Low on Batteries

Question:

A battery manufacturer in the U.K. is experiencing declining sales volume, even though its product is superior in lifetime and quality to those of its competitors. How would you approach this issue?

A decline in sales volume can be caused by two factors: declining market demand or loss of market share. Loss of market share can be due to competing products or substitute products. The Porter’s Five Forces framework could be used here. Think logically about a good way to approach the problem.

Don’t forget that you can always take some time out at the beginning to think about your approach. Many candidates don’t realize that it is perfectly fine to be silent for a moment; this might make you look thoughtful and is much better than starting to ramble and run around in circles. Just remember to say, “I’d like to take a minute to gather my thoughts,” before going silent!

Candidate: What is the product, who are the customers, and who are the competitors?

Interviewer: The company sells batteries for forklifts. Sales are made to OEMs (i.e., forklift manufacturers) and for replacement purposes to large manufacturers and distributors who use forklifts. The majority of sales are to the latter. Customers are located throughout Europe. There are five or six other European manufacturers which are similar in size to our client.

Since the competitors are in different countries, the methods of manufacturing, labor, costs, and so on, should vary from country to country. You should keep this in mind, since this information will come extremely handy later in the case.

Candidate: What is the trend in market demand?

Interviewer: Demand tends to be very stable, growing at approximately 3 percent per year.

Candidate: Interesting. Since demand is stable, I can infer that the industry as a whole is doing rather well, and that the decline in sales for the client, therefore, is most likely due to declining market share. Let me pursue this a little further. Are there any new substitute products or new competitors or new technological advances in battery manufacturing?

Interviewer:  There have been no major changes in technology. The only large change in the marketplace is the emergence of a new Portuguese competitor. This company has managed to grow to approximately the same size as our client in a relatively short period of time.

Now you know the reason for the decline in market share. The industry analysis part is complete and you should now target the specific competitor with respect to the product and price.

Candidate: Next, I would like to find out how this new competitor has been able to accumulate market share so quickly in an otherwise stable industry. It is necessary to evaluate the competitor’s price/product proposition to compare it to our client’s.

Interviewer: Our client’s product is superior in lifetime and quality to that of the Portuguese competitor. Our price is higher as well, however, but we feel the additional quality more than makes up for this differential.

Looks like a price war. You must convince your clients potential customers that your client’s battery is a better value, despite costing more.

Candidate: Now that we have established the different value propositions of the two companies, we need to find out what the customer is looking for when purchasing a forklift battery. Reliability and pricing are the most likely factors for an industrial buyer, and while we outperform our competitor on the former, we are lagging on the latter. The next step would be to evaluate the trade-offs between these two attributes, and to verify our client’s claim that the increased quality is worth the price.

Interviewer: That sounds fine. Where would you like to start?

Candidate: First, we know that our client’s product lasts longer. How much longer?

Interviewer: Our battery lasts for a total of five years, while our competitor’s only lasts for four years.

Candidate: And what is the price differential?

Interviewer: Our battery costs £1,500, while our competitor’s costs £800.

Candidate: That means that the cost per year is £1,500/5 = £300 for our product and £800/4 = £200 for the competitor’s. That is not looking good on the surface. Maybe our client should reduce its prices. Does its cost base enable it to do so while maintaining an acceptable level of profitability?

Interviewer: Not really. Our client’s cost base is substantially higher due to the higher quality of its products. In addition, labor expenses are significantly higher in the U.K. than in Portugal. Our client is not willing to leave his lukewarm Guinness and jellied eel behind, however, so moving is not an option. Therefore, lowering costs is not an option.

Candidate: So far we have only considered the purchase price as a cost of the product. It is possible that there are additional costs involved. To find out, we need to evaluate the use of the batteries.

You don’t need to be an engineer to figure this out; just use your common sense. At the same time, state your assumptions.

Forklifts will most likely ride around a plant or warehouse moving goods around. The battery powers the forklift, so it will need to be recharged periodically.

Again, you may be completely oblivious of the fact that forklifts are used for moving goods around. Never mind. All you need to know is that the batteries need to be recharged at some point.

While the battery is recharging, the forklift will likely be out of commission. At the very least, the battery will need to be switched, which takes time. Is there any difference in charging time or efficiency between the competing batteries?

Interviewer: It takes eight hours to fully charge our battery, which will then last for 12 hours. Our competitor’s battery takes 10 hours to charge and can be used for 10 hours. The batteries draw the same amount of electricity per hour while charging, but due to the better design of our battery, output efficiency is higher.

Candidate: This strikes me as the most crucial point, that the output efficiency of the client’s product is better than that of the competitor. This efficiency difference needs to be translated into costs and value for the customer. Value is derived from lower energy requirements, faster turn-around time, and fewer switching operations. Given the fact that our client’s customers are large industrial companies, they probably work around the clock. Therefore, let’s assume a 24-hour-a-day need for the forklifts.

First, let’s evaluate the energy savings. We need to know the price of electricity drawn per hour.

Interviewer: Right. Assume that the hourly rate is £.10.

Candidate: If the forklift will be used 24 hours per day for, say, 350 days in a year, it will require 24/12 x 350 = 700 charges of 8 hours each for our battery. That is 5,600 hours at £.10 or £560 per year. For our competitor, the battery requires 24/10 x 350 charges of 10 hours each per year. This equals 8,400 hours or £840 per year. The difference is £280 per year per battery.

Next, let’s evaluate the switching costs. I would like to know how long it takes to switch the battery.

Interviewer: This takes only a couple of minutes. For simplicity, let’s assume the time is negligible.

Candidate: That means that we can assume switching costs to be negligible. Since the batteries are out of commission while charging, however, we will need to evaluate how many batteries we need per forklift. Assume that our client’s customers operate fleets with multiple forklifts, which can all share the same batteries. For our battery, each forklift requires one battery to move while another is charging for 8 of the 12 moving hours or 2/3. That means that we need 1 2/3 batteries per forklift. For our competitor’s battery, the battery is charging for the entire moving time. That means that there are two batteries required for each forklift. The annual purchase cost per forklift is therefore £300 x 1 2/3 (£500) for us and £200 x 2 (£400) for the competition. That is a cost differential of £100 per forklift.

In summary, the purchase cost of our battery is £100 higher per forklift per year, but the energy savings are £280 per year. That means that our battery is a better value than that of our competitor’s.

Interviewer: That is clearly an important result! What do we do with it?

Candidate: We need to find a way to relay this information to the customer, because they apparently do not know about this benefit given our loss of market share. We may want to consider using a direct sales force to explain these benefits given the complexity. Printed materials may also be useful to describe the benefits in detail.

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