1. Sales and service dealers: They had strong technical orientation and usually had a strong service team and fully equipped workshops. They typically did not have a front office. Air-conditioner projects that required a great deal of engineering knowledge were handled very well by these people. They were comfortable handling projects worth of Rs.5 lacs or more. Their revenue heavily depended on annual maintenance contracts (AMCs) they entered into with the customers whose air-conditioner plants they supported.
1. Air-conditioner dealers: Many sales and service dealers graduated into air-conditioner dealers. They had shop and display facilities. They had a very strong service orientation. They were best suited to service the residential segment customers. 1. White goods dealers: They owned a show room and stocked and sold air-conditioners with other white goods. They had no service orientation or service facilities.
They executed a sale and typically had nothing more to do with the appliance.1. Sales and service dealers serviced 5% of residential segment. Air-conditioner dealers serviced 20% of the segment and the remaining 75% is serviced by appliance dealers. These percentages are reversed for the corporate segment. Appliances dealers hardly (5-10%) catered to corporate segments. A typical Cool King dealer was an extended arm of the company and was trained by the company in system design, installation, and services.
The dealers were governed by a well-documented policy and their performance was closely monitored. There was an established quality assurance system to ensure customer satisfaction. The company helped its dealers to set up product display areas and extended assistance in recruitment and training of competent sales and service staff.After Sales Service: In Cool King, service was a separate profit centre, with its own strategy, resources, and investments. After-sales service offered high gross margins and limited competitive pressure. As part of its After-sales service offerings, Cool King provided regular preventive maintenance and a life-cycle enhancement service.
Cool King had set up a National Parts Centre (NPC) with the objective of delivering genuine spares for any equipment sold by Cool King in the shortest possible time. Another initiative to enhance the customer experience in the area of After-Sales Service was introduction of an “Extended Hour” Service call registering and response facility. The After-sales service was backed by a state-of-the-art Service Operations Management Software at all cities for on-line customer call monitoring, which had resulted in improved response time and operational efficiency.Issues and Concerns The senior management team of CKL had deliberated on the issue of CKL’s response to the emerging opportunities in the window air-conditioner business. The central issue was, should Cool King reorganise itself to face the challenges in the window air-conditioner business or should it vacate this market segment and concentrate on the project business. While this decision was important, by no means was it easy to decide.
Several conflicting factors (some of them were internal to Cool King and some of them external), were complicating the decision making process. The top management had consolidated their thinking related to this decision on several themes.Opportunity Assessment: The window air-conditioner business in India is likely to have explosive growth. There will be three distinct market segments. Residential, Commercial and Corporate Segment.
The residential segment would require standardised product, the commercial and corporate segments would require standard products with low customisation. The market growth opportunity assessments were based on (a) expected availability of quality power as a consequence of government investment on infrastructure and implementation of economic reforms (b) the growth in the need for comfortable work and commercial environments as a consequence of economic liberalisation and enhanced industrialisation. This is expected to boost the commercial demand for window air-conditioners. The increase in disposable income is expected to translate into higher demand growth on window air-conditioners.
The cost of air-conditioners in China is one and half times the average monthly salary. In India as of 2002, the cost of a window air-conditioner is five times the average monthly salary. Growth in volume is a reality. Therefore, prices are expected to fall dramatically. Revenue growth would be driven by volume. Gross Margins would be thin. The role of competition: Competition would consist of a mix of strong domestic players as well as multinationals. The industry composition will change from technology users to technology generators.
The project execution skills of the foreign competitors would not be inferior to domestic players but may be expensive.Among the competition from multinationals in the window air-conditioner business, the competition from Korean companies has been aggressive. They have expanded the market and gained substantial market share by aggressive pricing, brand positioning, and innovative sales skills. Some of the major changes that have been influenced by Korean competition included 1. Installation product has been converted to plug-and-use product 2.
Manufacture to order is converted to manufacture to stock and sell 3. Technology product is being sold on price based competition (for a 1.5 Ton air-conditioner prices are expected to fall from Rs.30,000 to Rs.20,000)4. Window air-conditioners are being sold jointly with white goods products undermining the technological differentiation 5. Branding is an important instrument in sales 6. Strong influence on selling by distributors MNCs are likely to continue and duplicate some of these rules established by Korean competition.
Individual profitability of the units is replaced by volume based growth and revenue generation. Competition is willing to tolerate short-term losses in anticipation of long term profitability.Withdrawal from Window Air-conditioners (Implications): Should CKL decide to concentrate on project business and maintain only a token presence in the window air-conditioner business, several financial and operational implications follow. 1. A very low market share in the window air-conditioner business especially in the residential segment. 2. The growth and profitability in the cooling product division may severely be affected by aggressive competition. 3.
Commercial and corporate segments of window air-conditioner business, which is being supported by technology and solution platform, would be more vulnerable to competition.4. The impact of competition on cold storage business and on large projects would not be severe. 5. CKL has to work with a limited product portfolio characterised by technological complexity and higher project implementation skills. 6. Size and profitability would be slow leading to stagnation. Therefore, long term sustainability in the business may be threatened.
CKL so far: CKL was characterised by wide product range in the air-conditioner business, strong presence enabled by excellent project execution skills and a carefully built reputation in the relevant market segments. Revenue and profitability were enhanced by project execution skills, retrofit business, and after sales service revenue.CKL was accustomed to treating distributors as their business partners. While the products were sold at premium price, the efforts on brand building have been relatively low. Project execution times had been appropriate rather than rapid. The common manufacturing facilities of the company were used to make a small presence in the window air-conditioner market. Technological understanding of air-conditioner business and application engineering skills had been adequate.
Business Model of CKL: CKL’s value proposal consisted of three interdependent segments: technological know-how, project execution skills and application engineering talent. A combination of these three skills was used to deliver value to the relevant consumers in the air-conditioner business. The competitive pressure had several implications for the value chain managed by CKL. The technological environment was stable and was expected to be so in the near future. The project implementation skills were inexpensive when engineers were employed from Indian environment.
However, there was no restriction for a multi-national player to adopt the same route to effectively reduce the project implementation cost. Application engineering skills were not unique to CKL and is likely to be replaced by technology.Several low-end application engineering products would be replaced by standard technically advanced products. This would be routine when technology used in air-conditioner products becomes more and more sophisticated. However, there would be adequate scope for high-end application engineering skills in terms of designing customised products. CKL’s profitability and growth was ensured by inadequate competition (due to negligible market size in India), consumer misconception on technological complexities of air-conditioners, and revenues from after sales service.Window Air-conditioners – The Past: CKL had little more than a token presence in the market. A portion of the existing manufacturing facility had been used to produce window air-conditioners to generate some additional revenue.
Window air-conditioners were seen as complementary product to the main project business. The distribution channel used for selling window air-conditioners was the same as the one used for project businesses. No additional marketing efforts were made in terms of pricing, enhanced volume, or product positioning. Window air-conditioners were never given strategic importance in the overall product portfolio management in CKL.Preparation needed: For CKL to get into window air-conditioner business, many of the serious handicaps of the past have to be removed.
Marketing has to be completely revamped. Brand, aggressive pricing, acurate product positioning, and efficient handling of distributors would be the priority areas. It would be necessary to deal with white goods dealers. Can CKL do it? What are the implications of this transformation for the existing businesses?