Master’s Degree programme – Second Cycle
(D.M. 270/2004)
in International Management
Final Thesis
New product development: the
OSRAM case
Supervisor
Ch. Prof. Vladi Finotto
Co-supervisor
Ch. Prof. Andrea Stocchetti
Graduand
Giulia Tositti
Matriculation Number 833242
Academic Year
2015 / 2016
Acknowledgements
This paper can be considered a successful completion of years of studies and efforts. The following text is intentionally written in Italian language to mention all the people who have played a key role in the draft of the thesis, and who have helped me in every situation of my life. Un primo ringraziamento ai miei genitori e mio fratello Luca per la piena fiducia nelle mie scelte e l’importante sostegno morale ed economico, che mi ha permesso di raggiungere questo importante traguardo.
Mamma, grazie per avermi insegnato le regole fin da piccola, per avermi seguito durante tutto il mio percorso di studi e spronato a dare sempre di più. Renderti orgogliosa è sempre stato così difficile, apparentemente impossibile. Grazie per avermi sempre spronato a fare di più.
Papà grazie per avermi sempre voluto un bene incondizionato. Grazie per avermi sempre supportato e spronato a fare di più, sei il pilastro e la roccia della famiglia, non posso che ringraziarti e dedicare a te in particolare questo lavoro.
Luca, grazie per essere stato un ottimo esempio in famiglia, un obiettivo da raggiungere e uno stimolo a chiedere sempre di più a me stessa.
Un grande ringraziamento a Gianluca che, credendo continuamente nelle mie capacità e sostenendomi, mi ha permesso di continuare questo lavoro e raggiungere l’obiettivo finale. La tua stima e il tuo supporto mi hanno permesso di mettermi in gioco e mi hanno dato la forza di andare avanti e superare qualsiasi difficoltà. Grazie inoltre per l’aiuto nella raccolta del materiale utile e per i numerosi feedback formativi ricevuti.
Un successivo ringraziamento al gruppo giovani di OSRAM, colleghi e amici di diverse funzioni aziendali che, credendo in me mi hanno sostenuto, aiutato e motivato, permettendomi di svolgere in maniera ottimale questo lavoro. Spero vivamente di continuare il nostro rapporto di amicizia e di tenerci in contatto anche quando ognuno lavorerà in un’azienda diversa.
Un ultimo ringraziamento a tutti gli amici e familiari, in particolare Mariavittoria, Jessica, Caterina, Alessandra, Fabio, Anna, Leonardo, Alberto e tutti quelli che negli anni mi sono stati
vicino, supportandomi e credendo in me, mi hanno sempre sostenuto e aiutato a migliorare, senza di voi non sarebbe stata la stessa cosa.
Porgo sentiti ringraziamenti al Prof. Vladi Finotto, relatore di questa tesi, per la grande cortesia e disponibilità dimostratemi e per il suo supporto in questo lavoro in lingua inglese, sviluppato in sei mesi di stage in OSRAM Spa, per aver creduto nel mio progetto di tesi specialistica durante tutta la sua stesura.
Porgo un’infinita riconoscenza all’Ing. Giovanni Scilla, Global Portfolio Marketing Manager di OSRAM Spa, per l’opportunità che mi è stata concessa nello sviluppare il lavoro di tesi durante uno stage formativo in azienda, e per la sua importante collaborazione allo sviluppo del progetto e per il sostegno fornitomi ogniqualvolta ne avessi avuto bisogno.
Sentiti ringraziamenti all’Ing. Michele Gardenal, Product Marketing Manager in OSRAM Spa, inoltre mio tutor aziendale, per la sua disponibilità e importante sostegno e collaborazione allo sviluppo del progetto di tesi, nonché per avermi sempre supportato in ogni attività svolta all’interno dell’azienda, dandomi numerosi insegnamenti e feedback.
Ringrazio inoltre l’Ing. Dennis Fullin e l’Ing. Antonio Callegaro, Product Marketing Managers di OSRAM Spa, per l’importante e continuo sostegno durante tutta la durata del periodo di stage, nonché per avermi permesso di sviluppare il progetto fornendomi importante aiuto ogniqualvolta lo richiedessi.
Ringrazio l’azienda OSRAM Spa, per avermi consentito di svolgere il progetto di tesi e per l’importante esperienza lavorativa concessami, direi un’esperienza unica e formativa.
