PRIMARY
PERSPECTIVES
INDUSTRIAL GOODS AND SERVICES PRACTICE
2012/13 WINTER ISSUE
VERTICAL
INTEGRATION
REDUX
CHALLENGING THE WISDOM OF
MANUFACTURING OUTSOURCING
ALSO IN THIS ISSUE
A Superior Customer Experience:
The Danger of Reaching for Wow
at the Expense of the Essentials
Leveraging a Diversified
Portfolio: Picking the Right
Go-to-Market Model
ROA Optimization:
A Disciplined Focus in Times
of High Market Volatility
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Founded in 1981, Kaiser Associates is an
international strategy consulting firm that
serves as a key advisor to the world’s leading
companies. We provide our clients with
the unique insight derived from unparalled
primary research capabilities to drive critical
decision making and solve their most pressing
problems. We are dedicated to helping leading
corporations improve their performance and
achieve sustained profitable growth.
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Vertical Integration Redux:
Challenging the Wisdom of
Manufacturing Outsourcing
Evaluating the strategic, operational, and financial opportunities
(and risks) created through a vertically integrated business model
IDEA IN BRIEF
›› It is time to revisit vertical integration as
gains from manufacturing outsourcing
diminish or underwhelm relative to
expectations, and increased control
of the value stream presents an even
greater opportunity to drive competitive
advantage in the longer-term
›› Vertical integration can be beneficial
when: supply and distribution channels are
unstable, suppliers fail to provide greater
economies of scale or scope, insourcing
could create proprietary access to superior
scare resources, and significant operational
efficiency gains are available from supply
chain coordination
›› However, companies must be selective
and careful in determining what and how
to vertically integrate and at what level
of capacity as the decisions have much
longer-term consequences and higher
sensitivity to business fluctuations
A major heavy equipment OEM steadily increased outsourcing of its production activities
as demand grew rapidly following the mid-90s and the company needed to quickly scale
up its capacity and take advantage of the promise of greater outsourcing. As a result of the
2008 economic downturn and the significant reduction that the company had to make to
its orders, the company’s supplier base unfortunately weakened—resulting in more costly,
less responsive and less reliable material inputs. As demand since recovered and is on track
to grow beyond pre-2008 levels, the company was faced with a set of decisions to either
plan its capacity expansion using the same heavily supplier-leveraged model (balance sheet
attractive) or alternatively (and in sharp contrast) develop a more vertically integrated model
and grow capacity through internal capital investment. In short, contemplating moving from
what was perceived to be an efficient and highly leveraged model, to one that offers more
control and possibly lower cost, but with greater balance sheet burden.
Kaiser was asked to evaluate the potential cost saving and strategic and operational benefits
that could accrue from a vertical integration strategy relative to the key risks associated
with increasing its fixed cost/asset base and reduction of business model flexibility. Kaiser
brought insights on best practices and lessons learned from comparative benchmarks and
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conducted economic value analyses to assess the financial risks/rewards and sensitivity to
key operational factors. Moreover, Kaiser introduced a decision framework for the company to
use as a basis to drive effective vertical integration tradeoff decisions at the component level.
Consider the
drivers of vertical
integration
Assess the potential
advantages of vertical
integration
Measure
results
What strategic requirements are
driving our VI decision?
Can vertical integration be used to
address the strategic requirements?
What strategic requirements
are driving our VI decision?
Supplier availability/risk
Volatility of demand
Legacy processes
Logistical/transport costs
Potential benefits of VI
• Ability to drive differentiation through
value engineering
• Ability to continuously improve
processes across the value stream,
lowering waste and costs
• Faster responsiveness to
capacity/demand changes
Potential benefits of outsourcing
• Ability to leverage supplier scale/scope
Lower total manufacturing costs
Greater process efficiencies
Control
Locations/footprint
Labor dynamics
Synergies with
parent company
Cost effectiveness of
outsourcing options
Manufacturing core competencies
Lower waste
Faster throughput
Better financial performance
Product differentiation
Higher margins
Competitive advantage
• Ability to increase/decrease
production with minimal risk
• Lower financial risk in downturns
Kaiser’s analysis revealed that the company was significantly disadvantaged in its
manufacturing cost structure relative to industry peers that were heavily vertically integrated.
The key points of differences were threefold:
›› By having greater control, vertically integrated companies were able to more
significantly employ lean principles to identify manufacturing process improvements,
component-level technical cost reduction, and reduce variances across the entire
value stream
›› Analysis of our client’s strategy revealed that significant portions of manufacturing
outsourcing were going to small, captive suppliers that were not cost competitive due to
their limited economies of scale and offered little to no advantages in product quality as
compared to what could be built in-house
›› By planning internal capacity closer to average demand as opposed to peak periods
and using suppliers to serve surge capacity, Kaiser determined that the company
could have much higher levels of asset utilization and financial efficiency
By moving to a more vertically integrated manufacturing model, the company is now able to
take advantage of significant new opportunities in both cost reduction and value innovation
that were previously unavailable under its prior heavily outsourced strategy.
