Value selling at SKF service

Strategic marketing case 3

Stheffany Godoy G
Ella Leppänen
Weiyi Liu
Agenda

Bearing market

SKF’s business environment

Problem identification

Our suggestion

Short-term solution

Short-term implementations

Long-term suggestions
The global bearings market is about $40 billion
Global Market Global Presence

• It changes in pace with growth in world GDP and business cycles

• Bearings are used in a wide range of applications because they reduce friction, prevent
product failure, and improve ecciciency
• They are key elements in e.g. motors, wheels, and engines
• SKF is strongest in Western Europe (51%) and Asia (19%)
Changing bearing market
Competitors Landscape
• SKF is selling to a challenging market facing the
Other competitors
incoming economic downturn
follow tightly

• Trend 1: A growing concentration of distributors

and end users due to M&A

• Trend 2: End user organizations: shop for “good

enough” quality at the lowest prices

• Trend 3: Gradually losing power in developed Lost the first

place in the US
US Local Market Share
market due to the fierce competitions to Timken

• Trend 4: The growing needs for aftermarket repair

and replacement sales (30% of global demand)

• Trend 5: Large discounts from distributors,

commoditizing everything
SKF’s business environment
• SKF has three divisions:
• Industrial (32%), Automotive (35%), Service (33%)
• Net sales of $8,2 billion
• SKF performs well
• Leads the international market  the market share of almost 20%
• Invented the self-aligning ball bearing
• SKF has a unique offering and competitors don’t match their portfolio
• They have deployed a computer-based sales tool called DSP
(Documented Solutions Program)
• Internal resistance toward service approach and DSP
Distributors have a tough situation in changing
markets
SKF has 7,000 independent distributors worldwide,
which means 80% of their channels for end consumers.
There are 1,200 distributors, delivering SKF services to
50,000 end consumers in US.

Challenges for distributors:

• Their margins have dropped due to tough competition
• They have affected by the downturn period of the industry
• Lately, end users have bypassed distributors to directly
reach manufactures
SKF has a relationship with Steelcorp through ITC

8% of ITC’s sales Key account

SKF ITC Steelcorp
(producer) (distributor) (end user)
Fixed 10% margin 50% of total purchases are bearings
33% of those are SKF bearings

• ITC’s second largest supplier
in the US
• Top quality bearing
manufacture under the
pressure of market low prices.
• New value proposition based
on service, customer focus
• Build-up inventory as a result
of economic downturn.
• ITC needs the high prices from
SKF for margins
• The most important channel
partner for SKF in the US
• Has not yet agreed to use DSP
• World’s third-largest producer of
raw steel and steel-based
products → $30 bn sales
• Facing the negative effect of
economic downturn
• Never directly contacted with SKF
→ all interaction through ITC
• Invited SKF to participate in the
reverse auction
SKF faces a couple of problems

Main problem

In order to reduce costs Steelcorp has invited all its suppliers to participate in the reverse auction.

Should SKF participate in it or not?

How to minimize the risk of Should they continue the Which market should they
damaging the relationships transformation to solution- focus on?
with Steelcorp and ITC? provider?
There are pros and cons related to the decision
whether to participate in the reverse auction or not

Participating in the reverse auction Not participating in the reverse auction

+ Relationships with ITC and Steelcorp stay + No worries about one-off exception
untouched becoming a common way
+ SKF has a possibility to win the reverse + No damage to SKF’s value and solution
auction and to keep its end customer selling strategy

- Losing their value selling approach
- Competition shifts to price
- Falling into a commodity trap
- One-off exception may become a
common way as other customers might
find reverse auctions to be profitable
- Losing out their $4 million annual orders
from Steelcorp
- Losing the part of the business with ITC
- Damages to the relationships between
SKF, ITC and Steelcorp
SKF has a good value proposition which would be
harmed by the reverse auction

• With DSP they can measure the value of

their products and translate it to numbers

• For example, for the investment of $2.29

million SKF’s high-performance berings and
related services can generate a return of

Investments
nearly 500% in 54 months
Reduced failure rate

Benefits
Longer life
Less frequent replacement
Savings in labor, material, Premium paid for SKF
inventory, etc. bearings
End user training Additional tools
Condition monitoring Add-on service
SKF Service should stick with the strategy and
capabilities they already have
Mindset of SKF