Ringrazio infine tutte le persone che ho incontrato durante il mio percorso sino a qui, ringrazio tutti coloro che mi hanno trasmesso importanti insegnamenti, e ringrazio coloro che mi sono sempre stati accanto, credendo in me e dandomi supporto in ogni situazione e difficoltà che avessi potuto incontrare. A tutti UN sentito GRAZIE.
Table of contents
Acknowledgements ... 1
List of Figures and Tables ... 9
Abstract ... 11
Abstract in Italian Language ... 13
CHAPTER 1: INTRODUCTION ... 15
CHAPTER 2: THE GLOBAL LIGHTING MARKET ... 18
2.1. Introduction ... 18
2.2. Megatrends in the market’s expansion ... 20
2.3. Global general market’s composition ... 23
2.4. The LED revolution ... 25
2.4.1. Introduction ... 25
2.4.2. Improving luminous efficacy ... 26
2.4.3. Lower production costs ... 26
2.5. The shift to connected lighting ... 28
2.5.1. Introduction ... 28
2.5.2. Internet of Things transforms the Lighting industry ... 29
2.7. The impact on the value chain ... 33 2.8. Worldwide competition ... 35 2.8.1. Introduction ... 35 2.8.2. Philips ... 36 2.8.3. Zumtobel Group ... 37 2.8.4. Trilux ... 39 2.8.5. Cree ... 39 2.8.6. Nichia ... 40 2.9. Market trends ... 41 2.9.1 Introduction ... 41 2.9.2. Policy trends ... 42 2.9.3. Economy trends ... 45 2.9.4. Society trends ... 52 2.9.5. Technology trends ... 54 CHAPTER 3: PRODUCT LINE PRESENTATION ... 60
3.1. What is an LED driver? ... 60
3.2. Common problems affecting LED system operation ... 61
3.3 OSRAM LED driver: focus on OPTOTRONIC ... 62
3.3.1. A brief history of OPTOTRONIC ... 63
3.3.2. Manufacturing: a confrontation between the past and present ... 65
3.3.3. OPTOTRONIC Compact LED Indoor Driver range ... 66
CHAPTER 4:
ANALYSIS OF THE COMPETITIVE ENVIRONMENT ... 72
4.1. Analysis of the market for power LED drivers ... 72
4.1.1. Introduction ... 72
4.1.2. Market analysis ... 73
4.1.3. The latest LED lighting innovations ... 77
4.2. Are Chinese competitors still a threat? ... 78
4.3. Legislation and standards for LED lighting ... 81
4.4. Product life cycle ... 82
4.5. Analysis of market attractiveness ... 86
4.5.1. Introduction to the Porter’s Five Force Model ... 86
4.5.2. Analysis of internal competition ... 87
4.5.3. Customer analysis ... 89
4.5.4. Supplier analysis ... 89
4.5.5. Analysis of potential entrants ... 90
4.5.6. Analysis of substitutes ... 91
4.6. SWOT Analysis ... 92
CHAPTER 5: MARKETING IN B2B AND OSRAM COMPANY ... 94
5.1. Business-‐to-‐business marketing ... 94
5.2. Introduction and history of OSRAM Company ... 97
5.2.1. Birth of the OSRAM brand ... 98
5.2.3. Founding of OSRAM GmbH ... 99
5.2.4. OSRAM throughout the world ... 101
5.2.5. Launchpad for the future: OSRAM becomes a global lighting company ... 101
5.3. OSRAM’s internal organisation ... 102
5.3.1. Carve out of lamps ... 106
5.4. OSRAM leading Company ... 106
CHAPTER 6: THE PROCESS FOR NEW PRODUCT DEVELOPMENT IN B2B: THEORETICAL BACKGROUND ... 111
6.1. Introduction ... 111
6.2. The new product development process ... 112
6.3. Stage-‐gate model for the product launch process ... 113
6.3.1. New product idea generation ... 114
6.3.2. Scoping ... 116
6.3.3. Building the business case ... 116
6.3.4. Development ... 117
6.3.5. Testing and validation ... 117
6.3.6. Launch of the product into the market ... 118
6.3.7. The post launch product’s review ... 120
CHAPTER 7: The case study: OSRAM new product development ... 121
7.1. New product launch in OSRAM ... 121
7.1.2. Research and approach method ... 124
7.1.3. Project preparation (pre-‐Q0) ... 125
7.1.4. Product proposal and business plan readiness (Q0-‐Q1) ... 130
7.1.5. Design readiness (Q1-‐Q2) ... 132
7.1.6. Production readiness (Q2-‐Q3) ... 133
7.1.7. Sales readiness (Q3-‐Q4) ... 133
7.1.8. Project end and review (Q5) ... 134
7.2. OSRAM Launch of the product into the market ... 135
7.2.1. Marketing Mix ... 135
7.3. Alpha product case study ... 139
7.3.1. Brief introduction ... 139
7.3.2. Methods: research design and approach ... 140
7.3.3. Data collection ... 141
7.3.4. New Alpha product development ... 142
