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MUELLER-LEHMKUHL GMB
Strategic Profitability Management
1) What is the case - the context? - 0.5 page 1. Mueller Lehmkuhl (ML), a German producer of apparel fastener is facing stiff competitions from its Japanese competitors 2. Japanese have priced at Fasteners 20% lower than ML’s 3. Market competition - ruled by only 4 major players plus few smaller ones producing only cheap attaching machines 4. Market positioning of ML – Large-volume where automatic machines were required 5. ML’s market segments o Large companies purchasing large volumes of different fasteners o Smaller companies needing large quantities of single fastener 6. Stable market conditions with little price competition 7. Competition factors: o Quality of fasteners o Performance of attaching machines o Quality of service 8. Market prices – there does not seem to be a standard pricing as each consumers pays different amount for their fasteners, making it difficult to compete on price 9. Japanese entry into the market had triggered huge price cuts in high volume sales 10.Hiroto industries – o New Marketing strategy to sell attaching machines rather than renting them to identified distributors as the companies that manufactured both attaching machines and fasteners would sell/rent only to the end o HI does not own the machines and hence did not have the overhead of providing services o Invested capital was kept to minimum, ensuring low cost o No risk of returned machines unlike ML o HI’s entry helped dealers to compete directly with companies similar to ML with a significant price advantage 11.ML’s threats: o HI’s strategy threatened 1. Small volume customer who used fasteners 2. Large volume customers using Japanese fasteners on ML equipment 12.Challenges before ML: o Do not lose market share o Keeping price levels high in the face of Japanese competition o Customer retention o Lower wages and overhead provided by Japanese competition o Relevance of the current cost systems
2) What is the learning from the class - including discussion on the questions - 1 page Key learnings from the case: 1. Costs are not driven by labor. Products and costs should be market driven. This can be observed by ML’s fasteners which are over cost as the price/cost build up had forced on some products to recover the costs 2. As per the discussions for the questions in the case, it is evident that the fasteners can still be profitable after 20% price reduction when the bundled costs are unbundled 3. As the marketing conditions change, even the efficient cost systems can become obsolete as ML was better off in their market till they faced a disruptive idea of HI 4. Unbundling the costs can help in effective pricing of the products 5. Unbundling the costs will further helps in identifying the accurate product costs and can identify the sources of the errors in the costing system 6. These bundled cost system had helped the competitor exploit the company and successfully capture the market share 7. Bundling of costs will also affect the strategy of the firm by providing a false information on the overall product and overhead costs 8. For an established stable market, the key for the firm while handling the cost management seems to be survival 9. Cost ing system can push the firm to market specific products and is a double edged sword as inaccurate cost system can reduce the profit margins as is the case with ML 10.Unbundling of the cost structures can help in fixing the right price for the product and can avoid overcharging(eg: the AM’s were being overcharged as per the calculations in class) 11.When forced with stiff competition, the inward looking into activity based management of costs can help in finding the right price and right costs 12.The sudden changes to pricing by unbundling can disrupt the current equilibrium but the survival in the market should be the key 13.ML should pull products from smaller companies as a threat for enforcing contract obligations to sustain market share 3) Application of the case to a similar problem for one of the group member's companies?
Caterpillar sells construction and earth moving equipment in India. Product sold is bundled with telematics solution as a standard offering to customer. The offering includes machine, telematics device. The offer also includes telematics 3 years subscription for machine data and monthly reports. As industry witnessed in construction segment, led to opportunity for Chinese and Korean manufacturers to set up base and offer products at much lower price. These competitors offering does not include any technology solutions. Overall the customer perceived value of caterpillar as high quality and reliable machine. Industry segment in India shifting towards mid-tier segment that is price sensitive. Customer affordability for higher price machine is a challenge. This has been a major challenge for caterpillar to penetrate in growing markets.
