Question

Choose an industry and a B2B vertical market maker that interests you. Investigate the site and prepare a report that describes the size of the industry served, the type of Net marketplace provided, the benefits promised by the site for both the suppliers and purchasers and the history of the company. You might also investigate the bias (buyer versus seller), ownership (suppliers, buyers, independents), pricing mechanism(s), scope, focus, and access (public versus private) of the Net marketplace.

Answer 1

VALUE ASSESMENT OF SULZER INDIA PUMPS (SNS PUMPS)

EXECUTIVE SUMMARY

Industry: In India pumps and valves industry are valued at Rs.5000 crores and Rs.4500 crores respectively. These industries are not only big on their own but they facilitate the productivity and growth of other industrial sectors as well. The exports of pumps and valves amounted to about US $ 1.55 billion, serving over 100 countries for different engineering services. The exports in these industries are growing at a rate of 10-12 percent per annum. This growth potential combined with the boost from the government is attracting many international players.

Company: Sulzer Pumps India Ltd. is one of the leading companies in manufacturing of pumps, mixers, compressors, agitators and aeration equipment for industrial application. The parent company Sulzer Ltd., originated in Switzerland is a well-established global market player in the B2B sector. The industrial application is basically of three types— Power generation segment, Oil and Gas segment, Water segment. Since their major chunk of business depends on export, so they have to maintain international standards. Their competitors include KSG Pumps Ltd, ITT India, SlowServe, Andritz etc.

POD: In such a highly priced product where customers seek for customization according to their needs at lowest price, Sulzer has managed to differentiate itself through Direct selling by removing resellers in between them and the customer, by providing only pumps and not processes and thus reducing the cost of engineering know-how from total price, by giving utmost importance to design stage for delivering high quality, and by being globally present at 22 factories and 100 types of products and ensuring close proximity to the customers.

Direct Selling and Customers: They have an augmented product, follow a skimming pricing strategy and initially sell through bidding on tenders. Gradually, they look for loyal customers and tries to transform the Transactional selling into Enterprise selling or Strategic selling. By mapping on the Loyalty Ladder, they have three kinds of customer— Switchers (60%), Undesirable customers (30%) and Most Valuable Customer (10%).

Value Proposition: For showing value proposition a product example called SNS Pumps is taken. SNS4-50 process pump was developed to replace normal slurry pumps used in mining sites. It was priced at EUR 16,000 and has an average life of 10 years. The NBA is BrownBros priced at EUR 9,875 with an average life of 8 years. SNS4-50 requires less oil lubrication and hence saves cost for oil and labor totaling around Euro 105 annually, and also due to high efficiency and low power consumption, it saves on energy cost of EUR 24,000 annually.

Value = Oil Savings + Labor savings + Energy savings= EUR 105 + EUR 24,000 = EUR 24,105. By using value in use equation, we get Optimum Price of Sulzer Pump = EUR 36,449.

Hence the price of EUR 16,000 is much lower than the value they are delivering to customer. Also SNS4-50 lead to lower TCO due to low initial cost, low installation cost, low operation cost, low maintenance cost, and low downtime costs.

INTRODUCTION

In every consumer offerings there are a lot of players involved to make that offering possible. The markets involved in all these transactions apart from the final one are called business-to-business markets. To understand these B2B markets better and to apply the theoretical concepts learned in B2B course, we have studied in detail about the businesses of Sulzer Pumps India Ltd.

Company

Sulzer is one of the leading manufacturers of pumps, mixers, compressors, agitators and aeration equipment in the country. They have categorized pump industry into three major segments. They are oil and gas, power, and water industries. As they export large portion of their production, hence they comply with all the international quality standards. Their competitors include KSG Pumps Ltd, ITT India, SlowServe, Andritz etc.

Industry

In a manufacturing industry, pumps are used in large numbers, next only to electric motors. In India, pumps and valves industries are valued at Rs.5000 crores and Rs.4500 crores respectively. These industries contribute to significant growth of Indian economy. They serve majorly to industrial customers and the productivity of the core sectors of the economy depends upon these industries. The exports of pumps and valves amounted to about US $ 1.55 billion, serving over 100 countries for different engineering services. The exports in these industries are growing at a rate of 10-12 percent per annum. This growth potential combined with the boost from the government is attracting many international players.

