Please be informed that these analysis are not detailed analysis.
Internal and External Analysis:
Technological Threats and Opportunities in Industry
Threats:
- Siemens Energy introduced its new 2,3 MW SWT-2.3-101 model at the end of 2007, the company says it is ideally suited for low- to medium-wind speed sites. Siemens expects the low- to medium-wind market segments to grow substantially in the future, representing as much as one fourth of the total global wind power market in the coming years.
- Vestas is currently manufacturing tubular steel wind turbine towers. Lately developed concrete wind turbine tower let wind turbines reach higher heights where the wind speed is faster and wind efficiency is higher at.
Opportunities:
- Government policies in Denmark aimed at mitigating climate change are expected to further support for wind energy in terms of covering considerable amount of money for the R&D expenditures of wind turbine manufacturers which is supervised by universities.
- Development in aeronautical industry can directly effect with the wind turbine manufacturing technologies where both of them are related with fluid mechanics and aerodynamics. So wind turbine manufacturers can also collaborate with or benefit from R&D endeavours of big aeronautical companies such as Boing etc…
Porter’s Five Forces Analysis
The threat of substitute products: The existence of close substitute products increases
the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand).
* Buyer Propensity to Substitute: Investors are inclined to work with head of list companies
with world wide service for the investment amount is considerably high
* Relative Price Performance of Substitutes: Chinese manufacturers such as Goldwind and
Sinovel have very competitive prices.
* Buyer Switching Costs: Buyer switching costs are relatively not high but they are not
inclined to switch because of prices. The only reason for switching is bad service and long supply duration.
* Perceived Level of Product Differentiation: Buyers in the market are nearly aware of every
technological evaluations criterias about wind turbines for wind turbines investment are very expensive.
The threat of the entry of new competitors: Profitable markets that yield high returns
will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).
* The Existence of Barriers to Entry (patents, rights, etc.): Patents are highly protected by govermental regulations. Getting a wind turbine manufacturer licence in European countries takes considerable amount of time. Non-European manufacturers have get CE certification to be able export their turbines to European countries and there is an extra tax demand for such manufacturers.
* Economies of Product Differences: Some sort of aeronautical technologies creates a distinct cost differences and has a considerable amount of effect on efficiency. For wind turbine technologies are similar with aeronautical space technologies, implementation of these technologies are relative high
* Brand Equity: For Vestas is one of the oldest wind turbine manufacturer and leader in it’s sector, it’s brand equity is relatively higher than other companies except Siemens.
* Switching Costs or Sunk Costs: Switching costs are extremely high for wind turbine erection and operating projects are long term projects and each wind turbines has an average of 50 years life.
* Capital Requirements: Considerable amount of money required for the manufacturing facility investment of wind turbine facilities which makes entry to market impossible for SMEs.
* Access to Distribution: For the turbine parts can be transported by sea or land, it is very easy for a new entrant to access to distribution channels.
* Absolute Cost Advantages: Chinese companies have absolute cost advantages against manufacturers in other companies for work force is considerably cheaper in China.
* Learning Curve Advantages: Learning curve plays an important role in companies technologies for wind turbine manufacturing requires a high end technology and skill.
* Expected Retaliation by Incumbents: Competence between high rollers in industry are high especially in technological and cost level.
* Government Policies: Goverments generally encourages manufacturers for R&D investment in terms of providing low taxes etc… The only country where patent rights are not taken into account, is China.
The intensity of competitive rivalry: For most industries, this is the major determinant
of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc...
* Number of Competitors: There are more than 10 competitors in the market
* Rate of Industry Growth: 35% per year in Europe, 20% per year in the world.
* Exit Barriers: Considerable amount of capital investment for facilities. Signed long term service contract (more than 10 years)
* Diversity of Competitors: There are many competitors from different countries focusing on different competencies.
* Informational Complexity and Asymmetry: Many different and complex information of science branches have to be associated to be able to manufacture wind turbines.