AS IS Product Costing A deep dive analysis segregating product and technology separately. It is evident from below table, margin for bare product is higher and telematics is losing margin. Further analysis shows that telematics is losing margin due to 3 year free subscription that is built. Also, Telematics data usage shows that only 20% of the customers have logged into the system in last 3 years indicating that there are only few customers are really interested in telematics information while majority of the others are not using it. There is an opportunity to reduce machine cost by making telematics as an attachment instead of standard. AS IS product costing
Produc t Revenue (in lakhs INR)
Cost of COGS SG&A (in Lakhs) Profit Net Margin %
Machine
62
58 1 3 4.84%
61.22
57.03 0.9 3.29 5%
Telematics
Comments
0.78 Telematics price is inclusive of device cost + 3 year 0.97 subscription charges 0.1 -0.29 -37%
Proposed Product Costing Proposed solution is to de bundle product, telematics and telematics subscription. Below table shows product costing and margins when machine, telematics and 3 year subscription is de bundled. Machine price can be reduced by 0.78Lakhs and sold at 61.22lakhs and this helps in improve sales in mid segment. Further, there are two options for costing telematics and telematics subscription. One option is to unbundle subscription and let customers pay for it. This is shown in table below.
Option 1:
Produc t Revenue (in lakhs INR)
Cost of COGS SG&A (in Lakhs) Profit Net Margin %
62.23
58.16 1 3.07 4.93%
Machine 61.22
57.51 0.9 2.81 5%
Telematics Annual Subscriptio n unbundled
Telematics device
Comments
0.78
0.23
0.49 0.1 0.19 24%
Telematics subscription charges are unbundled and offered as 0.16 monthly service 0 0.07 30%
Option 2: Another option is that telematics can be bundled with a 1 year free subscription and still be profitable. Cost of 1 year telematics subscription is 0.16 and new telematics device profit is 0.03 as shown in table below
Produc t Revenue (in lakhs INR)
Cost of COGS SG&A (in Lakhs) Profit Net Margin %
Machine
Telematics device with 1 year free subscription
62
61.22
0.78
58 1 3 4.84%
57.35 0.9 2.97 5%
0.65 0.1 0.03 4%
Strategic Profitability Management
1) What is the case - the context? - 0.5 page 1. Mueller Lehmkuhl (ML), a German producer of apparel fastener is facing stiff competitions from its Japanese competitors 2. Japanese have priced at Fasteners 20% lower than ML’s 3. Market competition - ruled by only 4 major players plus few smaller ones producing only cheap attaching machines 4. Market positioning of ML – Large-volume where automatic machines were required 5. ML’s market segments o Large companies purchasing large volumes of different fasteners o Smaller companies needing large quantities of single fastener 6. Stable market conditions with little price competition 7. Competition factors: o Quality of fasteners o Performance of attaching machines o Quality of service 8. Market prices – there does not seem to be a standard pricing as each consumers pays different amount for their fasteners, making it difficult to compete on price 9. Japanese entry into the market had triggered huge price cuts in high volume sales 10.Hiroto industries – o New Marketing strategy to sell attaching machines rather than renting them to identified distributors as the companies that manufactured both attaching machines and fasteners would sell/rent only to the end o HI does not own the machines and hence did not have the overhead of providing services o Invested capital was kept to minimum, ensuring low cost o No risk of returned machines unlike ML o HI’s entry helped dealers to compete directly with companies similar to ML with a significant price advantage 11.ML’s threats: o HI’s strategy threatened 1. Small volume customer who used fasteners 2. Large volume customers using Japanese fasteners on ML equipment 12.Challenges before ML: o Do not lose market share o Keeping price levels high in the face of Japanese competition o Customer retention o Lower wages and overhead provided by Japanese competition o Relevance of the current cost systems
2) What is the learning from the class - including discussion on the questions - 1 page Key learnings from the case: 1. Costs are not driven by labor. Products and costs should be market driven. This can be observed by ML’s fasteners which are over cost as the price/cost build up had forced on some products to recover the costs 2. As per the discussions for the questions in the case, it is evident that the fasteners can still be profitable after 20% price reduction when the bundled costs are unbundled 3. As the marketing conditions change, even the efficient cost systems can become obsolete as ML was better off in their market till they faced a disruptive idea of HI 4. Unbundling the costs can help in effective pricing of the products 5. Unbundling the costs will further helps in identifying the accurate product costs and can identify the sources of the errors in the costing system 6. These bundled cost system had helped the competitor exploit the company and successfully capture the market share 7. Bundling of costs will also affect the strategy of the firm by providing a false information on the overall product and overhead costs 8. For an established stable market, the key for the firm while handling the cost management seems to be survival 9. Cost ing system can push the firm to market specific products and is a double edged sword as inaccurate cost system can reduce the profit margins as is the case with ML 10.Unbundling of the cost structures can help in fixing the right price for the product and can avoid overcharging(eg: the AM’s were being overcharged as per the calculations in class) 11.When forced with stiff competition, the inward looking into activity based management of costs can help in finding the right price and right costs 12.The sudden changes to pricing by unbundling can disrupt the current equilibrium but the survival in the market should be the key 13.ML should pull products from smaller companies as a threat for enforcing contract obligations to sustain market share 3) Application of the case to a similar problem for one of the group member's companies?