Using porter’s five forces, the industry attractiveness is as follows:

• Bargaining power of suppliers:

In this industry, as each customer has different requirements, hence they prefer customization over standardization. So the manufacturers, to meet the needs of the customers in this industry, produce their own designs and products from the scratch. Due to this, they purchase only the basic raw materials from the suppliers but not any finished good. For example they buy iron but not casings. As these raw materials are commodities, the suppliers will have no bargaining power over these manufacturers. This makes the industry attractive.

• Bargaining power of buyers:

The company gets contracts basically through tender process. As there are many players in the country who are into manufacturing of pumps, the tendering process involves price competitions.So the lowest bidder, in most cases, wins the contract. In this case, the buyer has the at most bargaining power, as he will get the work done at the lowest price possible. In addition, Sulzer always maintains high quality standards. This shows that even under very low prices, as the buyers have much bargaining power, the manufacturers are bound to maintain strict quality standards.

• Threat of substitutes:

There is no perfect substitution for pumps in industrial use. Companies can hire humans to do the job, which a pump can do but larger amount of labor is required. In addition, humans cannot do many works that a pump can do. During recession, companies go on to purchase pumps with lower price to get the basic jobs done, as without pumps many of the industries cannot do their day-to-day operations.So the threat of substitutes is very minimal.

• Threat of new entrants:

Even though the industry sales work on tendering process, the customers also consider the quality standards. So the customers allow only well established companies\brands to participate in the tender process. Moreover, the industry is a capital-intensive industry, i.e., to build manufacturing plants and service centers and to hire experienced personnel, it requires lot of capital investment.

In addition, there should be a well-established R&D department to cater to the customer requirements of customization. Well-established companies will have a strong R&D and also hold trademarks and patents, which make even the replication of standard product very difficult. Hence, new entrants cannot easily enter this industry.

• Rivalry:

The industry comprises of many small players, each of them is specialized in a particular type of pump manufacturing. As a single customer will have requirements of different type of pumps, he cannot go to a single manufacturer to meet all his needs. So the customer goes to different producers who are the best in those areas and purchases all his requirements. This shows that, even though there are lots of pump manufacturers in the country under organized and unorganized sector, but the competition level is on an intermediate level.

Overall, the industry is very attractive. In addition to these five points, the high potential of growth in this industry even under recession, and the boosts by government has made this industry much more attractive.

Market Segmentation

Sulzer has segmented the market on the basis of industrial application into 3 types:

1. Power Generation Segment – These are extensively used in biomass/waste power generation, coal-fired power generation, geothermal power generation, hydropower generation, etc.
2. Oil & Gas Segment – These types of pumps are used in oil & gas refineries, turbines, high-pressure pumps and have compact reservoir design.
3. Water Segment – Works in almost every industry like chemical, mining, agriculture, etc. They are used for dewatering purposes as drainage pumps, sludge pumps, firewater pumps, etc.

Points of Differentiation – The differences varies from segment to segment. Major POD include:

1. Direct Selling – There are no reseller involved in these segments within Sulzer and approach the customers directly with case studies depicting benefits to customers.
2. Provide only pumps (no processes or engineering knowhow) – Sulzer doesn’t try to sell everything, but only pumps and remove the costing of engineering knowhow from the total price.
3. Utmost importance to Design Stage - At Sulzer, design stage is given the utmost importance. They believe that if there is an investment during initial stages to understand the customer’s needs and design the product with complete consideration of the same, there is a minimum requirement to invest in further stages of product life cycle. Hence, R&D (Innovation department) is a big cost that leads to less maintenance, less servicing, more reliability, less downtime losses. But due to this, their products are highly priced but have a long-term effect on quality. The product life cycle emerges in case of continuous innovation in Sulzer as shown in Exhibit 1.

1. Close proximity to customers – Sulzer has a geographical location advantage with 22 global factories and 100 types of products, and therefore is convenient for customers for maintenance, servicing and installation of products.

Points of Parity – The basic specifications are similar with other pumps but the technology improvements make some differences. As these are high priced products, the benefits with POP is very less for Sulzer.

Market Offering

Sulzer is trying to give maximum value to the customer by giving the best possible value proposition to the customers. Overall, there is an augmented product selling that is associated with the core product i.e. Pump. This augmented offering consists of the services and cost benefits associated with the type of pump the company is selling.

