Industrial Manufacturing

Using Vertical Integration to Drive Revenue and Margin Expansion

THE CHALLENGE

Tower Strategy Group's client, a global manufacturer of highly engineered materials, was interested in leveraging newly acquired expertise and capabilities from a vertical merger to drive value creation in the form of both revenue and margin expansion. Specifically, they wished to understand if there was an opportunity to leverage the combined entity’s capabilities to access a handful of specific greenfield product markets and whether and to what degree further vertical integration was necessary to both establish a defensible market position as well as to meet senior management and shareholder margin expectations.

THE SOLUTION

Tower Strategy Group partnered with client’s Executive Leadership Team to:

  • Develop an understanding of client’s business drivers, capabilities, guardrails, hypotheses and concerns relative to entire breadth of market opportunities under consideration
  • Use that understanding to ID and prioritize the most attractive opportunities available in global marketplace (e.g., the major geographic markets delivering growth, the customer segments generating that demand, the relative attractiveness of those markets, etc.)
  • For the highest priority markets, define what drives share, revenue and profitability (e.g., product quality level, quality of consultative sales and post-sales support, etc.)
  • Based on those revenue and profitability drivers, map the value chain requirements for developing a profitable, advantaged position within the market
  • Based on that assessment, develop 2-3 growth scenarios (i.e., business model alternatives) that would allow client access to the opportunities available
  • Recommend, in relation to client’s existing manufacturing footprint and target markets, where to locate to-be-built value chain capabilities across a range of options in India, Western Europe and Brazil

IMPACT

Tower Strategy’s consultation resulted in a data-driven roadmap comprised of three business model options with varying degrees of value chain integration and a margin increase of 125% by Year 3 of the forecast period. These alternatives, outlined over a staggered 3-year timeline, were not mutually exclusive but rather progressive in nature (allowing the client to implement option 1, followed by 2, and then by 3 if it so chose). As a result, the client gained approval to begin actively implementing the first business model option with the intent of building towards a fully integrated value chain in its selected markets (option 3).

Turning Around a Failing Business Unit

THE CHALLENGE

Tower Strategy Group's client, a FORTUNE 500 multinational in the industrial and business solutions market possessed a division that substantially underperformed relative to internal expectations and its market potential. Having once been the market share leader within its segments, heightened competition from lower cost and increasingly sophisticated Asian players, major investments from legacy competitors to redefine their own business models and changing customer expectations and decision-drivers had fundamentally changed the rules of the game within the client's core markets. As a result, though the client's business continued to grow at a single-digit clip, its growth rates lagged that of key competitors and the market as a whole. The client believed that without substantial corrective action, division performance would continue to deteriorate rapidly.

Concerned about their eroding share and increased margin pressure, the client turned to Tower Strategy to identify the key steps necessary to help this division to regain market-leading growth rates while identifying key means to differentiate and occupy a premium position within the market itself.

THE SOLUTION

Tower Strategy Group worked with the client's divisional leadership to:

  • Define how customer requirements and decision processes were shifting within the market
  • Measure how well the client was positioned relative to these emerging segments and the resulting impact on its position within the market
  • Map how the value chain within the client's industry was adapting and changing in order to more effectively meet the needs of a fast-changing market
  • Define the specific aspects of the client's business model and product, channel, sales and marketing strategies that were inhibiting its ability to compete
  • Evaluate whether the clients brand retained enough equity to serve as a basis / platform for a pivot away from its historical model
  • Establish a vision, set of objectives and strategy for not just adapting to the changing market but for reestablishing a leading position within it

Impact

We identified that the client’s legacy business, due to trends towards higher efficiency and green products would cease to exist within 10 years. And defined how the client could more fully harvest its core business in the short- and medium-term, using that as a platform to fund a more substantial business model redesign in the long-term. With the end result being a substantially expanded footprint across the value chain, one that was necessary to avoid becoming a fully commoditized hardware / equipment-only player. And one that would allow access to more stable and higher margin revenue streams and to a more sustainable long-term position within the market.

Evaluating an Innovative Home Automation Play

THE CHALLENGE

Our client, a >$10B manufacturer in home improvement identified an opportunity to enter the home automation segment. Capitalizing on emerging IoT trends to tie together a substantial portion of home functions together into a single platform. A system that could better monitor, analyze and manage home systems and, as a result make it easier and less costly for homeowners to manage their most expensive asset. However, the client lacked experience in the segment, was wary of larger and more technology-focused players (e.g., Apple, Amazon and Google) and wanted deeper insight into whether and how to enter the space.

THE SOLUTION

Tower Strategy Group worked with the Innovation team, the Engineering team and a cross-section of Division leadership to:

  • Map the market opportunity for home automation, segmenting it by solution type (e.g., lighting control, utility monitoring, etc.) across the US, UK and India
  • Evaluate and define the innovation (hardware vs. software vs. hardware + software) needed to enhance client’s existing portfolio in line with market trends
    • And the relative difficulty / complexity of such a play Relative to the competitive landscape and new solutions coming on line from both the largest players as well as scrappy new upstarts
  • Sized the market opportunity based on number and type of households and their willingness to pay
  • Define a pricing strategy, including evaluation of various pricing and financing models
  • Evaluated channel options, including innovative, alternative design choices designed to substantially bring down TCO for the homeowner
  • Developed the framework for a market demand generation strategy for transitioning from niche, early adopter market to mass market
  • Provided multiple market entry and commercialization options ranging in scope from bold, aggressive and transformative to incremental and risk-contained
  • With a recommendation, based on client’s positioning, for the latter

Impact

Despite the client’s existing presence within home improvement, we determined that the client did not possess a “right to play” within this segment broadly. Though it could make a niche play. As, for it to deliver a compelling value proposition to the market, it would need to invest substantially in building horizontal capability and partnerships, vertically, within its value chain. Unwilling to make such a substantial leap, the client chose to forego its more ambitious, stand alone plans. And, instead, to integrate its solution into the offerings and platforms upcoming through the three most dominant incumbents primed to own home automation as a space.

Targeted Buy-side Commercial Due Diligence

THE CHALLENGE

Tower Strategy Group’s client, a multi-industry manufacturer was carefully considering an acquisition to grow one of its core businesses. With a complementary product set, the target represented strong potential to horizontally integrate within the client’s markets. And with a competitive bidding process underway, the client wanted to make certain that it priced its offer correctly – wary of overpaying in the midst of “deal fever.”

THE SOLUTION

Leaning on our commercial due diligence capability, including our voice of the customer and competitive intelligence services, Tower Strategy:

  • Gained a solid understanding of target’s stated position within the market as well as the focus and intent of its commercial and innovation plans
  • Mapped the basis of share and profitability within the target’s markets
  • Identified whether and to what degree the target was well positioned relative to those share and profitability drivers
  • Today as well as in the mid- to long-term
  • Evaluated whether and to what degree that positioning differed between target’s legacy and more recently commercialized product lines
  • As well as key variances based on the target’s primary customer segments
  • Based on the above, evaluated whether and to what degree target represented an attractive opportunity for client

Impact

Based on our due diligence work, the client uncovered specific performance gaps at the target. Ones that would require years (due to the NPD opportunity) rather than months to close. Facts which contradicted the target’s management team’s assumptions. As a result, our client was able to reset its own assumptions about the target’s value and reframe its bid, helping ensure it would not overestimate upside and, therefore its bid price.

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