BSOD TEDO EMM 2008

MARKET ENTRY STRATEGY THE CASE OF AB AXEL CHRISTIERNSSON

1. Description of company activities AB Axel Chrstiernsson (AC) is a manufacturer of lubricating greases. The company is located close to Gothenburg, Sweden. History of the company dates back to 1888, when the first formulations for high performance greases for the Swedish steel- en paper mills were developed and manufactured. The company employs 100 persons, of which 15 in the grease mill in Nol, 5 in research and development, 20 in ACs headquarters in Gothenburg and 60 around the country as sales and technical representatives. AC finds itself on a crossroad in its history: Sweden is about to join the EU, which means that EU competitors will get easier access to the Scandinavian markets. 1.1. Core business of the company AC develops, manufactures and markets high quality lubricating greases to various segments under the brand name Axel. AC sells 75% of its production in Sweden, the remainder in Norway, Denmark and Finland. AC is specialised in high temperature and high pressure greases for applications in steel- and paper mills and other heavy industries to which they sell directly. To the marine, automotive and other industries, AC sells through distributors and to the after market through retailers, repair shops and garages. AC offers an almost complete range of lubricating greases. There is a range of standard products, as defined in ISO 9002, backed up by a range of tailormade specialties. The quality of AC products is maintained at Swedish standards. While many producers add colours for cosmetic purposes, AC concentrates on transparency of product, enhancing quality, and purity of base oils used in production. AC sets standards for product specifications. Performances are improved through meticulous production procedures. This has an -accepted- negative impact on production flexibility and cost price. Bio-greases enhance Swedish image. For a small number of major oil companies (Q8, Statoil, Shell) AC produces some of the greases these companies sell, but do not (wish to) produce themselves. The company has positioned itself as the leading company in development and production of special lubricating greases with an emphasis on environmentally acceptable formulations (rape seed based oils) and production techniques, a major concern in Scandinavia. 1.2. Export cost structure of the company AC spends huge amounts in research and development. The company has a high marketing budget as well, positioning itself amongst the top companies in Scandinavia. Consequently, ACs cost price is relatively high, but given the

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high number of niche markets where AC can make high mark ups, the bottom line of the company is still positive. 1.3. Value creation activities of the company

Technology AC has always developed its own greases. In product development, it cooperates with 4 other independent grease manufacturers in the world: Brujarolas (Spain), Cato (USA), Fuchs (Germany), Nippon Grease (Japan), with whom they exchange data and test results. At intervals, AC launches new greases onto the market and is currently a world leader in the formulation of environmentally harmless greases based on rape seed oil. Since environmental concerns are important in Scandinavia, all greases are based on paraffinic, rather than aromatic lube oils. For some formulations AC has patents, but most of the basic formulations in the grease industry are public. Only some special variations for demanding applications are kept as a trade secret. AC has developed a number of high tech greases for very special applications together with OEMs or end users, like a low temperature grease for the rotating solar panels of the Hubble satellite (with NASA), a grease to prevent the ink from moving up and down in high end market ballpoints (with Parker) and highly water resistant submarine body greases to deflect sonar (with defence industries). AC has licensed its formulations and manufacturing technology to a grease manufacturer in Australia, for which they receive a royalty on production figures. Production AC has a manufacturing mill in Nol, close to Gothenburg with a production capacity of 5000 MTY. Production of greases is a delicate process. Even with the best lithium- or calcium based formulations, the final end product still can underperform, due to flaws in the manufacturing process. Production methods are similar to those of soap making, temperature curves and duration being the critical success factors. AC has developed cooking vessels in combination with the OEM, particularly advising on the stirring mechanisms. Marketing As part of the marketing-mix, product quality is seldom explicitly used: it speaks for itself. Most greases are sold to the automotive-, steel-, paper-, marine-, transport- and aviation industries. To these segments, AC sells it greases under the brand name Axel through whole sellers, distributors, engineering- and maintenance companies or through garages and repair shops. Large industries, particularly the famous steel- and paper mills in Sweden, are catered to directly by a special AC representative. Greases are sold in 55 gallon drums, pails, tins and cartridges for grease guns. For three major oil companies who have operations in Scandinavian markets, AC produces a number of special greases, which are packed under the label of the customer (Q8, Statoil, Shell). The major oil companies cannot and will not invest in the development and production of these greases, since they only represent 3% of their total luboil sales. The relation with these majors is a delicate one, since AC is both supplier and competitors in a number of market segments. Shell calls AC a necessary evil.