There are some components of Sulzer’s market offering that is stated by the company as “The Sulzer Difference”:

• Process Pump
  • Highest efficiency – Efficiency is the core of production, so by giving highest efficiency Sulzer can increase the production per hour for the client
  • Highest hydraulic power – Good for the customer who is handling different fluid flow for different processes
• Low energy consumption- There are regulations in multiple industries either by societal standards or by government regulations so there is always a pressure to lower the power consumption
• Heavy duty bearing construction – Durability is also very important for uneven stops at plants of customers like mining industries who makes a high percentage of Sulzer’s clientele
• Short payback time - As the efficiency is higher than the NBA so the relative high cost of the pump can be covered earlier then its competitor’s cheaper products
• Low spare part cost due to high standardization – Spare parts are highly important for pump industry as high usage of pumps make the replacement of spares very frequent. Sulzer has made this whole process of spares highly standardized to reducing the cost for the customers
• Low installation cost – Standardized operating and installation procedures are defined by the company that makes the installation cost lower
• Low maintenance cost – High standards of quality at the production stage makes it easier to maintain the pump, keeping the lower costs
• Low noise level – R&D has focused on the design to keep the noise level under control making the end product less noisy for the customers
• Run the pump with lower levels of water can be helpful for the customer to have more reserve for water

Sulzer keeps on redefining their market offering again and again and it is in coherence with the R&D so that they also keep in mind the current market offering while making the developments in the current product and also the industry offerings by the competitors. Due to their high spending on R&D they are able to lead the market and are able to price premium for their product with a unique market offering.

Elements of Business Model

Long term growth and sustainability can be achieved by identifying the elements of business model and keeping an alignment among them.

There are four elements of business model: -

Key resources –

Sales force- as the only mode of selling is consultative selling, we need highly skilled sales force that can deliver the customer value proposition while doing a sales pitch.

Research and Development – needed to establish their product as a differentiator in the market, due to R&D only they were able to deliver products which are two years advanced from the competitors’ offering.

Vendors – A good network of vendors supplying raw materials for Sulzer makes them deliver quality and on time

Brand – As Sulzer is known for their differentiated product, so one of the key resources is Brand for Sulzer which helps in a great way to sell to a new customer

Facilities – Manufacturing facilities and other facilities are also playing a great role in delivering on time

Technology – State of the art technology that Sulzer uses is not easy to match by competitors, as high quality is not easy to achieve without equally good manufacturing technology

Key processes –

Training- High level of training is needed for the sales force, as they are the face of the company.

Manufacturing- As one of the cost benefit is durability and better quality; there is a need to keep these standards at manufacturing facilities. Manufacturing should also be aligned with Research and Development, as some new product development should have better transition to manufacturing.

R&D – Highly skilled people and high capital is required to run a world class R&D facility. There was very high importance given to R&D in Sulzer.

Profit Formula- Premium is charged from the customers, hence their basic profit formula is to charge such that it will cover R&D cost. It means that R&D cost is properly allocated over the number of products getting sold. Other costs considered are mostly direct cost that is included in the price premium they charge for Sulzer Pumps.

Customer Value Proposition- The customer value proposition statement for the company is “We provide innovative and cost-saving solutions”. This market of pumps is highly sensitive to cost savings as there is high usage of pumps in the industry making their cost pattern per item produced is important and the main decision criteria in B2B selling.

Type of Selling

Most of the selling at Sulzer is direct and without resellers in between. For pumps, the bidding is through tenders; hence the initial order comes by fighting on prices. But as the relationship grows, the selling moves to Enterprise or strategic selling. The investment by customer and supplier becomes high as both of them share the competencies and capabilities to improve the product further. Hence, the offering is a partnership at Sulzer.

Cost to serve versus Relative Price

As the innovation cost is higher at Sulzer, their cost to serve is at high level initially. They follow skimming pricing strategy (like Apple). The prices initially are kept high for the latest designed product, once the product is in growth stage and is copied by other competitors; the innovation center tries to bring a new product in the market. With the introduction of new product, the price of earlier product is reduced to the volume axis.

Loyalty Ladder

Mapping the current location of each customer on loyalty ladder at Sulzer has 3 types of customers with Switchers at majority.

