Review the case Komatsu: The Rise of Service Dominant Logic and provide an analysis of the case. Your paper should be no less than 5 or 6 pages not including cover page and reference page. Your work should be formatted in the APA style and you must provide at least 5 references to support your work. Make sure that you use headings in your paper. Also, work will be reviewed for plagiarism. Make sure that all necessary content is cited properly. Your goal should be approximately 20% of cited content. If you do not cite and present work as your own, it is considered plagiarism. High similarity that is cited is not desirable as well as it reflects a lack of original content.To understand the issues, you may need to analyze the company, industry and external market issues or any other information. Identify issues, explain why it is an issue, explain your response, why did you respond as you did, and support your response with an external reference.This is an unprompted case, the issues are for your to discover and provide recommendations based upon your analysis of the company.
komatsu_case.pdf
Unformatted Attachment Preview
For the exclusive use of D. BANDARU, 2019.
IES600
M-1328-E
March 2015
Komatsu: The Rise of a Service-Dominant Logic
It was early 2015 and Komatsu Europe International N.V. executives were exchanging views
on the business model that would drive their future. They had seen many changes inside and
outside the industry in recent years, and Komatsu was facing a growing need to adapt its
current way of doing business. European CEO and President of the Marketing Division Keiko
Fujiwara, Vice President for European Distribution Management Tito Baldan, and General
Manager of the Solutions Business Dirk Legrand were contemplating their options and the
changes that these would require.
Their main business relied on selling mining and construction equipment through multiple
distributors across Europe. They also offered after-sales services, where they had witnessed the
emergence of new and innovative players in the market. The growth of service-oriented
businesses had brought forth several options for Komatsu and its distributors. The team had
been debating each of the alternatives before them and contemplating the advantages and
disadvantages they presented. They realized that the traditional model of selling machines
and making sure they would run was no longer enough to satisfy evolving customer needs.
New financing possibilities, ICT-based solutions, and other value-added services were
becoming commonplace. While Komatsu and its distributors were already moving in that
direction, they had to consider whether they are doing so quickly and aggressively enough.
They had to decide whether moving forward with the current business model would be
feasible and analyze the benefits that might arise from working together with new players
in the market. If they chose to change their current model, a thorough understanding of the
implications would be necessary. What changes would need to be made for Komatsu to offer
new value-added services? How could they retain their margins? It was time to evaluate their
current standing and consider what direction to steer the company in.
This case was prepared by Professor Stefan Stremersch and Elio Keko, PhD Candidate at the Erasmus University, as the
basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
March 2015.
Copyright © 2015 IESE. To order copies contact IESE Publishing via www.iesep.com. Alternatively, write to [email protected],
send a fax to +34 932 534 343 or call +34 932 536 558.
No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any
form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of IESE.
Last edited: 3/5/15
1
This document is authorized for use only by DIVYA BANDARU in Marketing Management taught by DR. ROBERT THOMPSON, Texas Lutheran University from Jan 2019 to Jun 2019.
For the exclusive use of D. BANDARU, 2019.
M-1328-E
Komatsu: The Rise of a Service-Dominant Logic
Komatsu Ltd.
Established in 1921 in Japan, Komatsu’s main business comprises the manufacturing and sale
of construction and mining equipment, utility equipment (compact machines), forest machines,
industrial machines and other.i In 1917, Takeuchi Mining Industry established Komatsu Iron
Works to manufacture machine tools and mining equipment for in-house use, which then
separated in 1921 to become Komatsu Ltd. Komatsu has since then expanded its business
within the industry to supply a variety of products and services, becoming the world’s second
largest construction-equipment maker after Caterpillar. In 1967, its first subsidiary outside of
Japan was established – in Belgium. This was followed by further expansion in Europe through
the establishment of a distributor in Germany in 1981 and production facilities built in 1985 in
the United Kingdom, in 1989 in Germany and in 1995 in Italy. In 1989, it established Komatsu
Europe International N.V. in Belgium to coordinate and expand Komatsu’s operations on the
continent. As of March 2014, it had 47,208 employees throughout the world.
