A descripation on Mes - Axel

7/28/2019 A descripation on Mes - Axel

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MARKET ENTRY STRATEGYTHE 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 companydates back to 1888, when the first formulations for high performance greasesfor the Swedish steel- en paper mills were developed and manufactured. Thecompany employs 100 persons, of which 15 in the grease mill in Nol, 5 in

research and development, 20 in ACs headquarters in Gothenburg and 60around 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 Scandinavianmarkets.

1.1. Core business of the companyAC develops, manufactures and markets high quality lubricating greases to

various segments under the brand name Axel. AC sells 75% of itsproduction in Sweden, the remainder in Norway, Denmark and Finland. AC isspecialised 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 distributorsand 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 tailor-made specialties. The quality of AC products is maintained at Swedish

standards. While many producers add colours for cosmetic purposes, ACconcentrates on transparency of product, enhancing quality, and purity ofbase oils used in production.AC sets standards for product specifications. Performances are improved

through meticulous production procedures. This has an -accepted- negativeimpact on production flexibility and cost price. Bio-greases enhance Swedish

image.For a small number of major oil companies (Q8, Statoil, Shell) AC producessome of the greases these companies sell, but do not (wish to) producethemselves. The company has positioned itself as the leading company in

development and production of special lubricating greases with an emphasison environmentally acceptable formulations (rape seed based oils) andproduction 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 ahigh marketing budget as well, positioning itself amongst the top companiesin 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 bottomline of the company is still positive.

1.3. Value creation activities of the company

TechnologyAC has always developed its own greases. In product development, itcooperates 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 launchesnew 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 arebased on paraffinic, rather than aromatic lube oils. For some formulations AChas 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 applicationstogether with OEMs or end users, like a low temperature grease for the

rotating solar panels of the Hubble satellite (with NASA), a grease to preventthe ink from moving up and down in high end market ballpoints (with Parker)

and highly water resistant submarine body greases to deflect sonar (withdefence industries).AC has licensed its formulations and manufacturing technology to a greasemanufacturer in Australia, for which they receive a royalty on production

figures.

ProductionAC has a manufacturing mill in Nol, close to Gothenburg with a productioncapacity of 5000 MTY. Production of greases is a delicate process. Even withthe best lithium- or calcium based formulations, the final end product still can

underperform, due to flaws in the manufacturing process. Production methodsare similar to those of soap making, temperature curves and duration beingthe critical success factors. AC has developed cooking vessels in combinationwith the OEM, particularly advising on the stirring mechanisms.

Marketing

As part of the marketing-mix, product quality is seldom explicitly used: itspeaks for itself. Most greases are sold to the automotive-, steel-, paper-,

marine-, transport- and aviation industries. To these segments, AC sells itgreases under the brand name Axel through whole sellers, distributors,

engineering- and maintenance companies or through garages and repairshops. Large industries, particularly the famous steel- and paper mills inSweden, are catered to directly by a special AC representative. Greases aresold in 55 gallon drums, pails, tins and cartridges for grease guns. For threemajor oil companies who have operations in Scandinavian markets, ACproduces a number of special greases, which are packed under the label of

the customer (Q8, Statoil, Shell). The major oil companies cannot and will notinvest in the development and production of these greases, since they onlyrepresent 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 marketsegments. Shell calls AC a necessary evil.

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LogisticsBase lubricating oils are sourced from major oil companies, located inSweden; all other ingredients have to be imported, sometimes from USA andJapan. 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 emergencystock at the mill, mainly in cartridges. Together with a large steel mill in thenorth 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, productioninterruptions 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 whereemployees of end user companies are invited for workshops on Lubrisense,

the art of lubricating grease, special application engineering courses. AC has4 application engineers who cover all large end users in the Scandinavian

market. AC guarantees its products, but no official document is made up onthis.

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2. Description of target market in general

Sweden was about to enter the EU (90s). This would have major consequencesfor 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 fiercecompetition could be expected from the independent manufacturers and themajor oil companies. A too aggressive policy in Europe could backfire on the

relationships with two of ACs main customers, Shell and Q8, who both hadoperations throughout the EU territory.

2.1. Potential market segmentsGiven the political situation of Sweden entering into the EU, AC had to considerits 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 inScandinavia (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 greasedemand had taken

place in the automotiveindustry, where lubrica-tion intervals and theuse of alternative fric-

tion materials drastical-ly reduced the demand

for lubricating greases(one source speaks of afactor 10).

DesignThe EU market is less

sophisticated than theScandinavian market interms of technology andinnovation. Most of the

steel- and paper mills on the continent are obsolete, contrary to the Swedishones, which are state-of-the-art 21st century operations. Maintenance costs areobviously higher and lubrication intervals are equally high, but the types ofgreases used are middle-of-the-road.

