Hilti Fleet Management (A): Turning a Successful Business Model on Its Head　　Introduction
　　In 1999, Marco Meyrat, General Manager of Hilti in Switzerland, received a visit from one of his key account managers, who said, “I have good news and bad news.” The good news was that Hilti had just landed a major new contract from Batigroup, then the largest construction company in Switzerland. The bad news was that Hilti would have to reinvent its way of doing business to meet Batigroup’s requirements. This was especially tough because Hilti had been very successful with its extant business model. In 1999, Hilti was Liechtenstein’s largest manufacturing company and one of the largest power tool producers in the premium segment globally. With its high level of innovation, long-term vision, and superior product quality, Hilti was in some respects characteristic of the whole region, which encompassed Germany, Austria, and Switzerland.
　　Over the next few days, Meyrat visited Batigroup and some of its construction sites. He saw how managing hundreds of power tools had put significant strain on Batigroup’s operations. Batigroup was a loyal and strategically important customer for Hilti and had requested a holistic tool management system. Its management wanted to outsource all processes related to the management of its tool fleet, including administrative activities, maintenance, and financing. Meyrat saw a major opportunity in this request. In the past, his salespeople’s power tool demonstrations had led to the sale of one or two power tools per call—never more than that. Suddenly the opportunity had arisen to sell contracts rather than individual tools. A single contract might result in Hilti’s provision of 100, 200, or 300 tools to the customer. Meyrat reflected that a scalable business model built on this foundation could result in more than a simple key account project for Batigroup.
　　At about the same time, Pius Baschera, CEO of Hilti, was on one of his visits to the Swiss market organization. On his yearly visits to the various market organizations, he placed high value on personally strengthening one of Hilti’s core traits: closeness to the customer. He accompanied salespeople on their visits to customers and talked to the customers about their needs. Since he had once been General Manager of Hilti Switzerland, he was particularly interested in the Swiss market and keen on following its recent developments, challenges, and trends. Baschera had also heavily
　　HBS Professor Ramon Casadesus-Masanell, Professor Oliver Gassmann (University of St. Gallen), and Doctoral Student Roman Sauer (University of St. Gallen) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. Certain details have been disguised. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management..
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　　strengthened Hilti’s firm performance. Since he took over the firm in 1994, Hilti’s sales had exceeded US$2 billion for the first time, and profit had increased at a rate of almost 8%. Given his high performance demands and close relationships with customers, Baschera was certainly a tough man to impress with a new business idea.
　　Nevertheless, Baschera’s visit gave Meyrat the perfect opportunity to arrange another business trip to Batigroup. He wanted to let Baschera form his own opinion on the matter. After their joint visit, which included meetings with the CEO and CFO of Batigroup, Baschera and Meyrat drove back to Hilti’s headquarters in Schaan, Liechtenstein, discussing their latest observations on the way. Baschera confirmed that he saw a fascinating opportunity in Batigroup. He said, “One of the biggest challenges, even at the top management level, will be figuring out how to manage thousands of power tools.”
　　Meyrat, in return, shared his belief that taking Batigroup’s request and developing it further could serve as a useful way to differentiate Hilti from its competitors. “I see a clear customer need,” he said. “The customer needs to organize all these small tools. We’re talking about hundreds and thousands of tools that Hilti could manage. We could target a much higher share of wallet than what we currently have.”
　　Baschera was impressed with Meyrat’s enthusiasm. He said, “Marco, I think we really have something here. But we need to take a close look at the specific solution: the operating model, our competitive environment, and so on. Batigroup’s request implies a radical break from Hilti’s current business methods. Those same methods helped us become a leader in the premium power tools segment. I think we should handle this opportunity low profile.”
　　Meyrat understood Baschera’s point about starting on a small basis, but emphasized the scope of the opportunity, which he saw as more than a simple key account project. Baschera pressed him on this matter. “Why exactly do you think Hilti needs to shift in that direction?” Baschera asked. “We’re on a successful path already. Our competitors are lagging behind.”
　　Meyrat replied, “That may be true, but customer needs are starting to change. We are losing ground to competitors in the small- tool market. As you know, we are a premium brand, and in the segment of small tools, premium is of less value. Differentiation is hard for us to attain. We have to find new solutions, new customers—otherwise our brand will fade out in Switzerland.”
　　Baschera had taken note of those recent developments. Still, he challenged Meyrat, saying, “I am a bit concerned about how far we can stretch this opportunity. There’s still no clear urgency for switching away from our tried- and-true methods. Such a shift represents a high risk for Hilti, even in regard to initiating a small key account project for Batigroup. In the end, what would you expect the market size to be for such a solution?”
　　After some consideration, Meyrat replied, “I’m not sure. Business model innovation doesn’t happen as often as product innovation. For Hilti, the chance to develop a new business model comes maybe two or three times per century. So we’re dealing with high risks in regard to the market and we have no classic procedures at hand. Batigroup is handing us this opportunity on a silver platter. Honestly, I think our biggest concern should be seizing and benefiting from it before a competitor does so instead.”