Findings and Conclusions ... 153
Sources ... 155
Appendices: Appendix 1: Model for interview about NPD process ... 161
Appendix 2: model interview about product launch into the market ... 167
List of Figures and Tables
• Figure 1: The world lighting market; source: Frost and Sullivan report, October 2014 • Figure 2: The lighting market’s composition; source: BCG 2020 Lighting Market Model • Figure 3: Europe LED based lighting fixtures’ sales; source: CSIL
• Figure 4: Evolution in lighting; source: OSRAM
• Figure 5: Dimensions of the lighting industry; source: McKinsey global lighting market model
• Figure 6: Global LED lighting market forecast; source: A. T. Kearney Analysis • Figure 7: Competitors along the value chain; source: A. T. Kearney Analysis • Figure 8: Market trends; source: OSRAM
• Figure 9: New regulations lag the market shift to LED; source: BCG 2020 lighting market model
• Figure 10: Example of OSRAM LED driver; source: OSRAM
• Figure 11: Application of the Kraljic Matrix; source: Kraljic P. Purchasing must become supply management, Harvard Business Review
• Figure 12: LED Market share estimates; source: HIS Technology 2016
• Figure 13: Application of BCG Matrix Model; source: Pacenti G. C., Business marketing, Il Sole 24 Ore, Milano 1998
• Figure 14: The product lifecycle; source: Kotler P., Keller K., Marketing Management, Bruno Mondadori, Milano 2007
• Figure 15: Summary of maturity phase implications; source: Kotler P., Keller K., Marketing Management, Bruno Mondadori, Milano 2007
• Figure 16: Porter’s Five Force Model, a detailed description; source: Kotler P., Woldemar P., B2B Brand Management
• Figure 17: SWOT Analysis detailed description; source: Kotler P., Woldemar P., B2B Brand Management
• Figure 18: Born of OSRAM; source OSRAM
• Figure 20: Digital System product portfolio segments; source: OSRAM annual report for fiscal 2015
• Figure 21: Application of the Ansoff matrix; source: H.I. Ansoff, Strategies for diversification, Harvard Business Review
• Figure 22: Levels of risk; source: H.I. Ansoff, Strategies for diversification, Harvard Business Review
• Figure 23: OSRAM Market segmentation; source: OSRAM
• Figure 24: Business model for industrialization; source: OSRAM
• Figure 25: Product status in the new product development process (NPD); source: OSRAM • Figure 26: Features of the methodology of Gioia D. A.; source: Gioia et al, 2012
Abstract
This thesis is the result of a work experience with the role of assistant Product Marketing Manager at OSRAM Spa, one of the two leading light manufacturers in the world.
Having a global presence for a company such as OSRAM is very important but, at the same time, it is challenging. The company is facing continuous processes of innovation and improvements; it is also increasing the focus on growth, innovation and technology leadership.
The company is investing heavily in the business of tomorrow by remaining a leading innovator; in fact, it has separated the lamp’s business unit, which has become a separate legal entity called “LEDVANCE”, to follow the need to focus on innovative and smart products for the future.
The business of OSRAM is in a phase of transition from old to new lighting technologies, becoming an important player in a world that is even more digitalized.
The purpose of this work experience includes supporting the firm in data collection and analysis of the general lighting market, in particular, the market for LED drivers; also giving support to the formulation and development of business processes from the product idea to commercialization, and acquiring and analysing data about strategies and optimisation processes in the product portfolio.
The global lighting market is continuously evolving and digitalizing, and the adoption of LED technologies is even more intensive, thanks to their growing quality of light and reduction in cost. In addition, the world of Internet of Thing is transforming the lighting industry with a direct combination of controllers, sensors and LEDs with the power of the internet.
