| Business Case Analysis | MEMO |

Date: 9 October 2014 | | To: KIOTO Group Senior Management | | From: | | Re: Your deteriorating position in the global solar thermal market race | |

European market is changing, your customers are backward integrating into your own business, the Chinese are dominating through price dumping and while your lobbying efforts are admirable, do you really think it is enough to put the Chinese dragon to rest? Emerging markets show high potential particularly due to your tremendous efforts in landing the KSA tender and establishing a track record in the region. Your white label products got you so far but is it still the right approach in these changing times? Especially when the middle men are pocketing up to 82% between themselves, leaving you with a modest 10% margin. 1. PROBLEM: What is the main (underlying) problem/opportunity in this case? | In the face of the intense pressure from competition, whether it be the Chinese price dumping strategy or the new threat from the backward integration of heating companies, and the inefficiency of the current distribution chain via plumbers and installers that is hiking up the cost, KIOTO Group has to decide whether it is enough to rely on their technological and quality advantages, this requires a deeper look into what kind of product(s) to focus on and who is their customer really (wholesale vs retail) and where is this customer located in order to establish a strong competitive position that will generate a strong market share and sustained sales and profit growth. | 2. ISSUES: What are all of the issues relevant to this case? | * Chinese are dominating the photovoltaic (PV) market with their low prices, made possible by the significant decrease in production cost of PV, price dumping strategies, low labour costs, no duty tariffs in European markets for Chinese imports, and government backed investments into Chinese companies. Establishing a 70% market share in Germany alone. To put it in perspective, GREENoneTEC made 40% of its business in Germany. * Growth in the European market has been artificially inflated by government subsidies. Subsidies that have been either reducing or cancelled altogether since market peak in 2008. German market suffered a 25% decrease in one year when subsidies plans were stopped. * End customer prices for solar thermal energy products (not PV) are high due to the high margins demanded by wholesalers (30%) and plumbers and installers added another 40% margin. GREENoneTEC though only gets a 10% margin. These high prices increase the threat from cheaper substitutes such as gas or electric water heaters. * The company prides itself with having a seamless supply chain and effective logistics services, a well trained permanent production team, optimized manufacturing processes to achieve both volume and flexibility and significant investments into R&D and innovation that produces a high quality solar thermal system. * 60% of newly installed collectors in Europe were delivered by the heating industry, which typically consisted of large companies, more and more of these companies were implementing their in-house productions of collectors. Turning them into competitors and forcing the company to seek new customers outside of the heating industry. | 3. ANALYSIS: Use a framework (PEST, Porter, SWOT, etc.) to analyze the issues in this case | New entrants (High pressure) * Low barriers to entry * Differentiation based on quality and innovation for solar thermal energy products, PV is driven by low prices * Moderate capital requirements * Government subsidies incentives in some markets, 30% in China, high subsidies for PV in U.S.These factors represent an attractive market that is easy to get intoSupplier power (Low pressure) * No threat of forward integration * Raw materials prices going up (Aluminum 50%, Copper 150%)Suppliers are mainly raw material providers that are not likely to go into the solar energy businessSubstitute products (Moderate pressure) * A lot of cheap electric and gas products * Fossil fuel prices are also going up, limiting the threatThe high end customer price is giving way to cheaper alternativesRivalry (High pressure) * A lot of competitors, especially from China using low prices to dominate market * Branded products business model in contrast to GREENoneTEC * Started claiming similar superior quality and offering long term guarantees and warrantiesFierce competition from China, especially in the PV marketBuyer power (High pressure) * Customers are exclusively wholesalers and system integrators * Large profit margins of the customers * Threat of backward integration (Heating industry) They buy in large volumes, giving them the power to negotiate lower prices and rebrand and sell for high marginsThis analysis shows an unattractive market due to the high pressures from the different forces, in particular rivalry and buyer power, however by changing the customer and targeting retail the buyer power will change dramatically and by choosing which products to sell and avoiding competing on price with the Chinese the rivalry will also favorably change. | 4. ALTERNATIVES: What solutions can you think of? | 1. Drop the PV product line altogether, focus on solar thermal systems (ETC and flat panel collectors), keeping their OEM business model while capitalizing on the change in smaller collector producers business model (due to cost pressures) to a sales mainly function effectively turning them into customers of GREENoneTEC. 2. Drop the PV product line, forward integrate and cut out the middle men, by offering branded products to retail customers, having an integrated installation and delivery process. 3. Offer PV products in the U.S. only (import tariffs will increase price of Chinese imports, and we have high subsidies for PV), focus R&D efforts on high efficiency, simplicity of the solar system that can be sold as a DIY IKEA like kit. | 5. RECOMMENDATIONS: What would you do? Why? | We recommend alternative number two, KIOTO Group strength lies in its R&D and innovation that is producing a quality product with high efficiency. Leveraging this better product, GREENoneTEC can differentiate itself from the other brands, while at the same time offering a competitive price since the huge markups by wholesalers and system installers are taken out and achieving better profit margins. Competing with the Chinese in the PV market on price is a losing game, and competing on the basis of quality is where GREENoneTEC can properly leverage its strength. Alternative one on the other hand, keeps the power in the hand of the buyer as they control the price and reap the benefits of the high profit margins borne by the end customer.Alternative three can be used as a bridging point to reach alternative number two, by focusing the company‘s energy on a market that is still demanding PV and offering high subsidies for it while defending itself against the Chinese price dumping strategies by imposing high import tariffs. The R&D efforts in simplifying the system to a DIY difficulty level will surely benefit the installation team and reduce their costs. |