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Logistics Base lubricating oils are sourced from major oil companies, located in Sweden; all other ingredients have to be imported, sometimes from USA and Japan. Most of ACs sales are delivered to the customer by third party transport companies. Distributors keep an average stock of 2-3 months, giving AC a relatively easy production scheme. AC keeps a small emergency stock at the mill, mainly in cartridges. Together with a large steel mill in the north of Sweden AC is developing a system for bulk deliveries of 5-10 mt. Support Product service is crucial in this business, particularly application engineering. Wrong application of lubricating greases leads to machine failures, production interruptions and sometimes huge losses in capital equipment. In that sense, some greases are bottle-neck products. Extensive product service is given in the form of: Product specification sheets Technical documentation o Material Safety Data Sheets, Vendor sheets, Hazard rating sheet Product application guides Application advise Sample sets Test reports, publications In the grease plant in Nol, AC has a special conference room where employees of end user companies are invited for workshops on Lubrisense, the art of lubricating grease, special application engineering courses. AC has 4 application engineers who cover all large end users in the Scandinavian market. AC guarantees its products, but no official document is made up on this.

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2. Description of target market in general Sweden was about to enter the EU (90s). This would have major consequences for AC, given the fact that the Scandinavian market till now considered ACs back yard- would open up for other competitors from Europe. On the other hand, there could be potential markets for AC on the continent, but some fierce competition could be expected from the independent manufacturers and the major oil companies. A too aggressive policy in Europe could backfire on the relationships with two of ACs main customers, Shell and Q8, who both had operations throughout the EU territory. 2.1. Potential market segments Given the political situation of Sweden entering into the EU, AC had to consider its options to enlarge its actual customer base towards the European continent. Given the nature and price of lubricating grease, the economical range of transport is limited to 1000 km overland. Segments are identical to the ones in Scandinavia (automotive, transport, paper, steel, marine, aviation, defence, etc) Four of the traditional five forces from the Porters diamond model apply in AC's situation: Rivalry amongst existing competitors Bargaining power of suppliers Bargaining power of buyers Threat of substitute products 2.2. End user/industry requirements Major shifts in grease Changes in the automotive market for grease lubrication : this 1956 demand had taken Chevrolet Bel Air left the assembly place in the automotive lines with 250 grams of grease in industry, where lubricaeach front wheel bearing with relubrication intervals of 3000 tion intervals and the miles. His successor, the new Bel use of alternative fricAir concept vehicle (below) will tion materials drasticalleave the assembly lines in 2002 with 7 grams of grease in each ly reduced the demand bearing for life time lubrication. for lubricating greases (one source speaks of a factor 10). Design The EU market is less sophisticated than the Scandinavian market in terms of technology and innovation. Most of the steel- and paper mills on the continent are obsolete, contrary to the Swedish ones, which are state-of-the-art 21 st century operations. Maintenance costs are obviously higher and lubrication intervals are equally high, but the types of greases used are middle-of-the-road.

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Quality Same considerations as with design. In general, the EU market is less quality conscious than the Scandinavian market. This is also reflected in the prices. Same process quality assurance requirements as in Scandinavia apply. AC had just obtained ISO 9001 certification, but in Scandinavia, ISO was considered a paper tiger and a mere administrative assurance system. One of the OEMs that AC catered to (SKF) in fact refused to certify for ISO and presenting their markets with their own SKF quality system. Speed Distribution patterns in the EU are more sophisticated. Particularly the automotive industry was infected by the Ignacio Lopez 1 virus, upgrading JIT to the highest standards of business models. Everybody in the supply chain and specially the major oil companies would demand weekly deliveries. Image Grease has a dirty image, but in the EU, little has been done to convert this image into a clean one by using natural based oils, reducing intervals and designing closed circuit lubricating systems. Grease is an exceptionally low interest product, making it hard to evoke any serious interest form buyers and end users. In industrial markets, buyers and end users care little about branded products; the image of the supplier is the critical success factor for sales. In some consumer segments, branded greases (Castrol) have managed to appeal to a certain type of end users (races, rallies, rally cross). Service As in the Scandinavian market, the after sales service, particularly in application engineering and training, is crucial for these types of products. In fact, ACs service activities in Scandinavia are unique; none of the competitors on the EU mainland is spending the same amount of time and money in this activity. 2.3. Price structures In general, prices for commodity greases are similar in the EU and Scandinavia. However, the prices for specialty greases core business of AC- are lower in the mainland of the EU compared to Scandinavia (more competition). There is a huge variation in pricing strategies. While a common wheel bearing grease for trucks may be sold at 8/kg (retail price), some special application greases can go as high as 300/kg. AC sells its ballpoint grease to Parker at a factory sales price of 44/kg. The better part of this price is positioning, since it is a simple low pressure, medium temperature grease, but made from transparent oils with a colouring agent, which sells to other larger- segments at 12/kg. Major oil companies have major interests in lubricating oils than in greases. Consequently they hardly consider the effects of price policy in their base oils (approx. 60% of total cost of grease) on the purchasing cost of greases. In negotiating process for base oils with grease manufacturers, they give priority to the gross margin on base oils rather than the profits on greases, bought from the same manufacturers.