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A Superior Customer Experience:
The Danger of Reaching for Wow at
the Expense of the Essentials
Analyzing drivers of a positive customer experience to drive brand
equity and customer loyalty
IDEA IN BRIEF
›› The best-in-class
systematically deliver great
customer experiences day-in
and day-out by employing
people, processes, tools, and
measures designed with an
explicit Customer Experience
strategy as its goal
›› Customer Experience is
viewed as a key business
value driver impacting
customer loyalty,
differentiation and brand
development
›› Organizations deliver superb
Customer Experience by
consistently delivering
outstanding touchpoint
experiences with minimal
customer effort peppered by
memorable highlights
›› In many circumstances,
there can be greater
leverage in reducing negative
experiences than there is
in investing in delivering
enhanced experiences
A leading aircraft OEM had unveiled plans for an innovative new product that would begin
full scale production and delivery in a few years. While the aircraft incorporated significant
breakthroughs in technology, the company believed that the key to its ability to winning and
retaining share in the long-run was not only through innovation but also through delivering
a superior aftermarket customer experience (cX). While the company had some sense of
its existing customers’ satisfaction with certain discrete customer-facing functions (i.e.,
warranty support), it lacked a higher order understanding of key contributors to a positive (or
negative) customer experience.
Kaiser was engaged to help define the core tenets of the company’s cX strategy (i.e., what type
of experience do we want to deliver/create) and what was needed operationally (from a people,
process, and technology standpoint) to deliver against that promise. Kaiser conducted rigorous
voice-of-customer (VOC) analyses to define the desired future-state and also conducted best
practice analysis of leading cX practitioners to inform solution development.
Kaiser’s VOC findings revealed that the company’s customer experience was much too variable
based on where interactions were occurring and the issues that were being addressed.
Through the analysis of the best-in-class, we found supporting evidence that customers
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believed it was much more important to first minimize the severity and frequency of negative
experiences rather than overly focusing on exceptionally positive experiences as service has
much more downside risk than upside potential. Best practices that we identified include:
›› Having a single point of contact that could help address all customer issues
›› Proactively communicating with customers on outstanding issues to deliver greater
visibility and accountability
›› Hiring people with both functional competencies and emotional intelligence
›› Ensuring the consistency of interaction quality across touchpoints and across
customer base through highly defined Customer Experience Management (CEM)
processes and practices
From there, after it got ‘the basics right’, and consistently right, the company could deliver
“wow” moments to the customer by seeking to reduce customer effort by anticipating needs
and proactively resolving or escalating issues.
Customer Experience Strategy
Customer
Experience
Goals
Outstanding
customer service /
responsiveness
Proactiveness in
anticipating future
customer needs
Doing what’s
right for the
customer
Single point of
customer
communication
Personalized and
differentiated service
and support
Provide
personalized service
and attention
Reduce customer
effort with a
simplified service
experience
Threshold of Customer Visibility
cX-Aligned
Operational
Processes
Customer lifecycle
management
Problem
resolution / incident
management
Self help
channels
Supplier and Customer Collaboration
CEM
Enablers
cX Performance Management Systems / Metrics
Customer Segmentation and Visibility
CEM
Foundations
Information Systems Platforms
Supply Chain Integration / Distribution Partners
People and Leadership Development
Company Policies including unified cX Strategy
Through development of a clear cX agenda and strategy, the company now has a clear
architecture of how its organizational resources, capabilities, and knowledgebase support
critical cX-centric operational processes and outcomes.
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Leveraging a Diversified
Portfolio: Picking the Right Go-to-Market Model
Improving the go-to-market model of a diversified industrials
company to create greater cross business unit opportunities in a
large, fast growing marketBrand Equity has little to do with brand identity - in fact, it has little to do with the
IDEA IN BRIEF
›› Although there is economic pressure to maintain and optimize
a single go-to-market approach to serving customers, an
expanded product portfolio may warrant a more differentiated
and nuanced approach
›› Without dissecting customers (and determining meaningful
segments) it can be very difficult to effectively determine
the degree to which a portfolio should be integrated across
businesses and when / how they approach customers
A Fortune 500 diversified manufacturing company was seeking to expand its presence in
supplying equipment and services to a fast growing market sector. The company was missing
significant opportunities with a low win rate on bids it pursued, as well as an inability to play in
some of the more lucrative integration projects due to gaps in its overall portfolio. Its current
portfolio was being sold by teams aligned by product category, technology and division, not
organized by customer, which left marketing and business development with uninformed and
often contradictory market intelligence from their sales teams. The result – not being able to
comprehensively identify the high value needs of customers and the inability to structure the
right offerings and determine which organizational unit was best positioned to approach and
win over customers.
