Indian Institute of Management - Kozikhode

PV Technologies, Inc.: Were They Asleep at the Switch? Case Analysis Note

By Mr. Umesh R. Sonawane EPGCMM-06-024 Sahara India Pariwar Manager Corporate Communications

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Summary PV technologies (PVT) is a leader in the Photovoltaic inverter industry and known for managing requirements for a large scale solar energy projects. Solenergy, one of PVTs largest and satisfied customer wins a contract to set up a 100MW power plant for the city of Bostrow. Solenergy calls for a Request For Proposal (RFP) from PVT and from other players like Soma and BJ energy. As a practice Solenergy does carry out a confidential evaluation of the vendors, its asking to submit an RFP, to check their financial and technical wellbeing, eventually to understand the capacity and ability of the vendor to perform the task at hand. Mr. Morgan (Chief Electrical Engineer, Solenergy) is leading the evaluation and Mr. Salvatori (Sales personnel, PVT) is worried about what he has learned from his network about the evaluation report. The insiders information on the report suggests that PVT is trailing to its low cost Chinese competitors and the fact that Solenergy is focusing on cost cutting may bleak their chances of winning this contract. Although, none of the information is official but Mr. Rubenstein (Director Sales and Marketing PVT) and Mr. Salvatori fears the media exposure of such non favorable report which could damage their leadership position in the market. In response to the information received Rubenstein and Salvatori has come up at 4-alternative proposals for the RFP, which they presented to PVTs senior executives to come up with best alternative and a probable implementation plan.

Evaluation of Alternatives
ALT. Pro. Competitive Differentiator PVTs standard proposal offers a 10yr warranty against competitors 5yr. 20yr will be a real value addition Cost Factors Sales & Marketing Response Favored due to high acquisition cost and it would offset any shortcomings Morgan would have anticipated Finance, Production and Engineers Response Argued that PVT is already giving 5yr extra warranty. Sees future complexity in cost structure and issue may arise when negotiating with other firms Evaluation Remarks

Providing 20 yrs. of warranty

Client (Solenergy) would prepay @18%/annum of purchase price per inverter. PVT will invoice monthly and refund/claim yearly the amounts balance or exceed after each year based on warranty services carried out.

99% uptime guarantee with refundable loss suffered in the downtime if any

PVT believed that no competitor has this reliable product, hence cannot risk matching this offer

Guarantee expense and maintenance contract

Guarantee reinforced the quality, durability, and reliability of PVTs products and would reinforce the companys leadership status

Repair cost are much higher to keep the uptime promise. Further negotiations with Solenergy and other clients will get affected

Although, this will enhance PVTs topline immediate revenue, but considering the clients price sensitivity this would not be appreciated. This option also conveys a message that there will be a performance issue with the PVTs inverters. Guarantee expense is nearly 36% of the total revenue and income earned from maintenance contract is negligible in comparison to this. Such statement can be replicated by the competitors just to

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Strategic this will Mal-functionalities attain the top spot can cost an image in the competition to the PVT as the Sales new product is new. product, new Instead, they can objections, but to come up with a be sold at new new product by price integrating smaller Marketing inverters together. Pioneer benefit R&D Morgan would be happy employing new edge inverter, but concerned about new malfunctionalities Mr. Salvatori and Mr. Rubenstein approach Mr. Morgan directly to check if the information received is true and further persuade if needed. Offering new product of 1.25MW by preponing the R&D Next generation product, adding value with cutting edge technology and cost savings Additional cost of the new product. i.e. Costlier than regular 1MW inverter

bag the contract. Doesnt cater to price sensitivity issue of the client, moreover, there is a high risk of losing the reputation in case of a mal function of the new product

Looking at the scenario, this can be a first step

RecommendationFirstly, do contact Mr. Morgan to give a reality check on the evaluation, but beware of influencing his feedback. Most probably looking at the overall market trend the things will be true about price cutting. Then following is the recommendation, I would like to make. Price Warrior Product Looking at the cost saving trend in the inverter market PVT should tweak its offering to make it available in the price range that is competitive and dynamic. Details1. Customization Give only whats expected by the client shed down all the fringe benefits (product or service level) 2. Low initial cost This option will reduce the initial cost of acquisition for the client 3. Upgrade - Gives customer a power to upgrade in the future with add on products or services on a-la-carte basis 4. Separate launch & leveraging PVT brand This offering will be launched as a new product from the trusted PVT brand, this will leverage PVTs brand image at the same time , it will fight low cost competition Benefits1. Most importantly, this will cater to PVTs existing clientele looking for a cost effective but reliable solutions, hence blocking new player to acquire PVTs client 2. Provide flexibility to client to upgrade phase wise not putting any cost pressure 3. This will ensure long term loyalty between client and PVT 4. Positioning this separately ensures PVTs premium client segment unharmed Drawbacks-

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1. In the long term this low price warrior may eat into PVTs premium pro duct revenues as well with clients preferring low price product more 2. Extra efforts will have to take to maintain high perceived value and differentiation for PVTs premium product range

Calculations: Producta. Industry standard efficiency level b. 7yrs warranty c. Maintenance cost pay per visit basis (equipment costs at actuals) Description List Price ($) Cost of sale ($) Gross Profit Add-onsa. Enhanced efficiency upgrade - $5,000 (adding 3.1% margin to the profit) b. Annual maintenance contract with equipment costs at actual - $3,000 (Adding 1.87% margin to the profit) c. Annual maintenance contract with equipment - $4,000* (Adding 2.5% margin to the profit) d. Extended warranty 3yrs - $5,000 (adding 3.1% margin to the profit) e. Maintenance per visit after the warranty period - $600/visit (equipment at actuals)** f. 15yrs warranty - $12,000 (adding 7.5% margin to the profit) *Annual maintenance contract with equipment Assuming 6 visits in a year plus 3equipement costs @100/piece 600*6 + 100*3 = $3900/Marketing Policies1. Effort should be made to convey the added value of the premium product range 2. Price warrior product should be tactically targeted to SME and price sensitive projects of the wealthy clients. ** Annual maintenance contract with equipment costs at actualAssume there are 6 visits in a year for maintenance: 600*6 = $3600/- visiting cost plus equipment cost Current 180,000 108,000 72,000 (40% of price) Recommended 160,000 108,000 52,000 (32.5% of price)

ConclusionThis proposal sort out the price sensitivity issue by keeping the initial cost of acquisition low taking a 7.2% hit on the margin, going further if client chooses any of the warranty, efficiency enhancement or maintenance options the additional revenue will add it to this left out margin. This proposal would give PVT an advantage of being the cheapest initial option and further sales force has to develop a relationship to sale add-ons to the client to fill the margin gap.

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