Caterpillar sells construction and earth moving equipment in India. Product sold is bundled with telematics solution as a standard offering to customer. The offering includes machine, telematics device. The offer also includes telematics 3 years subscription for machine data and monthly reports. As industry witnessed in construction segment, led to opportunity for Chinese and Korean manufacturers to set up base and offer products at much lower price. These competitors offering does not include any technology solutions. Overall the customer perceived value of caterpillar as high quality and reliable machine. Industry segment in India shifting towards mid-tier segment that is price sensitive. Customer affordability for higher price machine is a challenge. This has been a major challenge for caterpillar to penetrate in growing markets.
AS IS Product Costing A deep dive analysis segregating product and technology separately. It is evident from below table, margin for bare product is higher and telematics is losing margin. Further analysis shows that telematics is losing margin due to 3 year free subscription that is built. Also, Telematics data usage shows that only 20% of the customers have logged into the system in last 3 years indicating that there are only few customers are really interested in telematics information while majority of the others are not using it. There is an opportunity to reduce machine cost by making telematics as an attachment instead of standard. AS IS product costing
Produc t Revenue (in lakhs INR)
Cost of COGS SG&A (in Lakhs) Profit Net Margin %
Machine
62
58 1 3 4.84%
61.22
57.03 0.9 3.29 5%
Telematics
Comments
0.78 Telematics price is inclusive of device cost + 3 year 0.97 subscription charges 0.1 -0.29 -37%
Proposed Product Costing Proposed solution is to de bundle product, telematics and telematics subscription. Below table shows product costing and margins when machine, telematics and 3 year subscription is de bundled. Machine price can be reduced by 0.78Lakhs and sold at 61.22lakhs and this helps in improve sales in mid segment. Further, there are two options for costing telematics and telematics subscription. One option is to unbundle subscription and let customers pay for it. This is shown in table below.
Option 1:
Produc t Revenue (in lakhs INR)
Cost of COGS SG&A (in Lakhs) Profit Net Margin %
62.23
58.16 1 3.07 4.93%
Machine 61.22
57.51 0.9 2.81 5%
Telematics Annual Subscriptio n unbundled
Telematics device
Comments
0.78
0.23
0.49 0.1 0.19 24%
Telematics subscription charges are unbundled and offered as 0.16 monthly service 0 0.07 30%
Option 2: Another option is that telematics can be bundled with a 1 year free subscription and still be profitable. Cost of 1 year telematics subscription is 0.16 and new telematics device profit is 0.03 as shown in table below
Produc t Revenue (in lakhs INR)
Cost of COGS SG&A (in Lakhs) Profit Net Margin %
Machine
Telematics device with 1 year free subscription
62
61.22
0.78
58 1 3 4.84%
57.35 0.9 2.97 5%
0.65 0.1 0.03 4%
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