• They don’t seek business from customers whose only decision-

making criteria is price
Don’t
• In an increasingly competitive market, they give a high priority to
strengthening customer relationships participate
• Their effective sales people have good skills in building and
in the
nurturing close relationships with their distributor accountants
for long-term results reverse
• They have recently deployed DSP for quantifying and measuring
end-user value from using their bearings and related services
auction

• Typically, their bearings have significant price premiums

SKF needs to understand the reason behind the
invitation to the reverse auction

There has been a sharp decline in Steelcorp’s sales and

profitability as a result of the recent economic downturn Offer help
to achieve
It plans to cut its global workforce
the target
It plans to search for low-cost suppliers that could
meet its target of 20% of savings for total purchases savings and
It plans to reduce the number of producers in all cost
categories
reductions
As a short-term solution SKF should arrange a
meeting
Don’t participate in the reverse auction but arrange a meeting
with ITC and Steelcorp

The purpose of the meeting

• Demonstrate the value measurements and delivery with DSP and

offer Steelcorp help to achieve their cost reduction target by
highlighting the total cost of ownership

If the meeting doesn’t go well and Steelcorp still wants the reverse auction

• Participate, as a one-time exception, in the reverse auction in order

to maintain the good relationships with ITC and Steelcorp
• Participating enables the chance to win the reverse auction
Key steps for the meeting

Convince ITC and Steelcorp for the meeting to pitch the value
proposition: Products & Services.

Use CNA and DSP to show savings and ROI, and to give a not seen
before offer: discount on current volumes and higher discounts for extra
volumes, product credit = shortfalls in savings guaranteed.

Remind the advantages of having SKF brand reputation shared: “intel

inside” effect.

Explain that price is not the only relevant criteria since bearings are
key components in many applications and through the offer they gain
higher cost savings.
 If the meeting goes well it leads to a win-win
situation
SKF
(producer)
- Strengthens the relationship
with ITC and Steelcorp
- Maintains or increases the
sales to Steelcorp
- Highlights the service provider
reputation
- Motivates the internal mindset
change toward service
approach
ITC
(distributor)
- ITC can keep Steelcorp happy
- They can realize the value of
DSP to convince their
customers and increase the
sales
- They don’t lose the high
margins from SKF
Steelcorp
(end user)
- SKF solutions can help
Steelcorp with the economical
downturn
- Reliable supplier and products
- Customized solution
- Possibility to negotiate
- Cost reductions through
condition monitoring
In the long-term SKF needs to focus on the service
approach
• Share the benefits of DSP (now less than 15% of end users have been
introduced to DSP) and increase direct sales (through complementary
channels), but reroute customers to distributors

• Reinforce the movement from selling products to providing solutions

• Educate distributors and end users from price to value through service
based DSP and CNA

• Focus on positioning in the markets where the brand is already strong

(Westren Europe and Asia), and exploit the brand recognition in emerging
markets and create and strengthen the relationships with distributors

• Eliminate the internal barriers for service transformation

• E.g. through bonuses based on service sales
 Appendix A, Company overview 1

Company

-Sweden company;
Landscape -Net sales 63.4M and 20% market share -- the largest producer of bearings;
-3 different divisions.

Product
Reduce the friction between the moving parts of an engine, a motor or a
Primary Function
wheel
-Prevent product failure;
Advantages -Improve efficiency;
-Reduce energy consumption and maintenace costs.

Application Airplane engines, gas turbines, pumps, washing machines and roller skates
Range from 10% to 50% depends on the criticality of the customer's
Premium
application
Appendix B, Company overview 2
Division

Industrial, Automotive, Service,

32% of sales 35% of sales 33% of sales
customer

OEM customers OEMs Industrial end users

Target

(factories)

Machine tools Cars and trucks Replacement bearing

Application

Power generations Vehicle repair and Aftermarket services

Oil and gas maintenance market
Mining Home appliances
Power tools
Examples

Caterpillar General Motors British Petroleum

Metso Ford International
Siemens Black & Decker Paper
Nestle
Local decision for Direct deliver (20%)
Notes

pricing Distributors (80%)

 Appendix B, Adopting DSP

Before DSP After DSP By comparing the differences between adopting and
not adopting DSP, we discover the following trends by
Pump Population
523 523 establishing several assumptions:
(in units)
Reduction in Pump
348.67 1,046 Assumption 1: Assume the pump population keeps
Failures
the same level and ignore the possible synergy created
Cost of Failure 4,552,401.33 13,657,204
by adopting the system
Components 4,154,921.33 12,464,764
Assumption 2: Assume the reduction in pump failures
Labor 397,480 1,192,440 is proportional to the MTBF, so does other related costs

