Statement of the Problem (1 page)
Mueller-Lehmkuhl GmbH (MLG) is a German producer of apparel fasteners. In 1982, it formed a joint venture with the German subsidiary of the Atlas group, an American multinational for the purpose of benefiting from MLG’s technological superiority and access to other markets through the Atlas subsidiary. However, the effect of the joint venture essentially was the limiting of MLG’s markets to Europe and Africa.
MLG is one of the major competitors in the very mature European market for apparel fasteners. Its market share is currently 17% (although three other firms have about the same market share), taking a slightly dominant role in the industry. It has achieved this level of success through a simple business model of producing fasteners and attaching machines as a bundle. It offered high quality fasteners and different types of specially designed attaching machines that could be used only for MLG fasteners thus ensuring long standing business with its customers. The attaching machines are sold or rented out, and MLG provides top-of-the-line support service to compliment its superior quality fasteners.
A new entrant into the market is threatening MLG. Hiroto Industries (HI) is a large Japanese competitor that is marketing the same high-quality fasteners to the European market. It suffered stumbling blocks because of the very high and customer-relationship barriers to entry, but with a different business model, HI has gained ground on the European market, enough for MLG to take notice. HI is now manufacturing fasteners that are compatible with any attaching machine, even MLGs, and with a lower price, customers are now beginning to see value in switching suppliers. The problem statement is therefore, “what corrective steps should MLG implement to retain market share and profitability, in consideration of the lower price and change in business process ushered by HI?”
Executive Summary (1 page)
MLG is a major player in the mature European market for apparel fasteners having a market share of 17%. Its business model is the production of apparel fasteners at very high quality, sold to customers that it has long standing business relationships with. MLG integrates the production, distribution, sales and rental of attaching equipment for its fasteners, and has used this as a way of creating barrier to entry and protected market share.
However a new entrant into the market, the Japanese firm Hiroto Industries (HI) is competing for market share using a different business approach. It distributes attaching equipment that are compatible to all types of fasteners to its distributors, including fasteners its produces on its own and sold at a 20% discount. This move has allowed HI to gain a strong entry into the market, with traditional buyers feeling the advantages offered by the Japanese supplier and with MLG also feeling the imminent threat.
Doing so creates more value for MGL. It increases its net income for the same year from 9.5M to 35M and its average gross margin to 21% from 18%. With this strategy, MGL can compete with HI and others by continuing to offer high quality products at prices that are similar to HI, and still benefit from its entrenched position in the industry.
Analysis (4 pages)
Hiroto Industries (HI) a large Japanese competitor that is marketing the same high-quality fasteners to the European market, even though suffering through high barriers to entry due to entrenched supplier-customer relationships in Europe, has been able to gain a strong foot hold in the market by using an ingenious tact. HI has provided distributors ownership of attaching machines that are compatible with HI fasteners as well as those of competitors such as MLG. By doing so, HI has effectively segmented the industry into the fastener supply segment, which it competes in fiercely by offering the same high quality products at a 20% discount over the current suppliers, and the attaching machines segment that was used primarily by MLG and the other suppliers to corner the market.
HI’s successful foray into the small-volume markets creates a rippling effect, in that low-volume higher value markets are now beginning to experiment with Japanese fasteners, while providing smaller distributors the ability to also compete with MGL’s attaching machines business.
Because of the maturity of the European market, the limitation of MLG to find other regional areas to operate on due to the Atlas merger, the sheer size and volumetric advantage of HI being a Japanese firm, and the eroding supplier-customer relationship due to price and quality issues, MLG has no choice but to modify their business model or else find their company “in a bind”.
Table 1 MLG Product Cost Structure
Note that the cost structure presented above combined both segments of MGL’s business. The cost of producing and servicing the attaching machines, because they have been integrated into the fastener business, are calculated as part of “overhead”. For example, General Overhead includes the cost of technical administration for attaching machines and the cost of the machining department which produces the attaching machines. If these costs were removed from the total costs, meaning a segregation of the two business activities, then the General Overhead lines for both stamping and assembly are reduced by 61%.
The tooling department, although services both the production of fasteners and the attaching machines, services the production of fasteners at a rate of 50,000 per machine. At 47 pieces, that is equivalent to $2,350,000 or 77% of the total tooling cost. If we remove the 23% cost for tooling of attaching machines, the overhead costs is further reduced by 1%.
If the cost of the material required for the production of the attaching machines were removed, there would be an 8.5% reduction in the total material costs. The new cost structure is shown below.
Table 2 MLG Fastener-only Cost Structure
The new cost structures show that if MGL were to follow HI’s business strategy, it could compete by lowering its prices without sacrificing product quality. As a matter of fact, it would be able generate substantial net income if it were to retain the current pricing for its products. Here is a summary of the old and new costs and the computed gross margins.
Table 3 Comparison of Old and New Cost Structures
However, HI is competing for market share using a 20% discount to prices. If MLG wants to edge out HI at their own game, it could do so by reducing its selling prices also by 20% and survive. Here is the calculation for the reduced selling prices and its effect on MLG’s gross profit margins. The calculations show that the even at reduced prices, the average gross margin of MLG using the fastener-only business approach is 21%, higher than the original calculation of an average gross margin of only 18%.
Table 4 MLG Reduced Selling Prices and New Gross Margins
The bottom line numbers show how superior this business model is compared to its old business model. The table below shows that the net income for MLG without the cost of the production and servicing of the attaching machines increases dramatically from 9.5 M to 35M for the same year. It looks like the entrant of HI into the market has led to a better way for MLG to conduct its business and maximize profit.
Table 5 MGL Comparative Net Income Calculations