The market is quite fragmented, and there will be new players entering this new technology segment, which is considered a healthy business with enormous potential for innovative companies.
Therefore, the development of new products with innovative features is fundamental to competing in this environment and maintaining a solid position and a strong market share. A company can develop new products through its own development processes or by acquiring patents or licenses from other companies. The speed-‐up time to market and maximum fit with customer needs characterise a successful launch process, so involving customers during each
part of the development process is fundamental to receiving continuous feedback and solid information.
This work, in fact, analyses each phase of the launch process of a new product and its introduction into the market. There are several difficulties and needs to manage during each stage of the process, and there are many functions involved.
The purpose of the thesis is to identify and analyse all potential and concrete contestations happening during the real process of the new product development, with particular attention on the concrete development process adopted by OSRAM for “Alpha” product. A final in-‐depth empirical study is carried out to understand how people involved in the process make sense of their actions, decisions and experiences. With this inductive approach of Gioia Methodology, I would like to find and analyse emerging patterns and critical decisions inside the NPD process to see how players answer to problems and uncertainty.
Abstract in Italian Language
Questa tesi è il risultato di un’esperienza lavorativa presso OSRAM Spa, una delle maggiori Light Manufacturers nel mondo, assumendo il ruolo di assistente Product Marketing Manager.
Per una multinazionale come OSRAM, avere una presenza globale è fondamentale, ma allo stesso tempo rischioso. L’azienda è continuamente esposta ad un processo di innovazione e miglioramento, non solo relativamente ai prodotti offerti nel mercato, ma anche in relazione ai processi che stanno alla base; inoltre, gli aspetti di maggior interesse per l’azienda riguardano la crescita, l’innovazione e il leadership tecnologico.
L’azienda sta investendo intensamente nel business di domani rimanendo una leader dell’innovazione; infatti attualmente ha attuato la separazione del ramo aziendale delle lampadine, il quale è divenuto un soggetto giuridico legalmente autonomo definito come “LEDVANCE”, per concentrarsi meglio su prodotti innovativi e intelligenti per il futuro.
L’attività di OSRAM sta attraversando una fase di transazione dalle vecchie alle nuove tecnologie per l’illuminazione, che permettono di crescere e operare in un mondo sempre più digitalizzato. Lo scopo di questa esperienza lavorativa è sia sostenere l’azienda nella raccolta di dati e analisi del mercato generale di illuminazione, con particolare focus al mercato degli alimentatori per i LED; ma anche dare supporto nella formulazione e sviluppo dei processi di business interni, partendo dall’idea di prodotto, fino alla sua commercializzazione e analisi dei dati di vendita, con particolare focus alle strategie e ai processi di ottimizzazione del portafoglio di prodotti.
Il mercato globale di illuminazione è in continua evoluzione e digitalizzazione, inoltre l’adozione delle tecnologie a LED è ancora più intensa, grazie alla crescente qualità della luce e alla riduzione dei costi a lungo termine. Anche il mondo del così detto “Internet of Thing” sta trasformando l’industria di illuminazione, mediante l’ingresso di controller e sensori collegati ai LED tramite la potenza della stessa connessione di rete.
Pertanto, sviluppare nuovi prodotti con caratteristiche innovative è fondamentale per competere in questo mercato, e garantire il mantenimento di una posizione solida e forte al suo interno. Per
sviluppare nuovi prodotti, è necessario dunque che la società abbia un processo di sviluppo interno ottimale, con possibilità di acquisire brevetti o licenze da altre società. Un efficace processo di lancio di prodotto è caratterizzato da tempi di commercializzazione molto rapidi e una dettagliata analisi delle esigenze dei clienti; infatti è fondamentale coinvolgere il cliente durante l’intero processo di sviluppo del prodotto per ricevere continuamente feedback utili e informazioni solide.
Questo lavoro di tesi, infatti, procede con l’analisi di ogni fase del processo di lancio di un nuovo prodotto e la sua introduzione concreta nel mercato. Diverse sono le difficoltà che devono essere gestite durante ciascuna fase, e varie sono le funzioni aziendali coinvolte.
