Mueller-Lehmkuhl GmbH:
Statement of the Problem
Mueller-Lehmkuhl GmbH (MLG) is in a very curious position. In 1985, MLG was comfortably perched on top of the European apparel fastener industry, and while it has neither technological advantage nor other competitive strength against rivals, it has protected market share due to its long-standing relationship with its customers.
A new competitor has entered the mature European market, called Hiroto Industries (HI). HI has completely changed the landscape by successfully entering the market by giving a 20% discount to MLG’s prices and by attacking the high volume low-quality segment of the market, which makes up 85% of the total industry.
The sudden acquisition of HI’s 7.2% market share is a cause of concern of MLG. How could a company offer products at 20% discount and remain viable? Surely there must be some difference with the way they are producing their products but with no technological advantage, how could they possibly do this?
In light of these facts, how could MLG implement to retain market share and profitability, without sacrificing product quality or customer satisfaction?
Executive Summary
1. Mueller-Lehmkuhl GmbH or MLG is one of the few dominant players in the $551 millin European apparel fastener industry. It currently has a 17% market share. MLG’s business model is an integrated attaching machine - apparel fasteners business, in that it sells fasteners but includes attaching machines as a way of creating barriers to entry and ensuring market share.
2. MLG is operating profitably. It has continued operating profitably but its recent merger with an American company has led to a shrinking of potential export markets. The entry of Hiroto Industries in the European market is a serious threat to the long term viability of MLG, especially since HI is offering products of the same quality at the largest segment of the market at a discount of 85%.
3. MLG can revise its business model and work on separating the business of producing attaching machines from the production of its main products, the apparel fasteners. Removing the associated costs of attaching machines makes MLG more profitable, bumping its gross profit margin to 62% from 18%.
4. MLG will compete, now that the business landscape has changed, by offering its products at a 20% price discount as well. This would still be profitable for MLG, with a 21% average gross margin and an increase in net income of 35.6 million from 9.5 million.
The main difference between Mueller-Lehmkuhl GmbH and Hiroto Industries is how they view the business of producing apparel fasteners. MLG believes in an integrated approach, including the production of the machines required for attaching the fasteners to fabrics. This segment of the business does not create substantial revenue, since the business is driven by the sale of fasteners. MGL in fact sees the attaching machines as one of the biggest market control systems it has. For one, these machines are serviced free-of-charge my MLG tying its customers with goodwill. Secondly, these machines can be used only exclusively for MLG fasteners.
HI has taken a different approach to the business. HI looks at the business as the production of fasteners only. Attaching machines are services that could be provided by third parties using attaching machines that are not differentiated from others. HI believes that this business model is more competitive and provides its distributors the ability to compete with MLG’s attaching machine business as well.
If we examine HI’s approach and apply it to MLG, we can reduce overall project cost by removing:
1. The cost of the attaching machines – this includes the material cost and production of the machines, the servicing of the machines, and the cost of related inventory;
2. Machining costs included in the general overhead costs; and
3. Tooling cost for machines related to the production of the attaching machines.
The results show more competitive manufacturing levels for MLG. This direction however, removes the long-standing inclusion of attaching machines as part of the business model.
If we compare the old business model with the modified MLG business model, we can see how HI can offer prices at a 20% discount. Removing the production and all the associated cost of attaching machines makes MLG more competitive!
Assuming MLG can sell its products at the current price and volumes, the gross margins it would receive exceed an average of 60%! The inclusion of the attaching machines to the cost per unit calculations brings gross margin averages to only 18%. However, because of the presence of HI in the market, MLG must compete at the new price levels. Reducing the prices by 20% gives the results shown below. MLG is still profitable, having an average gross margin of 21%, still higher than the original 18% of the traditional business model.
In cash terms, the change in business model makes MLG more profitable. Net income has risen from 9.5 million to 35.6 million, a 275% increase!
The lessons here are evident. A mature industry with oligopolistic tendencies and high barriers to entry is not a safe industry. A new way of doing business will force old players to change. Fortunately for MLG it can and still take advantage of the situation. It can spin off the attaching business manufacturing as another business, and maximize profit and protect if not expand market share with this approach.
