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‘Sulzer Pumps is a provider of innovative products and services who can satisfy customer needs in motor pumping. Their manufacturing facilities are located on all continents with sales offices, service centres and representatives in more than 150 countries around the globe’ (Sulzer, 2008). Sulzer pumps’ product portfolio caters mainly oil & gas and hydrocarbon industry. Sulzer had developed a new pump and is anticipated to launch the new product in market within the next 18 months. Subsea  industry is one of the most exciting and fastest growing technology sectors in the world. Because it is an efficient and environmentally friendly way of producing oil and gas, increasing numbers of subsea wells are being installed around the world. The oil and gas development projects are now forecasted to be shifted to the world’s most remote locations and in extreme environments, pushing out into 8,000 ft water depths or beyond and going several hundred miles offshore. Innovations in subsea technology will play a vitally important role in enabling the execution of these projects and will form the basis of future ambitious plans (Parshall, 2008). This report considers the trend in the primary and secondary factors for subsea engineering and related pump manufacturing segment. The potential impact of changes in the marketing environment both external and internal for Sulzer pumps Limited are taken into account for forecasting the effective market demand for the new Sulzer pump in the subsea segment. The financial viability and competitive pricing decision for the new pump product is analysed and recommendations for competitive marketing strategy are elucidated.
Overview of Sulzer pumps:
Sulzer was founded in the year 1843 in Winterthur, Switzerland. Sulzer offer wide portfolio to business partners in the Oil & Gas and Hydrocarbon Processing Industries, to contractors and operators of Pulp & Paper mills and Power Generation Plants as well as for customers in the Water Treatment & Distribution, Food, Metals and Fertilizer businesses. The key market segment for Sulzer pumps with relatively higher growth potential is Subsea engineering sector for oil extraction which this report considers specifically in detail.
Figure Market segment for Sulzer pumps (Sulzer pumps 2008 in figures, 2010)
The geographical reach for Sulzer pumps (as indicated in the figure 2) is one of the key factors for successfully catering to the needs of the customers. At the same time by integrating the use of global supply partners to ensure both raw materials and factored items are supplied to the highest quality standards and investing in state-of-the-art factories, machine tools, packaging and test facilities, Sulzer pumps is keen in differentiating its product bundles (i.e. Product + Service) from its competitors. These continuous improvements would benefit to develop a competitively more advanced manufacturing philosophy.
Figure Geographical customer segmentation for Sulzer pumps (Sulzer pumps 2008 in figures, 2010)
Marketing analysis for Sulzer pumps:
External environment analysis:
The oil industry highly influences the market demand for Sulzer pumps. The subsea engineering technology being the efficient and environmentally friendly way for oil and gas extraction, the growth of the subsea market segment depends on the factors affecting the demand and supply characteristics of oil industry.
World Oil industry analysis:
Oil accounts for between 34% and 37% of the world’s primary energy. The population growth drives the increasing demand for food, water and energy and also places increasing pressure on the environment. Supplies of oil, gas, coal and uranium are forecasted to peak as reserves are getting depleted (as reflected in the crude oil price increase). At the same time, fear of climate change is putting pressure on the energy sector to move away from carbon burning to nuclear, solar and other environmentally friendly energy sources. The increasing demand for oil in future drives the need for exploration of new oil fields by upgrading and deploying innovative technologies. The factors promoting the expansion of the production capacity of oil are
GDP growth and population growth are key drivers of energy demand. The population of the world doubled from 3.2 billion in 1962 to 6.4 billion in 2005 and is forecast to grow to 9.2 billion in 2050 (UN, 2004).
Figure World population growth vs. Energy consumption (Westwood, Oil and Gas Business Prospects, 21, 2009)
Figure World energy consumption trend (Westwood, 2006)
Subsea market analysis:
Subsea technology comprises wellhead and related production infrastructure placed on the seafloor, rather than on a conventional surface platform, a spar, or a semisubmersible or other floating production facility. Subsea wells and infrastructure are tied back by flow lines, risers, and umbilical to surface producing facilities that may be directly overhead or many miles away, possibly even onshore. While deploying subsea technology can be very expensive, as water depths increase, conditions grow harsher, and locations become more remote, the alternative of building a larger, heavier surface facility to hold the wellheads, pumps, separation equipment, and other infrastructure is often more expensive, sometimes prohibitively (Parshall, 2008). In order to meet the rising demand, the future expansion for oil supply capacity could be classified based on the extraction mode as indicated in the figure 3.
Figure Global trends in oil extraction segment (Westwood, 2009)
From the above graph the following key points could be elucidated
Offshore sector is presently 35% of world production of oil.
Deepwater sector which was 3% of production in 2002 is on an increasing trend and is expected to be 10% by 2012.
After 2012, deepwater is the only sector of the three which would continue to grow.
The future oil exploration trend as predicted by Westwood (2009) indicates the importance of the growing deepwater sector. The future of the companies involved in the subsea engineering is rested upon breakthrough innovation and its rapid commercialization that caters to the changing trends in the oil and gas expansion.