Switchers (60%)– As majority of orders (tenders) are based on prices and tenders, hence Switchers accounts for almost 60% of the total customers at Sulzer. But once the tender is finalized and the customer has been served for 2-3 years, the firm tries to add value at the same price by pushing them in contracts or by showing them the technology advantage with their products.

Undesirable Customers (30%) – When the value addition is done at the same price, almost 30% of them don’t understand the value and move to other suppliers as soon as the prices are increased.

Most Valuable Customer (10%) – When Sulzer becomes more efficient at serving, they are able to reduce their total cost to serve but are still able to provide high value to the customer. These are joint long-term relationships.

This is one of the main problems that the company is facing. The number of switchers is very high in this company, while the company is positioning itself as an augmented high value product. The customers are considering it as just a mere product available at lower cost. Hence, it should try moving its customers to other quadrants of partners and MVC by highlighting value proposition and cost savings on their products. Similarly, undesirable customers are also at a very high level of 30%.

VALUE ANALYSIS (An example)

Sulzer came out with a mine-dewatering pump, named SNS Pumps, when the customers were using heavy-duty slurry pumps but wanted high reliability, low maintenance and servicing cost, high-energy efficiency, and robust design. Sulzer developed SNS4-50 process pump in 2015 which was able to drain the settling pit on its own when the old slurry pumps had heavy cavitation with low suction heads. Its superior design features minimized the total cost of ownership (as shown in Exhibit 2) for the customers with low installation and maintenance cost, and high operational efficiency.

Price – With validity of 3 months, this pump is priced at around 16,000 Euro with an average life of 10 years. The NBA by BrownBros is priced at EURO 9,875 with an average life of 8 years.

Value Proposition

• Highest efficiency in the process pump range with Minimum efficiency index (MEI) of greater than 0.7. MEI means how many pumps are of inferior efficiency than the subject pump. Minimum MEI in the market is 40% and most of the competitors’ pumps lie in the range of 0.4 to 0.7 MEI. (A benefit but cannot be quantified)
• Low energy consumption due to high efficiency leading to annual savings of Euro 24,000 (A COTP)
• Low installation and maintenance cost due to low spare cost (standardization), trouble free sulzer seals, and rigid bearings (COTP)
• Less oil lubrication requirements leading to oil and labor savings (A COTP). For Sulzer SNS pumps, the number of times oil lubrication required is lower as it is based on rpm of pumps. It takes about 30 minutes to lubricate the moving parts.

Oil Cost = Euro 10

Difference in Number Of times of lubrication = 10 (30-20)

Labor cost = EURO 0.50/oil change (Assuming EURO 1 as labor cost in India)

Total Savings = 10*10 + 0.50*10 = Euro 105 annually

• Innovative, high efficiency, low net positive suction head impeller (A placeholder)
• Easy and fast to install steel base plate (A placeholder)
• Also, there is a difference in average life of Sulzer’s pumps (10 years) and NBA pumps (8 years). Hence, NBA will cost Euro 12,344 for 10 years.
• Short payback time - As the efficiency is higher than the NBA so the relative high cost of the pump can be covered earlier then its competitor’s cheaper products
• Low noise level – R&D has focused on the design to keep the noise level under control making the end product less noisy for the customers

Value = Oil Savings + Labor savings + Energy savings

= Euro 105 + Euro 24,000 = Euro 24,105

Value in Use = Value of Sulzer – Optimum Price of Sulzer >= Value of NBA – price of NBA

Value of Sulzer – Value of NBA >= Optimum Price of Sulzer – price of NBA

Therefore,    24,105 >= Optimum Price of Sulzer – 12,344

            Optimum Price of Sulzer <= Euro 36,449

The optimum price of Sulzer’s SNS pumps could be as large as Euro 36,449. Hence, the current price at Euro 16,000 is very lower than the value it is delivering to the customer. This might be due to the tendering process followed to allocate projects in this industry.

Exhibits:

EXHIBITS

Exhibit 1 - Continuous Innovation in Sulzer impacting product life cycle

Exhibit 2 – Total cost of ownership for Sulzer’s Pumps and other heavy slurry pumps

                     Heavy Slurry       Sulzer’s SNS Pumps

Exhibit 3 – Total cost of ownership based on each cost involved