Our client was a division of a large (~$5bn/year) consumer products manufacturer that was generating lower margins than the overall business. In addition, the division was competing in markets which were newer and more technologically sophisticated than the company’s traditional core business.
Our objective was to evaluate the long-term profitability of the business. Additionally, we were to determine the best approach for the existing business (grow, maintain, exit).
Our approach was to focus on two key factors: channel/product profitability and the competitive cost position. We analyzed the business operations (plant, distribution, and R&D) to measure the client’s actual costs for each product/channel combination. The client had been using “normal” costs which differed significantly from actuals for certain key products. This analysis identified individual product-channel profitability and which combinations had negative margins. We estimated competitors’ costs using scale and experience curves modeled on historical analysis of the client’s cost data.
Building on this analysis, we forecasted future market potential for each major product line. For older products with historical data, we integrated information regarding worldwide markets to form an aggregate view of future demand. For newer nascent products, we developed “bottom-up” market estimated by examining technical suitability of the client’s products to new applications.
We synthesized our results to create an integrated dynamic model of how cost and market position would likely evolve over time for each product. This provided forecasts for unit costs (by product-channel) for the client and key competitors as well as overall market sizes (by product-channel) and prices.
Our work identified in which product-channel combinations our client was most competitive. The client’s overall competitive position varied widely and depended on price sensitivity, brand loyalty, and technical sophistication (which all varied depending on the particular product-channel combination) with gross margins ranging from -50% to +50%.
These insights focused management effort on developing business segments with the greatest long-term potential. The client discontinued costly capital investment in one product where the client was irreparably, structurally disadvantaged (immediately improving the NPV of the business by 20%). The client continued operations in products that had a solid competitive advantage and shifted production scheduling priorities to more profitable products. Building on our forecasting work, we worked with the client to develop an integreated model of the business to facilitate future decision making in response to changes in market conditions.