* Level of Advertising Expense: Approximately 2% of annual revenues.
* Economies of Scale: Highly applicable because of acculumated demand for further 2,5 years.
The bargaining power of customers also described as the market of outputs. The
ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes.
* Buyer Concentration to Firm Concentration Ratio: Lower than one, Vestas has more
bargaining power (demand & supply)
* Degree of Dependency Upon Existing Channels of Distribution: There many choices for
transportation channels. Vestas is not dependent on some certain company for transportation.
* Buyer Volume: Vestas have difficulties to answer potantial buyer’s demand.
* Buyer Information Availability: For buyers are inclined to get proposal from every manufacturer, Vestas do not need reach legal entity except from goverments.
* Ability to Backward Integrate: In the beginning, we mentioned about some vertical integration. Vestas had carried out backward integration in near past.
* Availability of Existing Substitute Products: There are a lot of wind turbine manufacturers but Vestas have some certain advantages concerning technology.
* Buyer Price Sensitivity: Only a small percent of buyers are very sentitive to price differences.
* Differential Advantage (uniqueness) of Industry Products: Products in the industry have some significant differences.
The bargaining power of suppliers: Also described as market of inputs. Suppliers of
raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.
* Supplier Switching Costs Relative to Firm Switching Costs: Suppliers want to work with Vestas because of the high volume jobs. So they are inclined not to switch.
* Degree of Differentiation of Inputs: Within every 1,5-2 years.
* Presence of Substitute Inputs: There can be some substitude items but generally they are rigid.
* Supplier Concentration to Firm Concentration Ratio: Vestas has more bargaining power.
* Employee Solidarity (e.g. labor unions): Employees right highly protected in Denmark. There are also labor unions about wind energy sector.
* Threat of Forward Integration by Suppliers Relative to the Threat of Backward Integration by Firms: Backward integration has more possibility then forward integration in terms of being realized .
* Cost of Inputs Relative to Selling Price of the Product: Profits are high, so costs of inputs are considerably lesser than selling price of the product.
Strenghts and Weaknesses of Technologies in Value Chain
For we are going to evaluate strenghts and weaknesses according to value chain, you can see detailed scheme below:
Value Chain
Strenghts:
- As a secondary activity in value chain (technology development), Vestas established an Innovation Network which is designed to create a global platform of interconnected ideas, technologies, methods and research. The goal is to build a dynamic and open environment in which to develop, share and support cutting edge innovation in modern energy. They are inviting partners to join them on a journey into the unknown future of modern energy. People power people, and they believe true innovation comes from great minds working and thinking together. Innovation Network is currently working with the brightest minds in academia and industry across the globe. Together with them, Vestas aims developing research programmes from their sites in Denmark, India, Singapore, the UK and the USA to strive for a revolutionary change in Modern Energy.
- At Vestas, service and maintenance which can be stated under primary activities in value chain are just as important to them as choosing the right wind turbine. Thus, Vestas want customers to know that they view the delivery of a modern energy solution as the beginning of a close partnership that will last the next 20-25 years, or more.A power plant represents a long-term investment, and Vestas know that trouble-free production is crucial for achieving a satisfactory return. Thanks to their global service network, they will have access to a range of standard products that ensure optimal operation, tailored to customer risk profile and minimize the amount of time turbines are not producing power.
Service
Weaknesses:
- For Vestas is working with suppliers for transportation, there can be sometimes problems concerning delivery times and following rules indicated in Vestas Transport Manual. This weakness can be stated under external logictics in primary activities of value chain.
- Another weak point of Vestas is relatively high prices of wind turbines because of the high amount of investment on R&D. This weakness can be stated under marketing & sales in primary activities of value chain.
- The third weak point can be stated as supply time which can be stated under secondary activities (supply) in value chain. As I indicated before demand is higher than supply and this causes a waiting time after order which is around 1,5 – 2 years.
To be continued...
A.Yigit NEPHAN
28.02.2010
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