Questa tesi ha lo scopo di individuare ed analizzare tutte le contestazioni ed azioni concrete risultanti dal processo di sviluppo di un nuovo prodotto, con particolare attenzione all’implementazione del prodotto “Alpha” in OSRAM. Un’analisi finale con approfondimento empirico è stata effettuata per capire come le persone, coinvolte nel processo, agiscono e prendono determinate decisioni. Mediante l’utilizzo di un approccio induttivo caratterizzante la metodologia Gioia, si è voluto analizzare e identificare il contesto in cui le diverse funzioni aziendali operano, i modelli emergenti e le decisioni critiche adottate, per determinare come i vari attori del processo rispondono di fronte a problemi e condizioni di incertezza.
CHAPTER 1
INTRODUCTION
The lighting industry is facing rapid changes in technology, frequent introduction of new products, shorter product life cycles and changes in customer preferences, as well as increases in price competition. The future business of a firm operating in this lighting industry will largely depend on its ability to offer innovative products tailored to customer needs.
The new product development process is fundamental when a company wants to expand its product portfolio, possibly penetrate other market segments, and satisfy further needs and requests of customers.
Therefore, this requires significant expertise, qualified employees, considerable investments in research and development, and successful implementation and introduction of new products. The introduction of a new product into the market is the most problematic stage of the process for the product development and launch. Giving a better understanding of this process, the steps included and comparing them with the literature —which includes data analysis, business cases, journals, interviews and professional discussions— can help in the understanding of product development. Another topic regards the way in which to increase the probability of successful product launches in a company such as OSRAM; the answer comes from a comparison between
the related theory and the current process of the company, but also from interviews conducted internally.
This work, in particular, tries to realise a continuous relationship and a constant comparison between the theory and practice, making theoretical considerations in the study of the business reality in OSRAM Spa, working in the lighting sector characterised by an industrial market.
In the following chapter (chapter two), to give a general picture of the lighting sector, there is an overview of the global lighting market, its composition, characteristics and evolution, but also the main players in this evolving market and the main market trends.
In the third chapter, there is a presentation of the line of products characterising the focus of the thesis: LED drivers. After a brief description of the product and an overview of common problems which affect LED system operation, I present the evolution of the LED drivers from the primitive very expensive LEDs for first decorative applications, to the new cost-‐effective and high quality of light products. I also give an in-‐depth description of the manufacturing activity in the past compared to the present and an analysis of the type of relationship between OSRAM and suppliers of electronic components: the starting point for the market analysis in the following chapter.
In chapter four, I analysed the specific market for power LED drivers with the implementation of traditional instruments needed for strategic planning. First, I analysed the actual phase of the product in the lifecycle model; then, the attractiveness of the market using the Porter’s Five Force Model, and finally, I identified the strengths, weaknesses, opportunities and threats of the market, through the SWOT analysis.
The fifth chapter focuses on marketing in B2B1 and the OSRAM Company, which operates in this
industrial contest. After an analysis of the B2B contest and the function of marketing, which has become even more vital for successful planning and introducing new products, the attention is focused on the history of OSRAM and its internal organisation, highlighting the process of carve-‐ out of lamp’s business unit. At the end, there is a presentation of the current actions of OSRAM towards innovation and growth strategy aimed at expanding and acquiring new markets and developing new products’ portfolios.
In chapter six, there is a theoretical background of the new product development process and launch into the market, with a particular focus on the stage-‐gate model: the basis used by the company for the development of new products. An analysis considers each phase characterising the development process, from the product idea to commercialization and real introduction into the market.
In the final chapter, number seven, the core element of this work, important analysis and evidence are collected inside. After a brief description of what currently happens inside the company when a new product is developed, I focus the attention on the real implementation of product Alpha: a good recent example of a product manufactured and developed by OSRAM. Through this qualitative case study, I reconstructed in detail the process of new product development to rigorously demonstrate the links between data, theory and real actions. By the combination of different inductive orders, identified and analysed through Gioia’s methodology, the goals are identifying actions, emerging patterns and critical decisions to see how actors answer to different problems and uncertainty. Thanks to this methodology and its level codes, I finally reconstruct the main phases of the new product development process, using a procedural point of view.
CHAPTER 2
THE GLOBAL LIGHTING MARKET
2.1. Introduction
The global lighting market is currently undergoing a radical change and a rapid transformation driven by the growing adoption of the light-‐emitting-‐diode (LED) technology and the increasing popularity of connected lighting systems. Projections reveal expected revenues of around $130 billion in 2020, so they will continue to grow at 3 percent annually.2
This has been the most notable transition since the nineteenth century, which saw the introduction of electric light bulbs.