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Changes in the automotive marketfor grease lubrication : this 1956

Chevrolet Bel Air left the assembly

lines with 250 grams of grease in

each front wheel bearing with

relubrication intervals of 3000

miles. His successor, the new Bel

Air concept vehicle (below) will

leave the assembly lines in 2002

with 7 grams of grease in each

bearing for life time lubrication.


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QualitySame considerations as with design. In general, the EU market is less qualityconscious than the Scandinavian market. This is also reflected in the prices.Same process quality assurance requirements as in Scandinavia apply. AC hadjust obtained ISO 9001 certification, but in Scandinavia, ISO was considered a

paper tiger and a mere administrative assurance system. One of the OEMs thatAC catered to (SKF) in fact refused to certify for ISO and presenting theirmarkets with their own SKF quality system.

SpeedDistribution patterns in the EU are more sophisticated. Particularly the

automotive industry was infected by the Ignacio Lopez1 virus, upgrading JIT tothe highest standards of business models. Everybody in the supply chain andspecially the major oil companies would demand weekly deliveries.

Image

Grease has a dirty image, but in the EU, little has been done to convert thisimage into a clean one by using natural based oils, reducing intervals anddesigning closed circuit lubricating systems. Grease is an exceptionally low

interest product, making it hard to evoke any serious interest form buyers andend 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. Insome consumer segments, branded greases (Castrol) have managed to appealto a certain type of end users (races, rallies, rally cross).

ServiceAs in the Scandinavian market, the after sales service, particularly in application

engineering and training, is crucial for these types of products. In fact, ACsservice activities in Scandinavia are unique; none of the competitors on the EUmainland is spending the same amount of time and money in this activity.

2.3. Price structuresIn 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 themainland of the EU compared to Scandinavia (more competition).

There is a huge variation in pricing strategies. While a common wheel bearinggrease 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 afactory 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 fromtransparent oils with a colouring agent, which sells to other larger- segments at

12/kg. Major oil companies have major interests in lubricating oils than ingreases. Consequently they hardly consider the effects of price policy in theirbase 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 priorityto the gross margin on base oils rather than the profits on greases, bought fromthe same manufacturers.

1Ignacio 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/planetMunicipal 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, chainsaws, tractors a/o. Regulations on oil spill particularly affect commercial

transport. Strict EU regulations are applicable to type and use of lubricants forlocks and bridges. The Swedish image of AC helps the company to positionitself 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 byactually 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 dataThe 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 oilcompanies -with an odd exception- are not too interested in grease market

figures, and the independent manufacturers -often medium sized companies- donot have the resources to investigate markets, with the exception of one German

company. Nevertheless there is a fair idea of grease figures, based onextrapolation of some available data. By extrapolation of these figures, it isassumed that the EU market for grease is around 130.000 MTY. Total installedcapacity 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 "enhancedcommodities", 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 competitionSpecialized lubricating

grease producing compa-nies.

Most of these companieslimit their marketing and

sales activities to domes-tic markets. They did not

yet constitute a majorthreat in ACs homemarket Scandinavia, butwould strongly resist ACsexport ambitions in otherEU markets.

In fact, there were anumber of independentplants in Western Europe

having difficulties tosurvive in the market. Some of them were family owned with hardly sufficient

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SHELL

(UK/NL)

TEXACO

(USA)

PETROGAL

(E)

AC

(S)

FUCHS(G)

TOTALFINAELF

(F)

EXXON/MOBIL

(USA)

RHEINER

(G)


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resources to invest in new technologies and/or production facilities. Thesecompanies would have a hard time to survive in the shrinking, but demandingmarkets of the 21st century.Ironically, one of ACs two major target groups constitutes its major competitoras well: the grease producing major oil companies. The need to preserve

employment and the threat of being presented with the bill for environmentalclean up prevents majors from closing down loss-making grease plants. Thismaintains 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 andinstalled excess capacity in the grease market. As we have seen, the grease

market was a declining market and the contribution to overhead is notinteresting enough to justify investments in grease production. Only the existingmanufacturers with captive volumes can afford the R&D effort for the productionof high tech greases that give an extraordinary gross margin.

Substitute productsFriction sensitive parts are increasingly made of Teflon coated or similarmaterials, which do not need lubrication. Materials and advanced technology,

particularly in the automotive sector, have increased lubrication intervalsspectacularly, reducing the demand for grease.

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Assignment

1. Export audita. Do the confrontation matrix on Axel Christiernsson and the EU marketb. Find the focus and challenge areasc. Decide whether AC should enter into the EU mainland markets

2. Overall strategya. 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 strategya. Identify market segments

b. Distribution strategyi. Identify the trade channels to the segments

c. Promotional strategyi. Unique selling propositionii. Positioningiii. Brandingiv. Promotional tools

d. Pricing strategy

i. Apply the Kraljic product portfolio to AC.

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A descripation on Mes - Axel

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