To define its strengths and build on them for future growth, in 2006 top management created
a document called “The Komatsu Way.” It comprised seven guiding principles as shared
values to be passed onto future generations (see Exhibit 1 for the seven ways of Komatsu).ii
In 2013, it announced a three-year mid-range management plan called “Together We
Innovate GEMBA [Japanese for workplace] Worldwide.” This plan focused on three major
aspects, namely 1) growth strategies based on innovation, 2) growth strategies of existing
businesses, and 3) structural reforms designed to reinforce its business foundation.iii
Today, Komatsu finds its main strength in innovation and technological advancement. In this
way, it aims to retain its leadership in the market, especially when considering the rise of lower
priced competition. It was the first in the industry to develop diesel-electric hybrid excavators,
as well as the first to commercialize a fleet of giant, wirelessly controlled, autonomous dump
trucks that can be remotely monitored.iv More recently, in 2013, it launched medium-sized,
intelligent machine control bulldozers equipped with the world’s first factory fitted automatic
blade control using stroke sensors (see Exhibits 2.1 to 2.4 for further information on iMC).v
When first introducing the revolutionary Dozer, Peter Robson, Komatsu America’s director of
intelligent controls, stated: “I kind of feel like Steve Jobs must have felt when he introduced
the iPhone because I feel that’s where we’ve moved this technology to.”vi Being the first to
introduce such advanced machines, Komatsu stands two to three years ahead of competition.
With the offered features of intelligent machines, Komatsu aims to automate the entire
construction process and provide remote servicing. This clearly demonstrates a move towards
more technologically advanced machines that would differentiate it from competitors and
allow for optimal use of data. However, it still struggles to keep up with the likes of Caterpillar
and new entrants with regards to offering a service-oriented proposition.
Komatsu’s Business Model
R&D and Production
At the core of Komatsu’s business model stands its focus on research and development (R&D).
In fact, for financial year 2013, R&D amounted to ¥64.4 billion (€478 million), constituting
3.3% of revenues. vii It was comparable with that of Caterpillar, who spent 3.8% of their
2
IESE Business School-University of Navarra
This document is authorized for use only by DIVYA BANDARU in Marketing Management taught by DR. ROBERT THOMPSON, Texas Lutheran University from Jan 2019 to Jun 2019.
For the exclusive use of D. BANDARU, 2019.
Komatsu: The Rise of a Service-Dominant Logic
M-1328-E
revenues, with R&D amounting to €1.7 billion.viii The R&D expenditure of Komatsu included
¥56.6 billion (€420 million) allocated to construction, mining and utility equipment and
¥7.8 billion (€58 million) allocated to industrial machinery and other. The process then
moves to production, where it maintains control of quality and unique performance by
producing key components exclusively in Japan. Subsequently, geographical optimization
occurs based on regional requirements and specific customer needs. This optimization is
supported by Komatsu facilities worldwide, which provide products and aftermarket parts,
including development centers in Europe and the United States that are able to further adapt
products. Based on its technological competencies, Komatsu develops highly sophisticated
products known as Dantotsu (unique and unrivaled products). These products aim to be at the
forefront of innovation, clearly differentiated on key features and not easily imitated by
competitors.ix
Distribution Network and Customer Relationships
Komatsu sells its equipment through a vast worldwide network of distributors. To date, Komatsu
has over 201 distributors – of which 13 are subsidiaries of Komatsu – in 151 countries
(see Exhibit 3 for Komatsu’s global sales and service network). In Europe, Komatsu has one
distributor per country with the exception of Germany, Italy and France. With continuous
support from Komatsu, distributors are in direct contact with customers and are in charge of the
sale and servicing of products. These local distributors also allow for customization of offers for
the diverse and ever-changing demands of customers and provide an invaluable source of
information for Komatsu and recommendations for new product development. Distributors make
use of dealers to sell equipment; however, this generally only entails sales of smaller sized
equipment and is a small percentage of total sales. Dealers tend to sell utility equipment to
building constructors (e.g., for housing, public structures or rental companies). As they represent
a key resource, Komatsu maintains a close relationship with distributors and provides them with
support, training and financing. To complement its offering, Komatsu offers customers the
possibility of warranty schemes such as Komatsu Care, a complementary warranty and
maintenance program. Additionally, it provides financing possibilities for the purchase of new
and used equipment, as well as rental programs.