Figure Global oil exploration trend forecast (Westwood)
Subsea market PEST analysis:
To predict the industry trend it is necessary to understand the underlying factors that influence the subsea market. The PESTEL analysis would be a very useful framework for analysing the primary and secondary factors influencing subsea market expenditure  (CAPEX & OPEX).
Table PEST analysis for Subsea market
Tax and subsidies for oil corporations and related market suppliers (specifically National oil companies are emerging stronger)
Political disparities and instability affects new investments in the sector
The oil price inflation (volatility in specific) also influences
The economy has been affected significantly in 2008 by a severe lack of liquidity. Many businesses and individuals are facing serious financial hardship as a result.
The world’s markets are becoming increasingly more joined up due to improvements in e-commerce, global firms, and the removal of trade barriers providing both opportunities and threats for global perspective of firms.
The demand for alternative sources of energy (substitutes for oil specifically non renewable) affects oil exploration
With the nature of oil and gas partnerships changing, companies who nurture relationships with national operating companies (NOCs) will continue to grow
SOCIAL & ENVIRONMENTAL
Demand for oil products consumption is influenced by the increasing population growth
Skilled work force issue:
“13% of the current workforce will have retired by 2007 and 33% by 2012” (Society of Petroleum Engineers)
Environmental issues related to oil spill over impacts raise concern over limiting offshore oil extraction and switch to alternative sources of energy
The challenges to subsea development posed by deep water and long distance, referred to as long-distance delivery management (LDDM), are to install a system that will not fail and that can be maintained
Shift to deepwater oil extraction in future paves way for subsea engineering which is less expensive and more effective than the alternative of building a larger, heavier surface facility to hold the wellheads, pumps, separation equipment, and other infrastructure
Subsea market future investment trend:
The global trend in the increasing demand along with increasing depletion rate of existing oil fields imposes supply challenges for future oil producing companies. The National oil companies (NOC) are fast gaining market share and also investing in increasing oil production. An indication of the trend in capital and operating expenditures of global oil producing companies is shown in the figure 5. The trend portrays increasing capital investment in future which implies the increase in demand for subsea equipments.
Figure Trends in CAPEX vs. OPEX (Westwood, Oil and Gas Business Prospects, 21, 2009)
The split up of the overall expenditure in subsea engineering is given in the figure below which indicates that the majority of the expenditure spent is in subsea wells part.
Figure Split up of expenditure in subsea engineering (Westwood, Global Offshore Prospects , 2006)
In the present scenario the subsea (off shoring) market spread is concentrated in Africa, American and Asian continents. The expansion in the subsea market for the future is forecasted to be in African, Asian and Australasian region which forms the focus for new investments (Figure 7).
Figure Trend for geographical subsea segmentation (Westwood, Oil and Gas Business Prospects, 21, 2009)
A detailed country wise market segmentation of the subsea industry potential on the basis of oil reserves is given below
Figure World oil reserves by region
The key subsea market regions where the pump manufacturers would be competing for in future is portrayed in the figure below which indicates the relative level of capital expenditure forecasted to be spent by companies across the world.
Figure Future offshore capital expenditure from 2009 to 2012 (Westwood, Oil and Gas Business Prospects, 21, 2009)
The future market priorities are changing from the focus on Multinational oil companies to National oil companies (NOC). The oil industry customer segmentation based on the above discussed consideration is in the Table
Table Changing Prioritisation in the oil industry
Multinational oil companies
National oil companies
The Gulf of Mexico with its tremendous potential for future oil exploration poses a tremendous opportunity for deepwater oil extraction. Sulzer pumps could concentrate in this region with the long term perspective to trap the future market demand from the uncommitted reserves.
Table Gulf of Mexico oil production scenario (Karl, 2007)
The targeting tactics for Sulzer pumps could be classified into three segments based on the trend in the subsea market Capex trend and future growth potential (as in Table 4)
Table Targeting tactics for Sulzer pumps
Main markets (present)
Additional Priority markets (proposed)
Markets to be observed
UK (for atleast next 3 yrs)
The key competitors for Sulzer pumps in the subsea market had been selected by considering the key parameters such as geographical presence, new product development, market share and trend in the new order contracts. The key strategic group  that Sulzer has to compete with is (indicated in the figure) below,
Framo subsea multiphase pumps
G.E (General Electrical)
Table Multiphase pumps of key competitors (Scott, p. 4)
The analysis of the present scenario connecting the internal capabilities and short falls with respect to the changes in the external is very critical for attaining successful differentiation (product & service) and sustainability. The SWOT analysis for Sulzer pumps could give a picture of the how the company is positioned/possessing capability to cater to external environment.
