Michelin fleet solutions vs the conventional tire selling model

Confirming Pages

549

Case 4 Michelin Fleet Solutions: From Selling Tires to Selling Kilometers

CASE ABSTRACT Mi chelin, a worldwide leader in the tire industry, launched in 2000 a comprehensive tire-management solution offer for large European transportation companies, called Michelin Fleet Solutions (MFS). With this new business model, the company ven- tured into selling kilometers – instead of selling tires. This decision moves the strongly product-driven firm into the new world of services and solutions. The shift is intui- tively appealing, and it provides Michelin with an opportunity to differentiate itself in the tire business. After three years, however, expansion is far below expectations and profitability is terrible – despite the outside help of a strategy consulting firm. The case presents the decision point in 2003, whereby MFS’s future has to be decided. Should Michelin seek to further develop this solution offer, and try to repackage the offer yet another time? Or was it just a passing fad that should be abandoned?

This case investigates the difficulties that industrial groups face when they transi- tion from selling products to providing service. It enables participants to reflect on the following issues: What is the rationale for industrial groups moving towards solutions? What kind of business model reconfiguration does it imply? How does moving to solutions raise multiple challenges throughout the organization (e.g. in terms of sales force management, risk management, channel relationships etc.)?

CASE STUDY On this gloomy day of January 2003, Jonas Pills hurried to take a cab in Clermont- Ferrand airport to reach Michelin’s headquarters, in downtown Clermont. While in the cab, he reflected upon his forthcoming meeting at the French tire manufacturer’s offices. After five years as a regional sales manager, Jonas had been appointed a year ago as Manager in Germany for the deployment of Michelin Fleet Solutions (MFS). Today would undoubtedly be decisive for MFS’s future. Would Michelin pursue or abandon its solution business?

This seemed such a good idea to begin with. With MFS, Michelin had moved from its traditional business of manufacturing and selling tires toward the new world of service, i.e. offering transportation companies comprehensive tire fleet management solutions. This radical move was initiated in 2000 with promising growth prospects. The new offering was targeted at large European transportation companies such as Schenker, TNT, Geodis, or Norbert Dentressangle. However, three years later, the pic- ture had become much darker: despite substantial investments, geographic expansion was still poor and MFS remained unprofitable. The situation had deteriorated to a

This case study was written by Chloé Renault, HEC 2006 and PhD Student at HEC, under the supervision of Frédéric Dalsace, Danone Chair of Social Business/Firm & Poverty and Associate Professor HEC Paris and Wolfgang Ulaga, Professor of Marketing IMD, Switzerland. The case was written as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. We would like to thank Stéphane Mamelle at Michelin for his assistance and support. Some data have been modified for reasons of confidentiality. Printed with permission from the author and www.ecch.com.

zei12052_cs04_549-562.indd 549zei12052_cs04_549-562.indd 549 2/7/12 10:50 AM2/7/12 10:50 AM

Confirming Pages

550 Case 4 Michelin Fleet Solutions: From Selling Tires to Selling Kilometers

point where International Strategy Consulting (ISC – name disguised), a well-known consulting firm, had been appointed a few months earlier to help fix the problem. Clearly, drastic steps were required to keep MFS alive.

As he entered the building, Jonas met Pierre Dupuis, Michelin Fleet Solutions Director in Europe. They immediately discussed the most recent German sales figures. MFS’s future critically depended upon its ability to succeed in this key market. They met Jean Baudriard, who was the European Director of the Truck and Buses (TB) Division. Typical of Michelin career paths, Jean had joined the company right after graduating as an engineer and had been working with Michelin for the past 30 years in various functions, including R&D, manufacturing, and sales. After a quick handshake, he immediately jumped to his main concern: “The Board members have added MFS on their next meeting’s agenda. It’s an explosive topic, and we must come up with clear recommendations. Should the company keep on developing this solution business? Should the MFS offer be repackaged? Or should it simply be abandoned? These are the questions we have to discuss today!”

UNDERSTANDING THE BUSINESS ENVIRONMENT

The Tra nsportation Industry and Its Challenges Jean Baudriard, TB Division Director, started the meeting by sharing insights from the latest market research on the transportation industry. “Road transportation has still the lion’s share in the European market: 44 percent of European goods are trans- ported by trucks, and this should not decrease as road transportation companies pro- vide unequalled flexibility and competitive price. We expect 3 percent growth a year for road freight transport. The importance of door-to-door and just-in-time services further reinforces this competitive advantage. But keep in mind that transportation companies suffer from a negative image, as they are seen as a main source of CO2 emissions. This really is under much political attention, and the idea of developing a carbon footprint responsibility for transportation companies is making its way.”

Pierre, MFS Director, observed “There is an impressive consolidation process in this industry. Within only a few decades, truly European players have emerged, and this is unlikely to stop considering that 80 percent of European transportation companies still operate with less than 5 trucks. Small players are ideal targets for external growth. Take Geodis or Norbert Dentressangle, for instance: they have embarked on a substan- tial acquisition program to increase their network, and they are seriously seeking to challenge Schenker and DHL as market leaders.” There were about 1,500 of such large European fleets, rapidly growing, and evolving in a hyper-competitive market.