In 2007, Komatsu Ltd. together with distributors introduced the concept of brand management,
which was then introduced in Europe in 2010. Its goal is to promote a closer partnership with
customers in order to serve their needs by identifying unique solutions to specific issues they
face. Komatsu aims to change its way of thinking from the conventional perspective of a
company (supplier) to that of a customer.x In line with this, it does not see marketing as simply
a value-added service but as integrated in its proposition in order to co-create value with the
customer. For example, when a major mining customer approached them with the need to
extract material at deeper and more hazardous levels, Komatsu cooperated with them to create
a unique solution. Using state-of-the-art technology, Komatsu developed and introduced its
autonomous haulage system, an unmanned dump truck operating system. This allowed the
customer to improve safety by protecting its employees from difficult working conditions. In
addition, Komatsu established joint continuous improvement activities with major mining
customers in an effort to promote higher efficiency and lower total cost of ownership (TCO).
IESE Business School-University of Navarra
3
This document is authorized for use only by DIVYA BANDARU in Marketing Management taught by DR. ROBERT THOMPSON, Texas Lutheran University from Jan 2019 to Jun 2019.
For the exclusive use of D. BANDARU, 2019.
M-1328-E
Komatsu: The Rise of a Service-Dominant Logic
Sales and Product Support
Komatsu and its distributors play distinct roles in product support to end customers. Komatsu and
its overseas subsidiaries supply spare parts, assure quality and support distributors with training.
Distributors, on the other hand, are in charge of sales of parts, maintenance, repair, training and
the gathering of information. With regard to repairs, the industry still tends to be reactive to
customers’ needs rather than adopting a proactive stance. Ideally, using life-cycle data and data
captured from individual machines, distributors can make pre-emptive repairs. However, a large
proportion of repairs still take place upon the request of a customer following a breakdown in the
equipment. While the provision of pre-emptive repairs leads to greater efficiency – reducing
the risk of major failures and downtime – it requires an optimal use of data.
To better tackle the need for data, in 2007 Komatsu Europe began offering KOMTRAX, a
machine monitoring telematics system now present in over 340,000 units worldwide
(see Exhibit 4 for information on Komatsu’s service and solutions). KOMTRAX, introduced by
Komatsu Ltd. in 2000, continuously monitors and records machine health and operational
data, providing information such as fuel consumption, machine utilization and a detailed
history that aids in making repair and replacement decisions. The information gathered from
KOMTRAX goes directly to Komatsu, which then provides distributors with the necessary
information to serve customers. Through KOMTRAX, Komatsu is also attempting to more
accurately estimate the life-cycle costs of machines. While this differs greatly depending on
country, region, machine type and the manner in which the machine is used, they find that
in some cases, life-cycle costs after the purchase of equipment are more than double the
acquisition price of the equipment (see Exhibit 5 for an estimate of life-cycle costs in
emerging countries). xi The estimate suggests that the greatest expenditures are repairs and
fuel costs. Overall, product support revenues result from maintenance (periodic inspection),
repairs, payment for spare parts and overhaul of key components through machine rebuilds
(see Exhibit 6 for product support for construction and mining equipment).
Revenues acquired are shared between Komatsu and its distributors, with sales of parts and
services being a large part of Komatsu’s revenues. In 2013, for mining equipment Komatsu
made 46% of its revenues through equipment sales, 37% through parts sales and 17%
through services. In 2014, it estimates that sales of parts will surpass those of mining
equipment (40% vs. 39%) and that services will rise to 21% of total revenues (see Exhibit 6
for annual sales of mining equipment). While distributors also gain from the sale of new
equipment, most of their profitability arises from product support services. Komatsu’s
exclusive distributor in Poland, for example, makes up to 70% of gross profit from after-sales
services. This has especially been the case in recent years. The financial crisis triggered in the
United States in September 2008 reduced the volume of global demand for construction
equipment to half that of the peak period recorded in April through June 2008, xii making
product support the primary source of income.
Similar to most distributors, Marubeni-Komatsu makes on average single-figure margins on the
sale of equipment, with larger margins and revenues coming from product support. The exact
distribution between machine sales and product support, however, is highly dependent on the
target customer. In the quarrying industry, customers receive support directly from MKL for
five to 10 years after purchase. In the demolition industry, where equipment deteriorates more
4
IESE Business School-University of Navarra
This document is authorized for use only by DIVYA BANDARU in Marketing Management taught by DR. ROBERT THOMPSON, Texas Lutheran University from Jan 2019 to Jun 2019.