Ignacio Lopez tortured suppliers of VW and GM (where he occupied higher management positions) by telling them : We dont keep any stocks and any personnel in warehouses, but I want you to deliver a part every 26 seconds to the production line. How you do it, is your problem, our doors are open

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2.4. People/planet Municipal governments set standards for maintenance products and equipment. Environmentally harmless products are now obligatory in public maintenance. This creates a growing demand for biodegradable greases for lawn-cutters, chain saws, tractors a/o. Regulations on oil spill particularly affect commercial transport. Strict EU regulations are applicable to type and use of lubricants for locks and bridges. The Swedish image of AC helps the company to position itself as a leader in environmental responsibility on lubrication. Grease in itself is not a very dangerous product, provided it is made of paraffinic oils. Some elderly application engineers used to test the quality of greases by actually tasting small samples! The production must take place in closed vessels and AC is one of the few manufacturers that comply with this requirement. 2.5. Macroeconomic data The lubricating grease market is a take away market. From a global perspective, there is no growth. Growth figures in the EU are negative. In South East Asia growth figures are positive, due to global shifts in industrialization. Volumes on production and consumption are hardly available. The major oil companies -with an odd exception- are not too interested in grease market figures, and the independent manufacturers -often medium sized companies- do not have the resources to investigate markets, with the exception of one German company. Nevertheless there is a fair idea of grease figures, based on extrapolation of some available data. By extrapolation of these figures, it is assumed that the EU market for grease is around 130.000 MTY. Total installed capacity is around 150.000 MTY, but this figure cannot be used to assess excess capacity, since major grease producers ship greases intercontinental. Actually, the combined major oil companies have a 75% market share in grease lubricants in the EU. The majors have a 90% market share in the product group "enhanced commodities", where AC's main R&D efforts and expertise are combined. Independent manufacturers would hold the majority of special grease markets. 2.6. Competitors

Existing competition Specialized lubricating grease producing companies. AC Most of these companies (S) TOTALFINAELF (F) limit their marketing and FUCHS sales activities to domes(G) RHEINER tic markets. They did not (G) yet constitute a major SHELL threat in ACs home (UK/NL) EXXON/MOBIL market Scandinavia, but (USA) would strongly resist ACs export ambitions in other EU markets. In fact, there were a PETROGAL number of independent TEXACO (E) (USA) plants in Western Europe having difficulties to survive in the market. Some of them were family owned with hardly sufficient

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resources to invest in new technologies and/or production facilities. These companies would have a hard time to survive in the shrinking, but demanding markets of the 21st century. Ironically, one of ACs two major target groups constitutes its major competitor as well: the grease producing major oil companies. The need to preserve employment and the threat of being presented with the bill for environmental clean up prevents majors from closing down loss-making grease plants. This maintains the excess production capacity for greases in the EU. The threat of new entrants or backward or forward linkage in the supply chain by potential customers or suppliers was hypothetical, due to growth forecasts and installed excess capacity in the grease market. As we have seen, the grease market was a declining market and the contribution to overhead is not interesting enough to justify investments in grease production. Only the existing manufacturers with captive volumes can afford the R&D effort for the production of high tech greases that give an extraordinary gross margin. Substitute products Friction sensitive parts are increasingly made of Teflon coated or similar materials, which do not need lubrication. Materials and advanced technology, particularly in the automotive sector, have increased lubrication intervals spectacularly, reducing the demand for grease. ----------------------------------------------------------------------------------------Assignment 1. Export audit a. Do the confrontation matrix on Axel Christiernsson and the EU market b. Find the focus and challenge areas c. Decide whether AC should enter into the EU mainland markets 2. Overall strategy a. What should ACs strategy/business model be to enter the EU market? b. What strategic alliances or options do you see? c. What would be the core product/market combination(s)? 3. EU market entry strategy a. Identify market segments b. Distribution strategy i. Identify the trade channels to the segments c. Promotional strategy i. Unique selling proposition ii. Positioning iii. Branding iv. Promotional tools d. Pricing strategy i. Apply the Kraljic product portfolio to AC.