the relevant market. The second level of the model proposed in the theoretical background defines the relevant market into different segments. In the original framework, this is done using criteria such as existing customers and new customers. However, since this framework should also be useable for new products or new markets, different criteria are proposed;

- Segment potential, is the segment potentially profitable?

- Segment accessibility, can Kavee enter the segment, is it reachable? - Value, can Kavee provide value for the customers within the segment?

Level III, the target market(s)

The next step of segmentation is to select the segments which seem to offer the best perspective for Kavee known as the target market. As mentioned during the theoretical background, the third level of the model used does not provide a proper framework for this final step. Therefore, the final selection of the segments will be done using the Segment Evaluation Matrix (SEM). In order to be able to map out the SEM, additional information about each segment is needed. This information has to be gathered based upon the actual circumstances within that particular segment. This is why this step of the framework has to be performed multiple times. For each of the segments, the data has to be gathered. When all the data is present, the SEM can be mapped out.

The segments will have to be ranked based upon several criteria which will be combined into the SEM. The SEM is based upon two axes, the qualification of the segment and the attractiveness of the segment as mentioned in the theoretical background. The ranking of the segments on both of these axes are based upon several parameters. The parameters mapped out in the original model do not match the situation at Kavee. Therefore, the model is adjusted to suit the circumstances. The parameters used for each axis are mapped out in the following paragraphs.

Qualification of the segment

The qualification of a segment depends on the fact whether or not a segment is operational (Dibb, 1995). It is important to make sure the segments are viable. Are the segments really a segment or is it just a group of customers with similar properties resembling a segment which turns out not to be feasible? In order to overcome this question, the framework suggests several parameters which should be assessed. Customers within a segment should have;

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Master Thesis Page 36 of 72 The type of application of the products should be similar. The demanded after sales service should be similar. Do the customers within the segment expect the same from Kavee? The higher the commonality, the higher the score for this parameter is.

- Measurable characteristics

Is the number of customers within the segment measurable? How big are their market shares? The easier this data can be gathered, the more predictable the segment is. Therefore, the higher the measurability, the higher the score for this parameter is.

- Identifiable competition

Who are the competitors within the segment and is the level of threat measurable? Is the competition identifiable? The higher the identifiability of competition within the segment is, the higher the score for this parameter is.

- Common distribution channel

Can all the customers within the segment be served commonly? The higher the homogeneity is within the segment regarding distribution, the higher is the score of this parameter.

- Distinctive communication mix

Can all the customers within the segment be reached using the same type of communication? The higher the homogeneity of communication is within the segment, the higher is the score for this parameter.

The weighting of each of these parameters should be adjusted to the desired level. When all scores are combined, the final outcome of the qualification axis for that particular segment can be calculated. The weightings given to the parameters are presented in table 3.

It is important to keep in mind that the basic question which has to be answered by the qualification criteria of a segment is that operational segments are those which are accessible and which can be served by an identifiable and distinctive marketing mix, or in the case of Kavee, the selected market strategy (Dibb, 1995).

Attractiveness of the segment

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Master Thesis Page 37 of 72 - The ability to reach the customers in the segment

Are the customers in the segment feasible for Kavee? For example, the aviation industry is unfeasible due to certification etc. The higher the feasibility, the higher is the score of the parameter.

- The competitive position in the segment

Is it possible for Kavee to gain ground within that segment or is the competition too high, now or within the near future? The easier it is to capture a market share, the higher the score of this parameter is.

- The size of the markets within the segment

The size of the markets is determined by the fragmentation of these markets. The higher the fragmentation, the harder it is to capture a substantial market share. The lower the fragmentation, the higher the score of this parameter is.

- The expected market growth, the future of the segments

Do the customers within the segment have a prosperous future ahead of them? Are the markets growing? The more positive the vision about the segment is, the higher the score of the parameter is.

- The compatibility of the market with Kavee and its objectives

Do the customers within the segment align with Kavee and its objectives? Do they not interfere with existing agreements? The higher the alignment, the higher the score of this parameter is.

- The price elasticity of the product

Compared to traditional steel cylinders, how much are the customers willing to pay? The more they are willing to pay, the higher the score of this parameter is.

- The product alignment

How easily can the product be sold to the segment? Does it need any modifications or adjustments? The easier the product can be sold, the higher the score of this parameter is. The weighting of each of these parameters should be adjusted to the desired level. When all scores are combined, the final outcome of the attractiveness axis for that particular segment can be calculated. The weightings given to the parameters are presented in table 3. In the next chapter, the process of combining all the parameters per segments into a SEM will be mapped out based upon several cases which will clear out the use of the matrix.

The SEM parameters

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Master Thesis Page 38 of 72 segments. Each of the parameters has to be weighted in order to combine the outcomes into a single score. This is presented in table 3. The current weighting of the parameters has been determined in consultation with Kavee. However, in the future, the weighting of the parameters can be altered to align the importance of each parameter with the future strategy of Kavee.

Table 3, relative importance of the parameters

5.1.5 Market information

In order to be able to make a selection of the segments, market information is needed. This information concerns the customers within that particular segment. Especially for the third level of selecting the segments, information about the actual customers within the segment is needed. In addition, this information is needed as input for the next step of the framework, mapping out different scenarios about the segment for Kavee. Gathering market information is primarily based upon the parameters mentioned in the third level of the segment selection process. The actual gathering of information will be performed using several techniques described at the next paragraph of this chapter. Collecting the data needed regarding certain segments will be performed in the next chapter.

5.1.6 Competitor analysis

One of the parameters used while selecting the segments using the SEM is based upon the competition within that segment. In addition, scenarios about the segment and the position of Kavee within that segment will have to be made. For the latter, the competitor analysis has to be performed more thoroughly. The competitor analysis combined with the market information of that particular segments form the input for the different scenarios about the position of Kavee within that segment. The analysis will be performed as a case within the next chapter which will clear out its functioning.

5.1.7 Scenario’s about the segment and Kavee

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Master Thesis Page 39 of 72 analysis, a market share forecast will be mapped out. Based upon this forecast, an indication about the market share of the aluminum cylinder within that segment is given.

5.1.8 Unique selling proposition

One of the requirements for a unique selling proposition to be mapped out is to have a proper understanding of the market your company is competing in. Based upon the data gathered during the market segmenting process and upon the unique selling points of the product itself, the information needed to map out the unique selling proposition is available and the questions mentioned during the theoretical background can be answered. The unique selling proposition can be seen as a summary of all the knowledge collected during the earlier stages of this framework. Translating the knowledge into the unique selling proposition will enable Kavee to adjust their strategy in order to be able to provide additional value to the customer.

5.1.9 Value for the customer

The goal of the framework was to create additional ‘value’ for the customer based upon a new product or a new market entry. The framework presented segments the market into different sub-markets. At the end of the framework, a selection of segments is presented in which the product, in the case of this research the aluminum cylinder, delivers additional ‘value’ to the customer.