For the exclusive use of D. BANDARU, 2019.
Komatsu: The Rise of a Service-Dominant Logic
M-1328-E
quickly, machines are usually purchased in conjunction with a maintenance package. On the
other hand, large plant hire companies, who subsequently rent equipment to end users such
as construction contractors, generally purchase large quantities and replace their fleet every
two to three years, which in itself does not always bring a great deal of revenue to MKL.
Rise of New Business Models
New Business Models Among After-Sales Service Providers
With growing capital constraints on mining and construction businesses and the need for a
reduction of inefficiencies, the industry was ripe for innovation. This opportunity was seized by
companies such as the Babcock International Group, the United Kingdom’s leading engineering
support service company. As one of the emergent players in the industry, Babcock established
its mining and construction division in 2011, which provides a unique proposition in the
market with regard to fleet purchase recommendation, after-sales services and recovery and
disassembly of machines. Babcock offers mining and construction businesses the possibility
to purchase all their assets, eliminating the need for large capital investments. Babcock
completes such transactions by forming joint ventures to purchase the assets and setting up an
SPV (special purpose vehicle1xiii), hence allowing for the asset to be kept off the balance sheet
of both Babcock and the customer. Thereafter, the first step taken by Babcock is to create
a comprehensive inventory of all assets owned by the customer and needs within its job sites,
allowing for the optimization of asset usage. Following the categorization of assets, Babcock
sets out to build a full profile of costs for each piece of equipment throughout its life cycle,
providing the basis for its pricing mechanism. Depending on the hours of use of each piece of
equipment, which may vary due to unexpected demand, the customer pays Babcock
a predefined fixed amount for the use and maintenance of its fleet, diminishing variable costs
for the company. Through its proposition, Babcock provides several advantages to its
customers. The possibility of financing frees up capital for the customer, allowing costs to be
spread out and only incurred proportional to demand. Furthermore, the customer only makes
one payment to Babcock for all services, reducing transaction costs substantially. Since its
conception, Babcock has signed several multi-year deals, including two 10-year contracts with
Lafarge, a world leader in building materials, worth £150 million (further information on
Babcock can be found in the case M-1329-E, “Babcock: An Innovative Business Model in the
Mining and Construction Industry”).
New Business Models at Caterpillar
While Babcock provides unique value to its customers through its wide range of services,
several other players claim a share of the market. Caterpillar, for example, holds a strong
position. It is in a better position than Komatsu to compete with new service providers due to
its larger overall size and its ability to work with very large distributors operating in multiple
countries. In most European countries, it is also more advanced than Komatsu in calculating
1 Also referred to as a “bankruptcy-remote entity” whose operations are limited to the acquisition and financing of specific
assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations
secure even if the parent company goes bankrupt.
IESE Business School-University of Navarra
5
This document is authorized for use only by DIVYA BANDARU in Marketing Management taught by DR. ROBERT THOMPSON, Texas Lutheran University from Jan 2019 to Jun 2019.
For the exclusive use of D. BANDARU, 2019.
M-1328-E
Komatsu: The Rise of a Service-Dominant Logic
total cost of ownership and has built stronger relationships with its customers. In fact,
Finning International Inc., the world’s largest Caterpillar distributor (operating in the United
Kingdom, North America and South America), offers a proposition similar to Babcock’s. In
2013, Finning recorded revenues of $6.8 billion, driven by product support revenues, which
constituted 47% of the total (see Exhibit 8 for a revenue overview for Finning International).
In fact, about 65% of its employee base of 15,000 is dedicated to product support.xiv Similarly
to Komatsu, Finning falls at a disadvantage to Babcock in offering such services by being an
exclusive distributor of a particular brand. However, it offers a variety of new and used
equipment, rental possibilities, financing, and a host of after-sales services. This includes
maintenance, support, data management solutions (e.g., machine health monitoring, tracking
and utilization statistics) and customer support agreements (CSAs). Such agreements, for
example, aim to lower costs by providing a planned approach to scheduled services or repairs
at a pre- …
Purchase answer to see full
attachment
