Firm:A.T.KearneyCaseNumber:Casesetup(factsofferedbyinterviewer):YourclientisamanufacturerofbicyclesTheyhavebeeninbusinessfor25yearsTheymanufacturerandsellthreecategoriesofbicycles:Racingbikes:Highend,highperformancebikesforsophisticatedcyclistsMainstreambikes:Durable,butnotoverlycomplicatedbikesforeverydayridersChildren’sbikes:Smaller,simplerversionsoftheirmainstreambikesforchildrenProfitsatyourclienthavedecreasedoverthepastfiveyearsQuestion:Whatisdrivingthedeclineinoverallprofits?Whatrecommendationsmightcorrectthesituation?Suggestedsolutions:Thefirstquestionistodeterminewhathascausedoverallprofitstodecrease.Toaccomplishthisthecandidatemustfirstunderstandwhathastranspiredineachofthethreeproductcategoriesoverthepastfiveyearsduringwhichprofitabilityhasslipped.Thefollowingarequestionsandanswersthatwouldbeprovidedinaninterviewscenario.Whataretheclient’smarginsforabicycleineachofthethreesegments?Racing:Cost=$600/unit,Profit=$300/unitMainstream:Cost=$250/unit,Profit=$75/unitChildren’s:Cost=$200/unit,Profit=$50/unitWhathashappenedtothemarketsizeofeachofthethreesegmentsoverthepastfiveyears?Racing:Hasremainedconstantatitspresentsizeof$300MMMainstream:Hasincreasedat2%growthrateperyeartoitspresentsizeof$1.0BChildren’s:Hasincreasedat3%growthrateperyeartoitspresentsizeof$400MMWhathashappenedtoourclient’smarketshareineachofthesesegments?Racing:Marketsharehasdecreasedfrom60%to30%Mainstream:Marketsharehasincreasedfrom0%to5%Children’s:Marketsharehasincreasedfrom0%to3%Whoaretheclient’smajorcompetitor’sineachmarketsegment?Whathashappenedtotheirmarketshareineachsegmentoverthepastfiveyears?Racing:Thereisonemaincompetitorandahostofsmallfirms.Yourmaincompetitorhasincreasedmarketsharefrom30%to50%Mainstream:Thereexistmany,largecompetitors,noneofwhichholdsmorethan10%ofthemarketChildren’s:Asinthemainstreamsegment,therearemanycompetitors,nonewithmorethan10%ofthemarketTheaboveinformationprovidesenoughinformationtoputtogetherapictureofwhyprofitshavedecreasedoverthepastfiveyears:Yourclient,withacommandingpositioninaflatmarketsegment(racing),expandedintonewsegments(mainstreamandchildren’s).Asthisoccurred,marketsharedecreaseddramaticallyinthemostlucrativesegment(racing),creatinganunfavorablemix.Theextenttowhichprofitshavedecreasedcanbededucedfromsomequickmath:profitshaveslippedfrom$60MMfiveyearsago(=60%x$300MMx33%racingmargin)to$44MMtoday(=(30%x$300MMx33%racingmargin)+(5%x$1Bx23%mainstreammargin)+(3%x$400MMx20%children’smargin)).Thedramaticdecreaseinmarketshareintheracingsegmentisatthispointstillunexplained.Questionsthatwouldhelpformulateanexplanationinclude:Havetherebeenanymajorchangesinproductqualityinyourclient’sracingproduct?Orinitsmaincompetitor’sracingproduct?NoHavetherebeenanymajorpricechangesinyourclient’sracingproduct?Orinitsmaincompetitor’sracingproduct?NoHavetherebeenanymajorchangesindistributionoutletsforyourclient’sracingproduct?Orforitsmaincompetitor’sracingproduct?Yes.Previouslyyourclientanditsmaincompetitorintheracingsegmentsoldexclusivelythroughsmall,specialtydealers.Thisremainsunchangedforthecompetition.Yourclient,however,begantosellitsracingbikesthroughmassdistributorsanddiscountstores(thedistributionoutletsformainstreamandchildren’sbikes)asitenteredthemainstreamandchildren’ssegment.Howdothemassdistributorsanddiscountstorespricetheracingbikesrelativetothespecialtystores?Pricesatthesestorestendtobe15to20%less.Whatpercentofyourclient’sracingsalesoccurinmassdistributorsanddiscountstores?Effectivelynone.ThisattempttosellthroughthesedistributorshasfailedHowhasthedecisiontosellthroughmassdistributor’sanddiscountstoresaffectedtheimageoftheclient’sracingproduct?Nostudieshavebeendone.Howhasthedecisiontosellthroughmassdistributor’sanddiscountstoresaffectedyourclient’srelationshipwiththespecialtyoutlets?Again,noformalanalysishasbeenperformed.Althoughsomeanalysisand/orsurveyshouldbeperformedtoanswermoreconclusivelythelasttwoquestions,apossiblestorycanbeputtogether.Therehasbeennoappreciablechangeineitherqualityorprice(oranyothertangiblefactor)ofyourclient’sracingproductrelativetoitscompetition.Itisnottheproductthatistheproblem,butratheritsimage.Asyourclientcameoutwithlowerend,mainstreamandchildren’sproductsandbegantopushtheirracingsegmentthroughmassdistributorsanddiscountoutlets,theirreputationwascompromised.Additionally,thepresenceoftheracingproductsinthediscountoutletshasputyourhistoricracingdistributor(thespecialtyshops)inaprecariousposition.Thespecialtyshopsmustnowlowerpricetocompete,therebycuttingtheirownprofits.Instead,theyarelikelytopushthecompetition’sproduct.Remember,yourclienthasnodirectsalesforceattheretailoutlets.Thespecialtyshopsessentiallyserveasyourclient’ssalesforce.Theaboveanalysisoffersanexplanationofwhathasaffectedthetopsideoftheprofitabilityproblem.Stilltobeexaminedisthecost,orbottomside,oftheprofitabilityissue.Questionstouncovercostissueswouldinclude:Howdoestheclientaccountforitscosts?Theclienthasasinglemanufacturingandassemblyplant.Theyhaveseparatelinesinthisfacilitytoproduceracing,mainstreamandchildren’sproducts.Theydividetheircostsintothefollowingcategories:labor,materialandoverhead.Overallcostshavebeenincreasingatafairlyheftyrateof10%peryear.Whatisthecurrentbreakdownofcostsalongthesecategoriesforeachproductsegment?Racing:Labor=30%,Material=40%,Overhead=30%Mainstream:Labor=25%,Material=40%,Overhead=35%Children’s:Labor=25%,Material=40%,Overhead=35%Howhasthismixofexpenseschangedoverthepastfiveyears?Inallsegments,laborisanincreasingpercentageofthecosts.Doesthebasicapproachtomanufacturing(i.e.themixoflaborandtechnology)reflectthatofitscompetition?Yourclienttellsyouthatthereisacontinuingmovementtoautomateandutilizetechnologytoimproveefficiencythroughouttheindustry,butitishis/heropinionthattheirapproach,maintainingthe“humantouch”,iswhatdifferentiatesthemfromthecompetition.(Unfortunately,he’sright!!)Istheworkforceunionized?YesWhatistheaverageageoftheworkforce?52andclimbing.Thereisverylittleturnoverintheworkforce.Whatisthepresentthroughputrating?Howhasitchangedoverthepastfiveyears?Presentlytheplantisproducingatabout80%ofcapacity.Thishasbeendecreasingsteadilyoverthelastseveralyears.Whatisthetypicalreasonforequipmentshutdown?EmergencyrepairDescribethepreventivemaintenanceprogramineffectattheclient’sfacility?Preventivemaintenanceisperformedinformallybasedontheknowledgeofseniortechnicians.Howoftenhasequipmentbeenreplaced?Isthisconsistentwiththeoriginalequipmentmanufacturer’srecommendations?TheclientfeelsthatmostOEMrecommendationsareveryconservative.TheyhavefollowedaphilosophyofmaximizingthelifeoftheirequipmentandhavegenerallydoubledOEMrecommendations.Theaboveinformationissufficienttoaddsomeunderstandingtothecostsideoftheequation.Yourclienthasanagingworkforceandplantthatisbehindthetimesintermsoftechnologyandinnovation.Thishascontributedtoexcessivebreakdowns,decreasedthroughput,increasedlaborrates(wagesincreasewithseniority)andgreaterlaborhours(overtimetofixbrokenmachines).Inproposingrecommendationstoimprovetheclient’ssituation,thereisnosinglecorrectapproach.Thereareanumberofapproachesthatmightbeexploredandrecommended.Thefollowingaresomepossibilities:Abandonthemainstreamandchildren’ssegmenttorecoverleadershipintheracingsegmentIssuestoconsiderinthisapproach:Howmuchoftheracingsegmentis“recoverable”?Whataretheexpectedgrowthratesofeachsegment?Howbadlydamagedistherelationshipwiththespecialtyoutlets?Aretherealternativeoutletstothespecialtyshopssuchasinternetsales?Howwillthismoveaffectoverallutilizationoftheoperatingfacilities?Maintainthemainstreamandchildren’ssegment,butsellunderadifferentnameIssuestoconsiderinthisapproach:Istheredemandamongthemassanddiscountdistributorsforbicyclesundertheirname?Whatadditionaladvertisingandpromotionscostsmightbeincurred?Whataretheexpectedgrowthratesofeachsegment?Whatisdrivingthebuyinghabitsofthemainstreamandchildren’smarket?ReducecoststhroughautomationandinnovationIssuestobeconsidered:Whattechnologicalimprovementsaretobemade?Whataretherequiredinvestments?Whataretheexpectedreturnsonthoseinvestments?Howwilltheseinvestmentsaffectthroughput?Towhichlinesaretheseinvestmentsappropriate?Arethemainstreamandchildren’ssegmentspotentially“over-engineere