Table SWOT analysis for Sulzer pumps
Leading global supplier in producing high efficient units
Highly dedicated R&D wing
Development of new technologies (Poseidon – Helico axial multi phase technology)
Strong customer relationship
Sales lacking in pulp and paper sector
Frequent change of laws in oil and gas industry
Weak record of working with small industries
Fluctuating Trading currencies
Strong oil market in coming future
More Ultra deep well projects in future (as indicated in external environment analysis)
Huge investment & subsidies by the government (specifically NOCs) for deep water projects
Culture change to switch to substitutes (Use of renewable energies)
Environmental effects and related protests might influence legislative measures
Government regulation and political forces driving trade disparities
Financial analysis for Sulzer pump:
The financial justification of the new pump product is critical for considering the business viability of the product. The report takes into account of a few basic assumptions to reduce the complexities of considering real time data (which would be beyond the scope of the assigned work).
The costs considered are direct materials, direct labour and overhead costs in general
The overhead is fully absorbed (@100%) on the basis of direct labour cost
The sale of pumps per customer is assumed to be 3. Each customer would purchase three pumps per order
Price is the charge paid/realised by the customer for owning/using the product/service for the entire life of the product/service used (i.e. Sum of all costs including opportunity costs till disposal/resale of the product). Price is one of the four key elements of a marketing mix and so it is very critical for Sulzer pumps to adopt the right pricing policy according to the changes in the external environment. The pricing could be done in two perspectives
Market based pricing
Cost based pricing
In the case of Sulzer pumps, by considering the competitive environment and impact of key elements like product quality & service, technical expertise for future product development and other elements would also play a major role in
Figure Pricing choices based on product life cycle (Best, 2005)
Table Pump pricing using Full cost pricing method (cost plus pricing)
Mark up %
Mark up price/unit
Break even analysis:
Break even sales (BEP) indicates the sales required to have no loss (no profit) for a financial undertaking.
By using the equation method,
BEP = Total Fixed cost
Where Contribution/unit = Selling price/unit – Variable cost/unit
In the financial consideration for Sulzer pumps the fixed cost that occurs every year is assumed only as the overhead cost and the total variable cost includes direct materials DM/unit and direct labour DL/unit.
MOS = Actual sales – BEP
Margin of safety (MOS) is an indicator of the safety level of projected operations above the breakeven point. The higher the MOS % the lower is the financial risk of incurring losses.
Table Break even analysis for Sulzer pump
Margin of safety
MOS as % of sales
Figure BEP for the projected sales of Sulzer pumps
Financial viability of the new pump project:
The net present value (NPV) for the new pump project is calculated to evaluate the financial viability of the project in the time horizon considered. The assumptions taken into account for calculating NPV is as below,
The time horizon considered is for a period of 5 years
The residual value of the project at the end of 5 years is difficult to be estimated. From the perspective of prudence, the residual value at the end of five years is neglected in NPV calculation.
The project is assumed to be financed by bank loan and hence the cost of capital (which is taken as the discount rate) for the new project is taken as the typical bank lending rate for loans.
The risk Beta (ß) for the Sulzer Company is assumed to be unchanged after taking up the new investment.
The price inflation for the factor inputs of manufacturing is taken as 3% (as given in the assignment)
The real options i.e. future option to invest, to increase wealth or to secure competitive advantage is not considered as they could not be valued to the required accuracy.
In the NPV based assessment, a positive NPV  indicates that the project adds value to the company’s overall cash flow and hence would increase the company’s wealth.
Table NPV estimation for assessing financial viability of the project
Figures in GBP
Net cash flow
Discount rate @ 12%
NPV for 6 years
NPV for 5 years
NPV for 3 years
Pricing policy: (Best, 2005)
The competitor analysis indicates the potential competitors who are well established in the market. To compete with the potential global players the price differentiation strategy should be proactive by type. During the initial stage of product life cycle, the cost plus pricing approach could be used (This could vary from a period of 1 to 3 years depending on the competitor’s reaction). Subsequently Sulzer pump could gain (first mover advantage specific to the new pump) sustainable market share by pre-emptive price cutting and value based pricing. Since the competition for market share in the business environment is not just based on price (relative to consumable products) other factors like product quality, customer intimacy and integration with other subsea contractors are critical to sustainable business excellence.
Increased collaboration and product simplification together with specialist supplier and globalizing the procurement processes & operating procedures would strengthen the supply chain (supply chain strategy).
Reducing the scale of subsea systems is essential for greater flexibility and cost savings in field development, especially when drilling smaller targets over the life of a field.
Focus on specialized manufacturing by understanding and catering to the needs of the operators while effective integrating the other subsea contractors would increase the overall value of the value chain for Sulzer pumps.
By applying lean manufacturing methods and/ adopting methods for high quality integrated into own manufacturing and at suppliers (zero defect philosophy – Six Sigma) could prove to be useful for increasing the value delivered to the customer.
The subsea market segment is one of the fast growing sectors and could suffice to maintain its importance for pump manufacturers. With the positive outlook of the market it could be elucidated that competition from pump manufacturers for market share would be high. Sulzer would need to specifically target the customer segments with highest growth potentials with differentiating strategy. Continuous product enhancement and product development, improved supply chain, global presence but local differentiation, striving for world class technical expertise and customer relationship management are recommended to be some of the building blocks for Sulzer to exploit future opportunities.
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