The importance of the lighting market in terms of energy use is high; in fact, it represents one-‐ fifth of the global electricity consumed by the lighting sector. Thanks to the enormous efforts of the lighting industry, the share of electricity used for lighting in Europe has decreased from 19% in 2006 to below 15% recently. 3
2 Estimation based on data of McKinsey’s Survey, ‘’Global lighting market model’’. 3 Estimates based on data of McKinsey’s Survey, ‘’Global lighting market model’’.
Figure 1: The world lighting market; source: Frost and Sullivan report, October 2014
Our definition of the global lighting market includes all elements of the value chain from components to lamps, and modules to luminaires, lighting control components, light solutions and services. It considers all technologies and their main applications in general lighting, automotive lighting, as well as in some special lighting segments.
Although overall growth is holding steady, the dynamics of the lighting market are shifting dramatically: the advantages of LEDs, which include low energy consumption, long lifetime and enhanced versatility, are driving market share gains. The rapid growth of LED adoption will continue as prices for the technology fall. In fact, expectations reveal that the average price of an LED point, which is a type of LED light source, will drop from more than $6 in 2014 to less than $3 in 2020 and that the prices of LED linear lamps, the long tube-‐like lamps used in professional
settings, will fall by 18 percent over that period4. Also, the connected lighting systems, known as
smart systems, are growing in popularity because they allow significant cost savings.
These trends, which reinforce one another, are fundamentally altering the underlying economics and dynamics of the market. Existing players are scrambling to adapt, while new players, such as manufacturers in Asia and companies that market private-‐label products, are emerging.
The result across the complex lighting ecosystem is that companies must evaluate where they can compete effectively and adopt new strategies to win in the future, in this technological and competitive landscape transformation.
2.2. Megatrends in the market’s expansion
A number of megatrends highlight the growth in the lighting market: global population rise is the first, especially in developing countries; secondly, urbanisation is increasing the overall demand for lighting products with the use of light even more frequent. Also, rising incomes are increasing the amount that consumers are willing to spend on lighting and, finally, due to scarce resources and climate change, the demand for energy-‐efficient products has become a global movement towards the gradual shift to higher prices in the lighting market. Governments around the world are responding to this with greater regulation towards energy efficiency, and the lighting industry is addressing the issue by pursuing the development and enhancement of more energy-‐ efficient lighting technologies.
Currently, the EU lighting market is driven by various policy trends such as energy efficiency and systems performance; sustainability, like circular economy concepts; smart lighting, including data-‐driven manufacturing and digital single markets; and finally, material efficiency and hazardous material. Digitalisation and data economy is apparently changing not only the market for lighting but also Information Technology function will domain the finance and insurance sector in ten years.
It is important to underline increasing regional differences, so the decision-‐makers have to think about how to make cities and regions more attractive for talented people and how quickly these places are growing in a perspective of future-‐oriented companies.
The world’s population is expected to grow from 6.9 billion in 2010 to 7.7 billion in 20205. This is
an important driver for the growing lighting demand, both in residential and in all other areas of lighting. The increase in the population originates mainly from Asia and this resulting shift in gravity will also be reflected in the geographical distribution of the lighting market and in the corresponding need for customised products in these high-‐growth markets.
Almost all European societies are in persistent and profound demographic change: low birth rates and rising life expectancy are increasing the proportion of older people. This increasingly positive attitude means that the older generation is professionally and socially active for longer. In fact, in Europe, the population will increase from 509 to 516 million in 2025, and this is due also to progress in the experience and performance of vital medical procedures.
The global economy is expected to grow in 2020: the most important expansion will be driven by initiatives in cities that will directly impact on demand in the lighting market, especially in the general lighting sector. Recent McKinsey Global Institute’s research has revealed that 600 urban centres, covering a fifth of the world’s population, are expected to reach around 60 percent of worldwide GDP growth in 2025. In fact, urbanised cities use more light than rural areas, so the urbanisation trend will be a strong driver of the light usage diffusion.
These shifting demographics are causing the major rebalancing of the engines of global consumption; in the past, the main driver of consumption growth was the expanding population, but now this trend depends overwhelmingly on individuals spending more. It is now even more important to know which consumers will have the purchasing power together with their inclination to spend, where they are located and what they want to buy.
