The Situation
The client was an industrial valve manufacturer that catered to large oil and gas firms in Asia. They specialised in custom designed valves that controlled a variety of fluids ranging from water to crude oils and gases. They had a committed and talented R&D facility to simulate and test fluid dynamics within the valves they built.
The Business Need
The client’s valve manufacturing provided sufficient profit margins and they were comfortable with their market share. However, over the last few years, the top management has clearly noticed a steady decline in sales volume. One of the reasons for this was because of the top management’s adamant hold on profit margins. On one hand, if they had reduced margins to increase sales, the reality of declining sales volume would not be very evident in a few years. The sales volume would have been propped up by less profitable sales. On the other hand, since they held onto the profit margins, the increasing competition that was causing the loss of sales became quickly evident.
The question that was posed to our consultants was this: should the client change their stand on holding onto current profit margins or should they reduce profit margins to increase sales volume and therefore compensate for revenue loss.
Analysis
Our initial discussion with the client, showed us that their market awareness was quite limited. As a first step, we conducted a market study of the valve industry for the Asian region. The results of the market study presented the fact that the price of the custom designed valves had dropped in the region. Purchasers of these valves also had new manufacturers in the region to procure from. One obvious step was to get into a price war with the new entrants in the valves industry.
The other aspects that came out of our structured analysis of the client’s strengths was their maturity in tool and die manufacturing. Though the client did not have expertise in materials other than steels, their basic engineering capability for working with homogeneous and composite materials was evident. Our analysis also pointed to the client manufacturing process needing significant improvements that can be made, to reduce product costs. For example, advanced software simulations can be used to reduce or avoid physical testing to a large extent and improve quality related failures.
Our market study in India pointed to a burgeoning residential and commercial plumbing market for valves. This was an eye opener for the client’s management.
The Solution
The solution that was proposed was a two-pronged approach to change the overall business strategy. One was to look at the collapsing profit margins and the other was into new product development.
As a stop-gap, a revision of profit margins could be done, however a clear minimum was to be determined upfront by the management. Our consulting team guided the management through a pricing exercise to come up with these profit margins.
A new product development was started to look at plastic and composite plastics-based valves for the retail market, especially for residential homes and commercial buildings. The client’s capability in tool and die manufacturing was quickly realised with plastic mold and plastic forming dies.
Results
The client got a revenue boost by gently reducing the profit margins. This boost helped with the product development of retail plastic valves. The product development took a few months because the R&D in plastics had to be done. They initially released 3 valves into the market and achieved better market acceptance than the existing plastic valves because of their higher quality standards they brought to the manufacturing process.
Our team had pointed out that the client sales teams were not capable of doing retail sales and an entire sales restructuring had to be done to approach the new retail market.
The market research and strategy change for the client took 3 months to complete. The retail sales team creation and restructuring of the sales effort took another engagement of 6 months.