SKF SERVICES – SHOULD WE GO DOWNSTREAM? ALEKSI HALTTUNEN, TAMARA HÜBER, JAVIER ORTIZ, LARI PELANNE

AGENDA 1. KEY ISSUES 2. INDUSTRY ANALYSIS 4. RECOMMENDATIONS & IMPLEMENTATION PLAN 3. STRATEGIC ALTERNATIVES

AGENDA 1. KEY ISSUES 2. INDUSTRY ANALYSIS 4. RECOMMENDATIONS & IMPLEMENTATION PLAN 3. STRATEGIC ALTERNATIVES

CURRENT SITUATION SKF is known for excellence and quality in production of bearings.  High prices, but the best quality in market.  Competitors are becoming low cost producers and prefered, with “enough” quality, but never as SKF.  In long term could be harmful Key partners in U.S. are ITC (Channel) and SteelCorp (End Customer)  Growing distributors and end users.  Mainteinance engineers lost influence and now end users prefer good enough but not that expensive.  End Users demand discounts and preferences when purchasing  Impacting on producer margins, and even bypassing distributors.

MARKET SHARE In U.S. represents only the 12% of the Mkt share. The big competitor is Timken, with 30% of Mkt Share

PROBLEM  Reverse aution: Lower Price bidder will won.  Price of selling v/s quality.  SteelCorp and ITC distributor are large customers  Relations may affect in a recessive market.  So, Accept or reject the offer?  Insight of changing market, so the solution has to be long term oriented.

AGENDA 1. KEY ISSUES 2. INDUSTRY ANALYSIS 4. RECOMMENDATIONS & IMPLEMENTATION PLAN 3. STRATEGIC ALTERNATIVES

BEARING INDUSTRY Price-oriented market in turbulent state

BEARING INDUSTRY – FIVE FORCES Substitution threat New entrant threat Buyer Power Supplier Power Compe tition Distributors and end-users are concentrating  Attaining more power New Chinese low-cost producers are entering the market

BEARING INDUSTRY – FIVE FORCES Substitution threat New entrant threat Buyer Power Supplier Power Compe tition Distributors and end-users are concentrating  Attaining more power ”Good enough” mentality is replacing quality  Market demand is shifting towards lower priced products New Chinese low-cost producers are entering the market Empowerment of those two forces fierce the rivalry in the market and lower the margins of bearing producers

AGENDA 1. KEY ISSUES 2. INDUSTRY ANALYSIS 4. RECOMMENDATIONS & IMPLEMENTATION PLAN 3. STRATEGIC ALTERNATIVES

TWO ALTERNATIVES AND THEIR CONSEQUENCES GO to Reverse Auction  Fear reputation damage  Competing on price is against SKF‘s strategy  Two possible outcomes 1. Win the auction with lowest price and low margins 2. Lose the auction Don‘t GO  Reputation and brand image will be obtained  Probably serious long-term ramifications for the relationship with Steelcorp Potential loss of $4 million of orders to lower-priced competitor 2.

MEASURING THE DOWNSTREAM OPPORTUNITY Attractiveness of Downstream Business Competing on price: Not very attractive Life cycle activity as multiple of product cost: high Importance of Customer Relationships ICT important key account Technology/ performance lead Power of Distribution Channel Degree of Channel Concentration: medium/ high 80% of service sales indirectly: Power of distributors high Rel. unattractive/ unimportant Attractive/ imperative Potentially troublesome Downstream Opportunity

MEASURING DOWNSTREAM OPPORTUNITY BUT: Take the current industry situation into account  Industry standard might change towards auctions  Potential loss of market share if reverse the proposal (competitors join the reverse auction)  Don‘t risk to loose position in the US market Conclusion of the framework Going downstream might be troublesome or not be a good choice

AGENDA 1. KEY ISSUES 2. INDUSTRY ANALYSIS 4. RECOMMENDATIONS & IMPLEMENTATION PLAN 3. STRATEGIC ALTERNATIVES

PRICING STRATEGY Example pricing  The initial price of the product could be lowered to win the auction  The high margins could be gained from the solutions  Higher proportion of services would actually create also a better margin overall *assuming same margins

IMPLEMENTATION 1. Step: Immediate actions  Meet with ITC and Steelcorp to show the value of services. Conduct CNA.  If the auction is still taking place, bid on product price and gain the margin from services afterwards.  Make sure Steelcorp buys the service  Leverage on Total cost of ownership model  See the auction as an opportunity to test new pricing model of the integrated solution 2. Step: Mid-term  Teach end users and distributors of the benefits of acquiring the entire solution  Increase the amount of incentives for sales people (now 80%)  Avoiding reverse auctions in the future  Concentrate on training the staff to sell solutions, not only the product  Invest more in DSP development to create more value for the customers 3. Step: Long-term  Change the dynamic of the industry toward integrated solutions  Maintain high overall margins by selling more integrated solutions  Be the number integrated solution for the customers  Develop a service platform for all bearings in the industry?

‘’DSP is our last defense in a commoditizing market’’

RECOMMENDATION  Go to the auction  Gain market share in bearings  Concentrate on service sales - surpass the distributors  Investigate new possibilities for DSP