Total Costs 4,552,401 13,657,204 Assumption 3: No reduction in solution investment

SKF Solution Trend 1: Deduction in MOH and raw material will
2,287,677 2,287,677
Investment enhance the managerial accounting performance and
Net Benefit 2,264,724 11,369,527 leads to the accurate decision-making
SKF Solution ROI
99% 497% Trend 2: Huge improvement in ROI to meet the internal
over 54 months
rate of return requirement if using this as the hurdle rate
 Appendix C, SKF sales calculations
Current situation
SKF Service US sales $ 275 000 000,00 (Number from the case)
ITC sales $ 2 100 000 000,00 (Number from the case)
SKF gets from ITC 0,08 $ 168 000 000,00 (SKF gets 8% of ITC's total sales)
ITC accounts for 61,09 % of the total Service sales (SKF gets from ITC / SKF Service US sales)
Steelcorp total purchase from ITC $ 24 000 000,00 (Steelcorp total purchases from ITC)
Steelcorp total bearing purchase from ITC 0,5 $ 12 000 000,00 (50% of Steelcorp's total purchases are bearings, number from the case)
Steelcorp SKF bearing purchase through ITC 0,33 $ 4 000 000,00 (SKF accounts for 33% of Steelcorp's bearing purchase)
After ITC's 10% margin, SKF gets from Steelcorp 1,1$ 3 636 363,64 (ITC gets 10% margin)
Currently, Steelcorp accounts for 1,32 % of the total Service sales ((SKF gets from Steelcorp - 10% margin to ITC)/SKF Service US sales)
Currently, Steelcorp accounts for 2,16 % of SKF Service sales from ITC ((SKF gets from Steelcorp - 10% margin to ITC)/ SKF gets from ITC)
Steelcorp total purchases accounts for 1,14 % of ITC total sales (Steelcorp total purchase / ITC total sales)
If Steelcorp bought only SKF bearings from ITC (like in case SKF wins the reverse auction)
Steelcorp total purchase after 20% savings $ 19 200 000,00 (Steelcorp's current purchase 12 M - 20%
0,8
Steelcorp bearing purchases after 20% savings $ 9 600 000,00 (Steelcorp's current purchase (12 M - 20%)*0,5
0,5
(ITC's bearings sales to Steelcorp after 20% purchase savings - ITC 10%
SKF would get (SKF total bearing sales to Steelcorp) $ 8 727 272,73
margin)
(SKF US total sales + SKF's total bearing sales to Steelcorp - SKF's current
SKF Service US sales would be $ 280 127 272,73
bearings sales to Steelcorp)
(SKF's total ITC sales + SKF's total bearings sales to Steelcorp - SKF's current
total SKF's ITC sales would be $ 173 127 272,73
bearings sales to Steelcorp)
(SKF total bearing sales to Steelcorp (after Steelcorps 20% savings) / SKF
the bearings sales would account for 3,12 % of total SKF Service sales
Service US sales)
(SKF total bearing sales to Steelcorp (after Steelcorp's 20% savings)/ SKF's
the bearings sales would account for 5,04 % of total SKF sales from ITC
ITC sales)
Appendix D, Reasoning why to participate in the reverse auction

Why the relationships with ITC and Steelcorp are so important that SKF should participate in
the reverse auction even though we first state that do not participate in

If the meeting doesn’t go well SKF should participate in the reverse auction, because
• They shouldn’t lose Steelcorp
• Steelcorp and ITC are among the SKF Service division’s largest customers
• Currently Steelcorp accounts for 1.32% of the total SKF Service sales which can be seen as a big
number since Steelcorp is a regular customer, and if SKF could be the only supplier for Steelcorp
(in case of winning the reverse auction), Steelcorp would account for more than 3% of the total
SKF Service sales which is even bigger amount (Appendix C)
• They shouldn’t harm the relationship with ITC because sales through ITC accounts for almost 62% of
the total SKF Service sales  ITC is a significant partner for SKF (Appendix C)
• SKF values good customer and partner relationships and not participating would harm them
• During economic downturn every single customer counts