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<Group 5>

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 MLs
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
5. MLs 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
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 HIs entry helped dealers to compete directly with companies similar to
ML with a significant price advantage
11.MLs threats:
o HIs strategy threatened
1. Small volume customer who used fasteners
2. Large volume customers using Japanese fasteners on ML
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

Key learnings from the case:

1. Costs are not driven by labor. Products and costs should be market driven.
This can be observed by MLs 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 accounting 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 AMs 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
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
t Machine Telematics Comments
Revenue (in
lakhs INR) 62 61.22 0.78
Telematics price is
inclusive of device
cost + 3 year
Cost of COGS 58 57.03 0.97 subscription charges
SG&A (in Lakhs) 1 0.9 0.1
Profit 3 3.29 -0.29
Net Margin % 4.84% 5% -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 Telematics n
t Machine device unbundled Comments
Revenue (in
lakhs INR) 62.23 61.22 0.78 0.23
charges are
unbundled and
offered as
Cost of COGS 58.16 57.51 0.49 0.16 monthly service
SG&A (in Lakhs) 1 0.9 0.1 0
Profit 3.07 2.81 0.19 0.07
Net Margin % 4.93% 5% 24% 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

device with 1
Produc year free
t Machine subscription
Revenue (in
lakhs INR) 62 61.22 0.78

Cost of COGS 58 57.35 0.65

SG&A (in Lakhs) 1 0.9 0.1
Profit 3 2.97 0.03
Net Margin % 4.84% 5% 4%