By 2030, consumers in large cities will account for 81 percent of global consumption and 91 percent of global consumption growth (according to McKinsey’s research); however, the demographic profiles and the growth prospects of cities are diverging. Some cities are continuing to expand under the demographic profile and so they can expect robust consumption growth,
while others are already experiencing a decline in the population, putting the consumption under pressure. Also, in the next 15 years, half of the world’s largest cities will have fewer young adults than today.
Patterns of consumption are becoming even more complex and varied: emerging economies with richly varied incomes and spending habits and cultures, are becoming prominent features of the global consumption landscape according to the rise in incomes. At the same time, in many countries income inequality is rising, so companies face the challenge of attracting customers at very different pricing points. The weight of global consumption is moving towards services, reflecting the ageing of key consumer segments in developed economies and rising incomes in emerging economies. Cities that are very different in their customer profiles could diverge from the others as population growth slows.
To confront this change, companies need to arm themselves and acquire deep knowledge about the geography of consumers as well as the structural drivers of their spending, from income trends to the changing timing of major life decisions such as getting married and having children. Another two of the world’s greatest concerns regard scarce resources and climate change: McKinsey has been working on this topic for several years from the perspective of climate change, and finally has developed a so-‐called ‘global greenhouse gas abatement cost curve’ offering a holistic perspective of the abatement activities for the greenhouse gases. This analysis shows that the replacement of current non-‐energy-‐efficient light sources with energy-‐efficient light sources will provide considerable economic benefits while reducing the emission of CO². The population has to realise that the average price of lighting products will increase and that energy efficiency is the driving force that will contribute most powerfully to the upcoming discontinuity in the lighting industry.
2.3. Global general market’s composition
The three largest sectors in lighting are general lighting, automotive lighting, and backlighting. The first sector is the most important and it is destined to enhance its presence. According to the analysis of McKinsey, general lighting includes seven application sectors: residential, office, shop, hospitality, industrial, outdoor and architectural.
In fact, general lighting is the largest sector, accounting for approximately 75 percent of the total lighting market. The general lighting market has two key drivers: the strong growth in construction investment in emerging countries and the greater penetration of higher priced light source technologies, including LED, which raises the average price of lighting products.
This is also the most complex lighting market, with multiple applications and characteristics that vary substantially by geography. Residential lighting has the highest share, accounting for over 40 percent of the total general lighting market. Its LED penetration is slower but, thanks to its total market size, its worldwide revenues from LED are likely to be over EUR 20 billion by 2020. In terms of LED penetration, architectural lighting is the early adopter due to LED’s technological edge in colour control, with over 85 percent market share in 2020, although it is likely to remain limited in terms of market size. Hospitality, shop and outdoor LED applications are also expected to have fast growth in market share reaching 70 percent or more by 2020 with the utilisation of the LEDs. 6 In contrast, office and industrial applications will be slower movers due to the current
high penetration of cost-‐competitive linear fluorescent lamps. In terms of general lighting’s geographical aspects, Asia is already the largest market in both the total general lighting market and LED general lighting market; in fact, it is strengthening its position due to its high economic growth, with China at the head of it.
The automotive lighting market will continue to grow and will reach EUR 18 billion across technologies by 2020, driven mainly by the conversion of automotive headlamps to LED technology. The high design flexibility LEDs offer and the fact that automotive OEMs are embracing the technology worldwide are making them one of the most visible vanguards of LED technology today. The trajectory of the automotive lighting market is similar to that of general lighting as its growth drivers are comparable: strong growth of the vehicle market in emerging
countries and LED penetration. Another trend in the automotive lighting market is the shift from light source replacement to new lighting installation business. The driver for this is the evolution towards longer light source lifetimes, leading to a decrease in the replacement of light source market.
Backlighting is the segment made up of lighting used in devices such as TVs, smartphones and
tablets. It has long been the major driver of the LED market, with its lower brightness requirements. However, while it remains stable in market size across technologies at approximately EUR 4 billion up to 2016, the backlighting market is expected to decline to around
half of that by 2020, with brighter LEDs leading to a decreasing number of LEDs required, for example, per TV.
Figure 2: The lighting market’s composition; source: BCG 2020 Lighting Market Model
2.4. The LED revolution
2.4.1. Introduction
The lighting industry has been a conservative and stable industry compared with other electronics industries. Humans had used fire as a light source for thousands of years until the revolutionary invention of the light bulb in the 1870s. In 1920, there was the radical invention of the fluorescent light bulb: more efficient and with a longer lifespan.