　　Baschera answered quickly, as they were now approaching Hilti’s headquarters. “Marco,” he said, “Hilti supports strategic and innovative initiatives, but whatever we do will be closely observed by the rest of the company.”
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Hilti Fleet Management (A): Turning a Successful Business Model on Its Head

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　　The History of Hilti
　　When Hilti started as a family- owned business in 1941, it focused on contract manufacturing of construction tools. The scope, size, and reach of the company expanded significantly over the years. With its expansion, Hilti’s goal was to concentrate on areas where it could achieve the leading position, and to grow faster than the market. In this vein, the firm continued to focus primarily on the commercial segment, rather than the segment of do-it-yourself customers.1
　　Several distinctive features contributed to the success of Hilti’s business model and differentiated the company from competitors such as Bosch, Makita, and Hitachi Power Tools. One such feature was the direct selling approach, which the company maintained since its foundation. Nearly two- thirds of all Hilti employees contacted customers regularly. They had approximately 250,000 daily contacts around the world.2
　　To best target customers with the direct selling approach, trade (e.g., building construction) and regional segments were meticulously separated according to their turnover and the potential they offered.3 Within these customer segments, Hilti sales employees tried to reach as many people as possible who were involved in tool-purchasing decisions (e.g., purchasers, users, foremen and tradesmen on building sites, specifiers, architects, and executives). The company also adopted a multichannel approach to sales that included field workers, telephone support, Hilti centers, and an internet portal. It even sent videographers to worksites to observe how customers conducted daily tasks and used its products.
　　Hilti’s customer-centric approach extended throughout the company. Even senior management spent some time with customers on-site. Most importantly, Hilti’s R&D department was one of the first to adopt a Lead User concept, which integrated customers deeply in the process of developing new tools. Regular collaboration with customers and quality management enabled expedited development process times of about 24 months, in contrast to the average time of 3 to 3.5 years reported by industry observers.4 Moreover, Hilti was able to improve the productivity of its R&D department. Baschera said, “The research centers of our competitors consist of 1,200 researchers or even more. So you might ask: ‘How can Hilti compete against this work force?’ Hilti is able to achieve the same output with a lot fewer researchers because of its close and permanent customer interaction. Every innovation is born out of customer needs, not just developed through over-engineering.”
　　Hilti created the market for premium power tools and strove to position itself as a premium supplier. The median price of Hilti tools was above that of competitors, as the company focused on value-added products rather than short -term price benefits. Since it had to offer superior technology to compensate for charging a premium price, Hilti spent approximately 4.5% of its sales revenue on R&D.5
　　In the 1990s, Hilti began to branch out from product centricity while continuing to develop new appliances and technological improvements. In 1992, the company introduced warranty certificates; in 1996, it introduced three-year full service for breakers, a form of power tool; and in 1997, it introduced a six-month repair guarantee. Later, the value proposition of “Lifetime Service” was included in the tool price, integrating features such as a lifetime repair cost limit, up to two years at no cost, and a lifetime manufacturer’s warranty.6
　　Companies like Hilti that focused on heavier power tools, priced around $800, had smaller portfolios, consisting of about 50–100 different products (plus the corresponding variants). In order to compete with the broad portfolios of other companies that were three to four times larger, they now sought to expand, offering light tools and smaller devices down to about $200, as well as common
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　　consumables and accessories for only a few dollars.7 It became more difficult to differentiate with such offerings. For basic tools like angle grinders, there was no motive to compete on special features or higher performance, and no reason for customers to purchase them from a premium brand. Consequently, there was no need for a well-trained sales force to demonstrate such products. However, Hilti’s sales force was built on the philosophy that there was a strong need to demonstrate the techno-logical superiority, innovative features, and performance of Hilti products in live demonstrations. Such costly demonstrations were pointless for commoditized products, but in the late 1990s, firms like Hilti faced increasing commoditization. Meyrat said, “We found ourselves losing ground to our competitors in the small-tool market. [. . .] We are a premium brand, and in that segment premium was of less value. Differentiation was also harder for us to attain.”8
　　The market analyses carried out during those years foresaw an intensification of competition. Analysts at Hilti predicted that rivals would grow in size, increasing their merger and acquisition (M&A) activities and striving to gain higher market shares. Indeed, major competitors strove to expand their product portfolios and optimize their quantity/cost ratios.9 Additionally, the M&A activities of competitors increased, and they grew substantially. Such growth threatened Hilti by causing a scaling effect. Larger companies such as Bosch benefited from increased marketing and R&D budgets, additional sales channels, and improved production cost profiles.10 (See Exhibits 1a–c for detailed information on Hilti’s financial data and history.)