When crucial information gaps leave a company grasping in the dark
A global technology and consumer products company had fallen on hard times. Despite bearing one of the world’s most venerable and well-known brands, its flagship product had been rendered obsolete by digital technology, and other products had failed to pick up the slack. Profitability had plunged across the board, along with liquidity, and a key business unit that provided hardware and consumables to the consumer and small-business markets was hemorrhaging cash.
At the core of the business unit’s problems was a severe shortage of trustworthy information about the profit contributions of specific channels, products, and customers. Unable to identify its true cost to serve its markets, the company simply could not accurately determine where it was making or losing money. To make matters worse, promotional spending generated little return because of the company’s inadequate understanding of the relationship between R&D investment, product lifecycles, and demand. The information gaps degraded the value of profit forecasts, and chronic company-wide variances were eroding investor confidence. Senior corporate leadership engaged AlixPartners to closely scrutinize the business unit’s operations and help develop a strategy to restore it to profitability.
Better numbers illuminate the path back to profitability
The first step was to perform a customer and product profitability analysis and manufacturing cost assessment, whose results enabled us to pinpoint the activities, products, and markets that were draining cash. Armed with that information, management was able to take swift and decisive remedial actions. It imposed hardware price increases on specific retailers to reestablish the brand’s premium identity and raised prices across the board on consumables related to its core product line. Promotional spending was slashed, and the company exited unprofitable channels and cut volumes on specific products that generated unacceptable returns.
These actions gave the company some breathing room while it gathered additional information about the business unit and developed a comprehensive plan to address the multiple issues plaguing its operations. The business unit was restructured and its headcount reduced while it accelerated its targeted exit of specific geographies and retail channels. With an eye toward short-term improvements, it revised its product roadmap to curtail immediate R&D spending and looked into extending some product lines that held short-term growth potential. At the same time it sought out partnerships that could support the growth of more profitable OEM product lines.
Quick actions produce profits now and lay the foundation for a brighter future
The aggressive plan of action that we helped formulate has delivered better-than-expected results. The unit has increased its contribution to overall corporate profits by more than $200 million annually as it has restored its hardware price premium of about 10%. And it has held the line on its price increases for associated consumables.
More broadly, the company has developed a more realistic picture of the unit’s growth potential and cost to serve, enabling it to sustain its return to profitability. The engagement proved the value and utility of the customer and product profitability analysis, prompting senior leadership to apply the analysis to other areas of the business. The analyses have helped management improve its forecasting and determine other actions to support profitability. Those actions have resulted in significant gains in EBITDA and paved the way to long-term business sustainability.