Figure 3: Europe LED-‐based lighting fixtures’ sales; source: CSIL
LEDs evolved in the 1960s using the light emission properties of certain semiconductor materials; they now constitute the clear fourth-‐generation candidate thanks to the full-‐colour spectrum combined with their low input power and improving price levels.
During the period 2010-‐2015, we can assume that LED has significantly increased. As we can see in the figure above, LED is projected to become the most widespread light source by 2020, and the relative demand is expected to grow due to the push of the LED-‐based lighting technologies. In fact, customers want sustainable buildings and so lighting can play an important role in achieving this goal.
The target of LED revolution shows a reduction in costs that is becoming increasingly aggressive every year, due to the intensive focus of companies in this sector. The average price of an LED point will slip from more than $6 in 2014 to less than $3 in 2020.
There are two key drivers in reducing LED lighting costs. The first is improving the brightness of light generated (measured in lumen) in terms of the power consumed (measured in watt). Commonly, this refers to the increase in luminous efficacy due to less energy use to achieve the same brightness. The second is reducing production costs per LED product, by reducing the material costs and improving production efficiency.
2.4.2. Improving luminous efficacy
There are various opportunities for improving luminous efficacy along the value chain. One of the key drivers is the greater sophistication of the critical production step, in which the light-‐emitting layers are created. Options include more efficient production handling and a better choice of layer material. Also, multiple activities to enhance luminous efficacy are currently underway, such as the recent introduction of laser technology and surface roughening, both of which increase the amount of light leaving the chip rather than being absorbed inside. Initiatives are being taken to increase the amount of light reaching the human eye at the package level. At a module level, LED driver design will be continuously refined to improve electrical efficiency, while enhancing secondary optics can reduce light loss.
2.4.3. Lower production costs
This point includes a wide range of activities that reduce material costs and improve the efficiency of the production process. Material costs are falling as the LED market expands due to economies of scale. Choice of material is another driver. Today, one of the most expensive components of LED material cost is the sapphire substrate, so preferring the use of silicon can significantly reduce substrate costs. Through the reduction of the LED package and thus the size of the entire light source, and, potentially the fixture, is additional optimising material costs. The integration of production steps that are common in the semiconductor industry is another major cost improvement option. For example, technologies that integrate the package and module step, such as chip on board, are being explored.
LED penetrated the backlight market first and now has also made inroads into the automotive sector. However, the major market for LED going forward is the general lighting.
LED technology has more advantages compared with traditional technologies such as incandescent, halogen and compact-‐fluorescent-‐lamp lighting. The first important aspect refers
to the energy-‐efficiency of LED: in fact, more than 50 percent of the total cost of lighting stems from energy consumption. Secondly, LED is more versatile than other technologies. This point regards the wider variety of colours, the smaller dimensions and the possibility of using LEDs in creative new ways. Third, LED has an extended life, so the result is an LED luminaire, characterised by a light source that is integrated directly into the luminaire.
The forces driving LED adoption will play out differently in various customer segments and different geographies. In fact, in the professional segment, the total cost of ownership is crucial in purchasing decisions. Consequently, professional customers have already moved into more efficient and conventional technologies and are now shifting to LED. Consumers, in contrast, are more focused on the purchase price of the lamp in making a purchasing decision, but we expect an acceleration in the adoption by 2020.
The rate of LED adoption will also differ by region: China and Japan will be the countries that move most rapidly to LED, having high rates of customer acceptance and strong regulations, followed by Europe and North America. While in Latin America and Africa, LED adoption will be a bit slower because of the fact that they remain expensive relative to incandescent lighting.
2.5. The shift to connected lighting
Figure 4: Evolution in lighting; source: OSRAM
2.5.1. Introduction
The increasing popularity of LED gives momentum to another significant shift: the adoption of connected lighting systems, also called smart systems. These systems make more sense if used with LED thanks to the versatility of LED in terms of factors like brightness and colour variation. The construction of the market and the economic conditions are the main factors in the high demand for new, connected systems in lighting.
Residential smart lighting and applications with connected lighting controls offer consumers the ability to add easily intelligence systems and control the light system in their homes. Also, in commercial applications, these solutions offer effective ways of reducing energy consumption for the managers and building owners together with other benefits for stakeholders. Smart solutions mean a reduction in energy consumption and additional functionality in the light luminaires, such as the ability to flash the luminaire.
