Saurer: The China Challenge Question 1 Comparing with the China staple fiber twisting machines, Saurer Twisting Systems (STS) has a number of strengths. The STS are leading product and incorporated state-of-the-art engineering. The technology and R&D helped STS to build up functional brand, the STS machines helped the customers to improve efficiency, quality and productivity. Hence STS is a strong brand and highly regarded by many customers. Being the largest manufacturer of textile machinery, Saurer can offer full solutions to customers.
According to Exhibit 4, there are Sauer’s products in different steps of the textile value chain from spinning to embroidery. Thus, Saurer has the capability to penetrate into textile industry in a great depth by extensive product offering. However, STS do not have the price advantage comparing with local Chinese competitors. STS had simplified the functions of the sophisticated machines into “good enough” machines so as to cater for the needs of China market, however, the pricing is 31. % more than Muratec, and twice the price of Rifa i. e. the close competitor. As Chinese customers tend to be price-sensitive, they would prefer low-priced manufacturers like Rifa for faster pay-back. In addition, STS products are imitated and the functions copied by Chinese competitors because of weak protection of intellectual property in China. This weakened the strength of STS in terms of product functionality. Most of the locally made twisting machines were copies of those manufactured by Saurer or a Japanese competitor.
In some cases, the colors of the machines and the brochures – including printing errors – were reproduce Saurer’s usual position in the high-end market meant that identifying and reaching customers for low-end solutions would be challenging for its sales force. Since the company had historically focused on customers with high-end needs, it sales force had little contacts with the low-end segment. Saurer also encountered the difficulty to adopt to Chinese market.
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The Chinese customers only ordered new machines after receiving orders for yarn, which meant that they then needed very quick delivery. Additionally, they tended to be less interested than their Western counterparts in machine ergonomics – labor costs were low and replacing workers was easy – although some had begun to appreciate that more efficient machines could enable them to increase revenue. Question 2 Saurer should enter the China market with lower functionality. Firstly, Chinese customers are price-sensitive and they concern about the pay-back period.
By offering low-functionality machines at lower price, Saurer can captured this low-end customer groups by fulfilling their basic needs. Secondly, Saurer can build up the customer base for future business, as Saurer can introduce other textile machines for their customers. However, margins on the new product were likely to be significantly lower than on their existing products, and even if they managed to achieve some aggressive cost targets, there was a concern that the new product could cannibalize their high margin, premium machines.
So Saurer lost its product leadership by lowering the machines functionality. Hence, the good enough machines do not help Saurer to win customers by brand and functionality for this low-end segment. The pricing of STS machines become critical as customers are price-sensitive. Question 3 To protect Saurer’s brand, they should use a dual brand marketing strategy for the new products and sophisticated products. Its Volkmann brand was the leader in the premium end of the market, both in China and globally.
In order to avoid jeopardizing the brand and minimize sales canalization, Saurer should adopt a different brand name for its low-end and lower-priced machines. As for pricing, Saurer should try to match with the competitors so as to win a bigger market share in this low-end market. To improve the margin, Saurer may consider to lower the production cost. As the low-end customers had little interest in preventive maintenance and annual contracts, Saurer had to change its business model for the low-end market segment.
Since customers preferred quick repair service in proximity, Saurer may consider to develop partnership with local machine repairing centers by supplying the components at lower cost, so as to increase the competitiveness of Saurer machines as comparing with other low price competitors. Currently, Volkmann had 7 sales staff for China market. To cater for this fast growing low-end segment, the company should develop a separate local sales team for low-end market so as to penetrate into the low-end market. According to the company’s quick analysis, 85% of the potential demand of the new machines would be in 6 of China’s 22 provinces.
Saurer may allocate the sales team into 6 geographical areas and launch the new machines. Question 4 If Saurer decided not to introduce the new product, it will have to set its premium position and target the high-end segment, i. e. the export-oriented state-owned firms which were typically able to get licenses to buy imported textile machines. Being the global leader in textile machines, Saurer can ride on its competitive advantage by offering full solutions in different stages of value chain and helping these high-end customers to achieve economy of scale.
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