“It is not only about consolidation, they have also changed their business model. Large transportation companies have now become genuine logistics service providers, with a dedicated logistics division offering a wide array of services from transportation outsourcing, supply chain management to one-stop shopping solutions,” added Jonas Pills. A great number of retailers, consumer goods manufacturers, or automotive compa- nies indeed increasingly relied on so-called “third party logistics” for their non-strategic processes (e.g. product delivery, inventory management, etc…), thus targeting higher returns on assets and increased flexibility in their supply chain.

The Truck and Buses Tire Industry Truck and bus tires (TB tires) represent 27 percent of the tires sold in the world, and are the second tire market after passenger cars (60 percent). All tire makers have a broad and deep TB tire mix, as these tires must to be adapted to various road and usage conditions

zei12052_cs04_549-562.indd 550zei12052_cs04_549-562.indd 550 2/7/12 10:50 AM2/7/12 10:50 AM

Confirming Pages

Case 4 Michelin Fleet Solutions: From Selling Tires to Selling Kilometers 551

(e.g., highway, off-road, city, trailers…). Europe, a relatively mature market, accounts for 29 percent of the world’s TB tire business, with 24.5 million tires sold in 2002.

The Truck and Buses tire market is relatively consolidated with Michelin, Bridge- stone and Goodyear accounting for almost 18 percent of the market each. However, low-cost Asian firms are increasingly gaining traction. Considering that a tire is a labor- intensive product, competition from China and/or Korea is indeed a real threat. For example, in the same category, a Michelin TB tire (400 €/unit) and a Bridgestone tire (350 €/unit) are relatively close in terms of pricing, at least relative to the Chinese equivalent, aggressively priced below (at 250 €/unit). In this industry, price is a powerful selling argument, as some customers typically view tires as highly commod- itized “dirty black things.”

Truck and Bus es Tires Within the Michelin Group Michelin’s mission is to “contribute to the mobility of goods and people” and the tire business accounts for 99 percent of the group’s revenues. With global revenues of 15.6 billion Euros for 2002, the Michelin group is one of the three dominant players in the consolidated tire industry (Michelin 19.6 percent; Bridgestone 18.6 percent, Good- year 18.2 percent market shares). It employs more than 125,000 people worldwide, has 70 industrial sites in 18 countries and a sales presence in more than 170 coun- tries. Michelin strongly focuses on research and development and is acknowledged as the industry’s leader in technology, offering premium tires and driving the market. The Truck and Buses division accounts for 25 percent of overall sales in 2002 and 40 percent of the group operating result.

Though usually considered as a simple commodity, TB tires are highly sophisticated and complex products (Exhibits 1 and 2). The TB tire market consists of two distinct but interdependent market segments: the “Original Equipment” market (OE) for truck manufacturers and the “Replacement” market (RT) for transportation companies.

Original Equipment is the original tire fitting on brand-new vehicles. Michelin’s OE market share is around 65 percent in Europe. The main clients are truck manufacturers such as Mercedes, Man, Iveco or Renault. On this segment, transportation companies play an important prescriptive role as they decide what tire brands should be installed on their trucks. Michelin’s sales people actively encourage these customers to request that their new vehicles be equipped with Michelin tires.

Replacement is the other avenue for the TB tire market. Tires wear out faster than the vehicle itself; as such, several replacements are necessary, making this market the most important with 80 percent of TB tires sales. On this RT market, price plays a critical role, and Michelin’s market share in Europe is 21 percent.

Truck and Buses Tires in the Eyes of Distributors Michelin addresses the replacement market almost exclusively through professional tire distributors. These distributors usually sell tires for different vehicles (trucks and cars) and from different brands. TB tires are service-intensive: they require constant monitoring, regular maintenance and repair, tasks which are time-consuming and require professional expertise (Exhibit 2). As a consequence, distributors often have a complementary service business, performing some tire maintenance activities.

Distributors are independent local or regional entrepreneurs or bigger networks. Among those distribution networks is Euromaster, Michelin’s own distribution network created in 1994. It acts as an autonomous entity inside the group, selling both Michelin and competitors’ brands. Euromaster has 1,700 centers in 10 European countries and employs 11,800 people.

zei12052_cs04_549-562.indd 551zei12052_cs04_549-562.indd 551 2/7/12 10:50 AM2/7/12 10:50 AM

Confirming Pages

552 Case 4 Michelin Fleet Solutions: From Selling Tires to Selling Kilometers

Truck and Buses Tires in the Eyes of End Users Though they only account for 5 percent of a truck’s running cost, TB tires play an impor- tant role for road transportation companies for two main reasons. First, tire-related breakdowns (e.g., punctured tires) have become the most frequent reason for a truck to stop, as engines’ reliability dramatically increased. Second, tires have a strong impact on fuel consumption, the second most important cost factor after personnel. Twenty percent to 40 percent of a truck’s consumption is directly linked to tires. “Tires are the easiest and most effective way to decrease a truck’s environmental impact. If legal requirements call for carbon footprint reduction, they will become even more critical,” observed Jean.