Our client, Samsung, is
the second largest
wearable manufacturer.
Over the past 3y, BU
revenue and market share
have been growing, but
the profit is declining.
Why? And what can we do?
11
Verify the objective
“Do we have any specific profit target to
achieve?”
“Do we have any time deadline to reach it?”
“Are there any other objectives we should
know about?”
Ask clarifying question
“Has the industry seen any major changes
recently?”
“Since revenue and market share are
growing, what about cost per unit?”
“Are our main competitors facing the same
issue?”
Coach: Antonello Congedo
Frame the problem
Deep-dive areas for data gathering
Industry
Customers
Company
o Competitors list, differences and performance
o Substitutes
o Recent changes (prices, M&A, new technology,
marketing, new product, …)
o Segmentation (B2B vs B2C, geography, …)
o Expectations and interest changes
o Behaviors (preferred distribution channels, sales per
customer, willingness to pay, …)
o Current profitability: major segmentations and trends
(look at the issue tree below)
Coach: Antonello Congedo
Frame the problem
Profit
Revenue
Price
o Price discrimination
o Trends & recent
changes
x
-
Cost
Volume
o Major revenue stream:
• Product mix
• Customer segm.
• Distrib. Channels
• Geography
o Trends & recent changes
o Segmentation
o Trend & recent changes
o Competitor benchmark
Coach: Antonello Congedo
Samsung unit sold over the past 3y
Software
2017
4M
5%
Smartwatches
2M
Fit bands
2020
VR tools
8M
5%
25%
Others
4M
25%
40%
60%
20%
20%
5%
5%
30%
20%
30%
30%
10%
15%
20%
15%
20%
B2C
B2B
B2C
B2B
Coach: Antonello Congedo
Generate key insights
Main evidences:
Unit sold
2017
4M
5%
2M
2020
8M
5%
25%
4M
25%
40%
60%
20%
5%
30%
30%
20%
30%
10%
15%
20%
15%
20%
B2C
B2B
B2C
B2B
Coach: Antonello Congedo
Smartwatches
Volumes increased by
100%
2
Customer segmentation
& B2B product mix
didn’t change
3
Big shift in B2C
product mix
20%
5%
Software
1
Fit bands
VR tools
Others
Hypothesis: fit bands or VR
tools are the least profitable
products
Next step: do we know the
margin for each segment?
B2C Average Selling Price ’17-20
$
600
Software
500
400
300
200
100
0
2017
Smartwatches
Fit bands
VR tools
Others
2020
Coach: Antonello Congedo
Main evidence: -40% Price
decline for the most sold
product fit bands
Hypothesis: very low
profitability of fit bands
pushed client’s profit down
Next step: do we know the
cost for each product?
Coach: Antonello Congedo
Smartwatch cost segmentation: historical
trends & benchmark with main competitors
$
400
Profit
Marketing
& Sales
G&A
Labor
300
300
60
(20%)
15
30
60
(20%)
15
45
45
60
Parts
150
190
(48%)
15
15
60
300
90
(30%)
300
120
(40%)
15
45
15
30
45
60
120
120
120
60
2017
2020
Apple ’20
Huawei ’20
Xiaomi ’20
Note: Samsung software, fitness bands, VR tools and smartwatches have the same Cost Per Unit. Other’s CPU is 50$.
Coach: Antonello Congedo
Generate key insights
Smartwatch Cost Per Unit, $
400
Main evidences:
Profit
Marketing
& Sales
G&A
Labor
300
300
60
(20%)
15
30
60
(20%)
15
45
45
60
Parts
150
190
(48%)
15
15
60
300
90
(30%)
300
15
45
15
30
45
2
Every main competitor
perform better than
Samsung in a different
cost item
3
Fit bands (-90$ per unit)
and VR tools (-120$) are
making losses
60
120
120
120
2020
Apple ’20
Huawei ’20
Xiaomi ’20
Note: Samsung software, fitness bands, VR tools and smartwatches have the same CPU.
Other’s CPU is 50$.
Coach: Antonello Congedo
CPU didn’t decrease
with higher volumes
120
(40%)
60
2017
1
B2C profit dropped down by 190M$
B2C revenue,
B$
Profit
1.08
0.24
(22%)
1.74
0.05
(3%)
B2C Revenue increased by 60% (+660M$)
While CPU remained the same (240$) the
total cost increased by 100% (+850M$)
1.69
The profit margin dropped by 19pp, with a
Cost
0.85
2017
net income decrease of
-190M$
2020
Coach: Antonello Congedo
Product mix shift
• Retail customers shifted their preferences
towards fit bands
• A new product segment called Virtual Reality
tool has been launched in B2C segment
Mid case summary
–
Low profit reasons
Price decline
• Average price declines for fitness bands, going
from 250$ to 150$ (-40%)
Non-competitive cost structure
• Cost per unit not reduced although a revenue
boost of 100%
• Highest cost structure in the market
• Fit bands & VR tools cost higher than price
Coach: Antonello Congedo
CPU, $
A potential saving of 120$
per unit can be achieved
by leveraging the
competitors’ best practices
for each cost item
Marketing
& Sales
G&A
Labor
Parts
240
15
-120
(-50%)
45
60
120
120
15
15
30
60
As is
To be
Coach: Antonello Congedo
Identified initiatives and associated
risks for each cost item
Cost items
G&A
Levers
Pot. impact
Risks
o Reorganization
o HQ footprint optimization
o Mgmt compensation opt.
30$ per unit
o Staff demotivation
o Talent leaving
Labor
o
o
o
o
Increase automation
Delocalize production
Improve efficiency
Plant footprint optimization
30$ per unit
o Hidden costs
o Gov/unions reaction
Parts
o
o
o
o
Suppliers consolid./renegotiation
Quality/cost optimization
Eliminate wastes/inventory opt.
Inhouse vs outsourcing
60$ per unit
o Sales decrease
o Flexibility loss
Coach: Antonello Congedo
Total impact on Samsung profit
1.2B$
Potential profit
increase
Potential saving per
unit
120$
x
# units potentially
impacted
10M
All B2C and B2C products (excluding
“others”) can be considered be
impacted by the cost reduction initiatives
Coach: Antonello Congedo
Other initiatives
VR tools
Initiatives
Risks
o Exit (today -120$ per unit)
o Increase price
o Lose mkt share in a
o Deep dive on
fast-growing segment
growing trends
o Weaker ecosystem
o Volume drop
strategy
forecast
High profitable
segments
o Increase M&S efforts for most
profitable segments (B2B?,
software)
o Review pricing strategy
New products/
services
o Fast-growing market: look at new
trends to gain market share
o Introduce high profit accessories
(colour bands, …) or services
(extended warranty, apps, …)
Next steps
o Opportunity cost
o Investment costs
o Gov/unions
reaction
o Competitive reaction
o Monitor fastest
growing segments
o Monitor startups
and new product
launches
Coach: Antonello Congedo
Practice case – a top-down recommendation
For our profitability analysis the drop in
margins are due to a shift in product mix and a
price decline.
We achieved a potential impact of 1.2B$ (x25
boost), by developing saving initiatives among
3 main cost items.
•
G&A: -67%
•
Labor: -50%
•
Parts: -50%
As next steps we would like to deep dive and
quantify the impact of 3 high-potential actions:
• Review of VR tools pricing strategy
• Focus on software segment
• Launch of high profitable accessories
Coach: Antonello Congedo