Business Case Analysis

MEMO

Date: 9 October 2014

To: KIOTO Group Senior Management
From:
Re: Your deteriorating position in the global solar thermal market race
European market is changing, your customers are backward integrating into your own business,
the Chinese are dominating through price dumping and while your lobbying efforts are
admirable, do you really think it is enough to put the Chinese dragon to rest? Emerging markets
show high potential particularly due to your tremendous efforts in landing the KSA tender and
establishing a track record in the region. Your white label products got you so far but is it still the
right approach in these changing times? Especially when the middle men are pocketing up to
82% between themselves, leaving you with a modest 10% margin.
1. PROBLEM: What is the main (underlying) problem/opportunity in this case?
In the face of the intense pressure from competition, whether it be the Chinese price dumping strategy or the new threat
from the backward integration of heating companies, and the inefficiency of the current distribution chain via plumbers
and installers that is hiking up the cost, KIOTO Group has to decide whether it is enough to rely on their technological and
quality advantages, this requires a deeper look into what kind of product(s) to focus on and who is their customer really
(wholesale vs retail) and where is this customer located in order to establish a strong competitive position that will
generate a strong market share and sustained sales and profit growth.
2. ISSUES: What are all of the issues relevant to this case?
Chinese are dominating the photovoltaic (PV) market with their low prices, made possible by the significant
decrease in production cost of PV, price dumping strategies, low labour costs, no duty tariffs in European markets
for Chinese imports, and government backed investments into Chinese companies. Establishing a 70% market
share in Germany alone. To put it in perspective, GREENoneTEC made 40% of its business in Germany.
Growth in the European market has been artificially inflated by government subsidies. Subsidies that have been
either reducing or cancelled altogether since market peak in 2008. German market suffered a 25% decrease in one
year when subsidies plans were stopped.
End customer prices for solar thermal energy products (not PV) are high due to the high margins demanded by
wholesalers (30%) and plumbers and installers added another 40% margin. GREENoneTEC though only gets a
10% margin. These high prices increase the threat from cheaper substitutes such as gas or electric water heaters.
The company prides itself with having a seamless supply chain and effective logistics services, a well trained
permanent production team, optimized manufacturing processes to achieve both volume and flexibility and
significant investments into R&D and innovation that produces a high quality solar thermal system.
60% of newly installed collectors in Europe were delivered by the heating industry, which typically consisted of
large companies, more and more of these companies were implementing their in-house productions of collectors.
Turning them into competitors and forcing the company to seek new customers outside of the heating industry.
3. ANALYSIS: Use a framework (PEST, Porter, SWOT, etc.) to analyze the issues in this case

New entrants (High pressure)

Low barriers to entry
Differentiation based on quality and innovation for solar thermal energy products, PV is driven by low prices
Moderate capital requirements
Government subsidies incentives in some markets, 30% in China, high subsidies for PV in U.S.
These factors represent an attractive market that is easy to get into
Supplier power (Low pressure)
No threat of forward integration
Raw materials prices going up (Aluminum 50%, Copper 150%)
Suppliers are mainly raw material providers that are not likely to go into the solar energy business
Substitute products (Moderate pressure)
A lot of cheap electric and gas products
Fossil fuel prices are also going up, limiting the threat
The high end customer price is giving way to cheaper alternatives
Rivalry (High pressure)
A lot of competitors, especially from China using low prices to dominate market
Branded products business model in contrast to GREENoneTEC
Started claiming similar superior quality and offering long term guarantees and warranties
Fierce competition from China, especially in the PV market
Buyer power (High pressure)
Customers are exclusively wholesalers and system integrators
Large profit margins of the customers
Threat of backward integration (Heating industry)
They buy in large volumes, giving them the power to negotiate lower prices and rebrand and sell for high margins
This analysis shows an unattractive market due to the high pressures from the different forces, in particular rivalry and
buyer power, however by changing the customer and targeting retail the buyer power will change dramatically and by
choosing which products to sell and avoiding competing on price with the Chinese the rivalry will also favorably change.
4. ALTERNATIVES: What solutions can you think of?
1. Drop the PV product line altogether, focus on solar thermal systems (ETC and flat panel collectors), keeping their
OEM business model while capitalizing on the change in smaller collector producers business model (due to cost
pressures) to a sales mainly function effectively turning them into customers of GREENoneTEC.
2. Drop the PV product line, forward integrate and cut out the middle men, by offering branded products to retail
customers, having an integrated installation and delivery process.
3. Offer PV products in the U.S. only (import tariffs will increase price of Chinese imports, and we have high
subsidies for PV), focus R&D efforts on high efficiency, simplicity of the solar system that can be sold as a DIY
IKEA like kit.
5. RECOMMENDATIONS: What would you do? Why?

We recommend alternative number two, KIOTO Group strength lies in its R&D and innovation that is producing a quality
product with high efficiency. Leveraging this better product, GREENoneTEC can differentiate itself from the other
brands, while at the same time offering a competitive price since the huge markups by wholesalers and system installers
are taken out and achieving better profit margins. Competing with the Chinese in the PV market on price is a losing game,
and competing on the basis of quality is where GREENoneTEC can properly leverage its strength.
Alternative one on the other hand, keeps the power in the hand of the buyer as they control the price and reap the benefits
of the high profit margins borne by the end customer.
Alternative three can be used as a bridging point to reach alternative number two, by focusing the companys energy on a
market that is still demanding PV and offering high subsidies for it while defending itself against the Chinese price
dumping strategies by imposing high import tariffs. The R&D efforts in simplifying the system to a DIY difficulty level
will surely benefit the installation team and reduce their costs.