KONE – Onwards and Upwards!

How KONE is able to leverage its operational capabilities to create a thriving business model

What is KONE

KONE is the fourth largest companies in the escalator and elevator industry. KONE is best known as the supplier elevators for Kingdom Tower in Jeddah, Saudi Arabia, which will be the tallest building in the world upon completion in 2018.

KONE is a very successful company as it is highly effective at driving alignment between its operating and business models.

Business model and Operating Model Alignment

KONE creates value by providing customers with escalator and elevator solutions that leverage the latest proprietary KONE technologies and innovative designs. Being at the forefront of escalator and elevator technology has enabled KONE to grow its installed base of escalators and elevators to over 1,000,000 units.

Research & Development – Leader in Technology Innovation

KONE has been able to consistently grow its installed base over the years by leading the technology innovation race through successful investments in research and development. In fact, KONE invested over EUR 100 million in R&D in 2014 and was named the 48th most innovative company in the world according by Forbes in 2015. The focus on the development of new technologies has enabled KONE to continuously introduce products that are more reliable, safer and more energy efficient than its competitors, thereby increasing its competitiveness in the market. For example, the introduction of the KONE UltraRope in 2013 was a major technology innovation in the elevator industry that replaced the existing heavy steel ropes, which is still used by their competitors, with a more durable, reliable, eco-friendly rope technology that significantly decreased energy consumption, reduced downtime and rope stretch. As a result, KONE has been able to exceed customer needs, thereby driving its sales and profitability growth to exceed the market.

Its focus on R&D is also complemented by its manufacturing strategy, which provides KONE with the flexibility to quickly bring the new technologies it has developed to market faster. KONE outsources most of the manufacturing of its component to select suppliers. This not only allows KONE to invest limited capital in manufacturing and assembly operations but also enables KONE is able to quickly shift its manufacturing capacity to new innovative component suppliers that leverage the latest technology.

Proprietary Maintenance and Monitoring Services

KONE makes a slim margin from the sale of its escalators and elevators solutions in order to quickly grow its installed base. KONE’s growing installed base drives its monitoring and maintaining services business. KONE’s services business make up over 50% of sales. KONE is able to capture significant value by charging customers a significant premium for these services as it is the only company that is able to efficiently service its proprietary equipment due to the skills involved in maintenance and repairs and the limited availability of replacement parts.

KONE technicians perform over 10 million visits to service over 1,000,000 units annually. KONE has major comparative advantages in the provision of these services as:

1. Monitoring and maintaining KONE proprietary equipment requires significant training and expertise

Monitoring and maintaining KONE proprietary equipment is very difficult given the complex technologies it utilises. KONE is the only company that can provide expert service technicians skilled at repairing it solutions. KONE’s service technicians are highly skilled due to extensive in-house training and are also supported by a team of in-house KONE engineers in the event that they face a problem they can’t resolve. Keeping this expertise in house enables KONE to capture significant value.

2. KONE technicians can provide faster response time to emergencies and repairs

KONE has a competitive advantage in monitoring and maintenance services for its products as it can provide faster response time to emergencies and repairs.

KONE has much faster response times during emergencies than independent contractors as it is immediately warned as soon as an issue with its products arises via the KONE Remote Monitoring System. The system enables KONE to be made aware of a specific technical problem as soon as it occurs rather than when the customer calls, enabling its service teams faster dispatch response. vs. independent contractors.

KONE is also able to conduct repairs and maintenance services faster than independent contractors as the limited availability of spare parts required for maintenance and repair outside the KONE network service makes it very difficult and timely for independent contractors to purchase the spare parts it needs to complete repairs. In contrast, KONE service technicians are given priority on spare parts, enabling them to repair the equipment much faster, thereby reducing equipment interruption.

As a result of the alignment of its operating and business model, KONE has been able to grow sales by 55% from 2009 to 2014 while also increasing its operating margin from 11.9% of sales in 2009 to 14.1% of sales in 2014.

KONE will keep going up!

SOURCES:

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3 thoughts on “KONE – Onwards and Upwards!

  1. Interesting and enlightening post on the world of escalators and elevators @Charles MacBain!

    With escalators and elevators, as with other capital goods, including jet turbines and earthmoving machinery, it seems that customers are shifting from an owner model to a service model. KONE’s business model reflects this trend with half of its revenue coming from service! I’m guessing customers would eventually like to pay KONE on the basis of a very specific functional metric, such as “hour of available escalator/elevator time” or even “pounds-minute transported”. If the evidence available today serves as indication of where the industry is headed, KONE is in a strong poisition to reap benefits from this competitive transformation given that it has already developed a vast and efficient service force.

  2. Charles, this is a fascinating analysis.
    I found two points particularly striking: first, how KONE uses outsourcing not only as a mechanism to cut costs and focus on its core competencies, but also as a method to move fast, adapt to market trends and continually innovate – all of which give it a sustained competitive edge. The second is how tightly aligned are its installation business, and its maintenance and monitoring business. A good analogy is luxury car companies – the cars’ complex and innovative systems require expertise that very few external technicians have, so when you buy one of these cars – you would almost always prefer to have them serviced at a company-owned garage, which in turn creates a significant revenue stream to the manufacturer (either directly, or through royalty from its licensee garage operators).

    Thanks for a great post!

  3. Charles, many thanks for sharing your thoughts on Krone, this is a pretty interesting and attractive business model that I am not familiar with.
    I really like the fact that Krone sells its escalators and elevators at slim margin (and maybe breakeven or even loss?), in order to hook up the customer during the construction of a new building (when they are capital/cash constraint until the building starts to generate revenue), and then charges large maintenance services for many years, because of high barriers to entry for external maintenance contractors.
    I wonder how much they charge in maintenance per year and how does that compare with the installation cost. If the company sold the installations at loss (which I would not be surprised by), it would be interesting to see the number of years to breakeven or achieve a descent return.
    I also guess the dynamic must be different between escalators and elevators, because escalators are probably easy to replace, and easier to maintain than elevators (by an external contractor). Whereas elevators are more complex and probably kept for decades in the same building, therefore the building manager doesn’t have the choice but to pay the maintenance (which I guess is gradually increasing with time!).
    Thanks again!!

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