Kaiser was engaged to analyze the market and deliver a clear set of answers to the question:
what is the most efficient strategy for playing more effectively in this market? After collecting
inputs from senior decision makers from over 400 customer organizations, Kaiser developed
a set of 6 key customer needs or pain points, identified critical gaps as well as non-critical
“distractions” within the product portfolio, and plotted a detailed map of the purchasing
decision for high-value products.
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Using these inputs, Kaiser determined three organizational go-to-market models to match
the identified customer needs and solution requirements:
›› A ‘lead-sharing’ model in cases where customer’s purchasing activity is spread over a
period of time and spans multiple different acquisition stakeholders requiring careful
coordination of sales outreach
›› A ‘cross-business bundling’ approach in situations where customers highly value
a single one-stop shop of highly complementary products (e.g., due to purchasing
convenience)
›› A ‘solution sales’ model in cases where the company is well-positioned to capitalize
on unmet customer needs by further integrating the technologies and capabilities
of their products to better serve the unique needs of certain customer segments
determining whether to pursue a buyout (or not)
Go-to-Market Models
KEY PRACTICE
CUSTOMER BENEFIT
Sharing of customer
contacts and information
between businesses
regarding sales opportunities
Single Point
of Contact
Offering customers “one-stop
shopping” by bundling
complementary products
One-stop
Shop
Creating technically
integrated, customer-centric
solutions leveraging cross
business-unit capabilities
Customized
Solution
Model 1: Lead-Sharing
Realized
Sales
Business Unit 1
Business Unit 2
Business Unit 3
Model 2: Cross-Business Bundling
Realized Sales
Business Unit 1
Business Unit 2
Business Unit 3
Model 3: Cross-Business Integration
Realized Sales
Business Unit 1
Business Unit 2
Business Unit 3
By taking a more differentiated approach to serving the market, the company is able to
mitigate perceptions of unwanted upselling/cross-selling and bring a right-sized offering to
customers at the right time and right place.
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ROA Optimization: A Disciplined Focus in Times of
High Market Volatility
Using scenario planning to help create multiple contingency
options for strategic decision-making and operational planningnd
Equity has little to do with brand identity - in fact, it has little to do with the
IDEA IN BRIEF
›› Scenario planning presents a framework
for designing and selecting strategies,
making business managers aware of key
uncertainties, and confronting natural
biases for business optimism
›› Even in boom years, it is important for
companies to direct business units to
create a downturn scenario and survival
plan with a focused set of strategic and
operational goals to right size the company
to weather a wide variety of economic
circumstances
›› Companies can then institute robust
performance management programs
with clear operational and financial
benchmarks to help guide organizational
decision-making
A large OEM was challenging its businesses to right-size their operations in order to survive in
the “trough” years and improve margin in the average and peak years. One of the divisions of
the company believed it had made significant strides in achieving a new baseline for its costs
and assets but wanted to ensure that it was setting realistic ROA targets for the future and
that it was well-positioned versus its competitors who were undergoing similar optimization
initiatives. The company engaged Kaiser Associates to assess the manufacturing operations
and ROA (on an apples-to-apples comparative basis) of its two primary competitors.
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Revenue
Sales Scenarios
$
Return
on Sales
Costs
Net Revenue
List Price
Discounts/Rebates
COGS –
Variable
Raw Materials
Sourced Components
Distribution Costs
Direct Labor
COGS –
Fixed
SG&A
Return
on Assets
R&D
-30% in 2 years
Inventory
Current
Assets
Probable
No Change
AR
Raw Materials
WIP Inventory
Finished Goods
Cash
Current
Liabilities
Asset
Turnover
Best
Indirect Labor
Mfg Overhead (non labor)
Depreciation of Assets
AP
Accrued Expenses
Short Term Debt
Fixed
Assets
PP&E
Worst
Land
Buildings
Capital Equipment
The assessment provided a detailed comparison of machine sales, aftermarket positioning,
manufacturing and supply chain costs and assets across North America and multiple
international locations. Kaiser’s analysis uncovered several key areas where competitors
were gaining competitive manufacturing advantages:
›› Manufacturing efficiency through standardization and sharing of facilities between
multiple product categories
›› Flexible labor that was trained to work on multiple product lines
›› Sourcing leverage through in-sourcing of components from sister companies and
through optimizing the trade-offs between cost/quality
›› Asset utilization through inventory leverage with dealers and sharing of dealers and
their parts distribution network
The results of the analysis highlighted a number of additional cost optimization opportunities
for the business but also uncovered additional top-line opportunities in aftermarket and
international sales. The client reengaged Kaiser 18-months later to refresh the analysis to
assess the impact of changes they had made from the first analysis and to update their
understanding of competitors and how they could continue to outpace them in the market.
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John Wilhelm
Mark Stein
James Tetherton
Senior Vice President and Partner
North America
+1 202 454 2029
jwilhelm@kaiserassociates.com
Senior Vice President and Partner
North America
+1 202 454 2060
mstein@kaiserassociates.com
Vice President
EAME
+44 (0) 7980 818216
jthetherton@kaiserassociates.com
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