Relative Competitor Economics

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Relative Competitor
Economics
1996
Relative Competitor Economics
Cost Advantage of Market Leaders
The majority of bottom line differences between market leaders and their
competition can be traced to a lower cost position.
10%
8.5%
Return on Sales (Percent)
8% Higher value
6%
4%
Lower cost
2%
0%
Total difference in profitability (#1 vs. #5)
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Source: Bain Analysis RelativeCompetitor 2
Economics
GXC Presentations
Industry Cost Variation
In most industries, significant cost differences exist among players.
High Cost Producer Disadvantage
40%
35%
32%
30%
23%
20% 18%
16% 15%
13%
10%
0%
Condiment Clothing Airport Air Tile Aluminum Beverage
Services Conditioner Flooring Alloy Can
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Economics
GXC Presentations
Drivers of Industry Cost Variation
Operational excellence is often the primary driver of cost variance across
competitors within an industry.
Driver of Cost Variation Within An
100%
Scale
80%
60%
Industry
Operational
Excellence
40%
20%
0%
Aluminum Clothing Air Tile Flooring Beverage Auto Rental
Alloy Conditioner Can
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Economics
GXC Presentations
Reasons for RCE
RCE drivers
Earnings Turbulence in Validation of new

underperformance industry strategic initiative
• Decline or anticipated • New competitors / • Entry into new market

decline of earnings deregulation • Acquisition/joint
• Lower profitability • New products or venture/divestiture
relative to competitors technologies • Price strategy change
• Loss of market share • Customer behavior • Distribution change
shifts
• Capital expenditure
50% of RCE Cases 30% of RCE Cases 20% of RCE Cases
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RelativeCompetitor 5
Economics
GXC Presentations
RCE Examples - Earnings Underperformance
Bike Co.
• Bike manufacturer was losing money on every unit sold
• RCP identified cause of loss as expensive domestic labor for production
• Production moved to Asia, immediately restoring profitability
Electric Co.
• Bain analysis predicted that Electric Co.'s 1990 earnings would fall 10% below
investor's expectations
• RCP diagnosis identified a cost reduction potential of 30%, with labor as the main cost
driver
• With Bain assistance, Electric Co. reengineered its core processes to reduce labor
requirements, achieving a 15% cost reduction
Food Co.
• Food Co. was unsure that its strategy would be effective as market growth slowed
down
• Relative cost position analysis showed that being low cost was important to future
profitability, and highlighted plant age and capacity utilization as major cost drivers
• A joint Bain/Food Co. team assessed that Food Co.'s capacity utilization would be
optimized by closing a plant, and closed the aging Boston, Mass. facility to
drastically reduce fixed costs going into the future
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Economics
GXC Presentations
RCE Examples - Industry Turbulence
Carpet Co.
• Changing distribution structure and introduction of low price competitive
product put increasing pressure on market prices
• RCP determined scope and cause of Carpet Co.'s cost disadvantage
• 25% cost reduction plan in place, $40MM reduction achieved to date
Drink Co.
• Concerned that a growing shift towards private label soft drinks might induce
a branded price reduction, Drink Co. wanted to become low cost
• RCP determined that Drink Co. was the low cost producer and identified
actions to widen cost advantage
• Drink Co. outsourced its unprofitable syrup production and closed a plant to
boost capacity utilization
Cable Co.
• Due to deregulation of cable TV, the national provider needed to establish a
competitive cost structure.
• RCP analysis revealed that the company paid 25% more than other
providers for film rights, the largest cost segment.
• With a clearer understanding of market pricing, a Bain/Cable Co. task force
reduced film rights costs by $30MM.
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Economics
GXC Presentations
RCE Examples - New Strategic Initiatives
Aircon Co.
• Industrial air conditioner producer wanted to enter lucrative residential air
conditioner market
• RCP was used to develop business plan for Chinese joint venture Aircon Co. had
entered
• To date, division has achieved or exceeded cost and share goals
Clothing Co.
• Clothing Co. clothing design subsidiary Design Co. requested an investment of
$20MM to expand into men's clothing design
• To determine feasibility of the business plan, an RCP was used to determine
Design Co.'s competitive position
• Bain found investment to be profitable, but management earnings estimates
overly optimistic
Cup Co.
• Looking to expand its reusable cup production, Cup Co. was unsure of the
competitive reaction to expansion and whether expansion would cannibalize its
disposable division's market share
• RCP analysis showed that Cup Co. was low cost by a large margin, preventing
strong competitive counter measures, and that if positioned correctly, the
disposable production was sustainable with expanded reusable production
• Cup Co. has since opened two new reusable cup production facilities
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Economics
GXC Presentations
Outcomes of RCE
RCE outcomes
Cost reduction New capabilities New strategies
• Outsourcing / supplier • New technologies • New markets /

alliances • New products segments
• Complexity reduction • Faster delivery • New channels
• Process reengineering • Quality consistency • Alliances / acquisitions
• Production/distribution • Purchasing process • Pricing changes
cost reduction • Product mix changes
• Facilities / technology • Capital investments
rationalization
• Overhead optimization
• Organizational redesign
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Economics
GXC Presentations
RCE Outcome Examples (1 of 3)
Cost reduction
Cable Co. Airline Co.
• Upon deregulation of cable TV, Cable • Airline Co. was looking to cut airport
Co. needed to establish a competitive operations costs
cost structure • RCP revealed processes to be overly
• RCP revealed that Cable Co. paid 35% labor intensive, and labor to be
more than other providers for film rights, unproductive relative to competition.
the largest cost segment • Bain worked with Airline Co. to achieve a
• With a clear understanding of market 35% manpower cut by reengineering
pricing, reduced film rights costs by processes and boosting productivity
$45MM
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Economics
GXC Presentations
New capabilities
Carpet Co. Ship Co.
• Changing distribution structure and • International shipping leader Ship Co.

introduction of low price competitive wanted to expand by taking US
product put increasing pressure on market competitors' international business
prices • RCE analysis examined competitors'
• RCP showed low labor productivity as capabilities and intentions, and
cause of Carpet Co. cost problem identified competitor service and
• Carpet Co. has since cut labor costs by process capabilities which Ship Co.
6%, and is currently researching a new needed to introduce
technology which will reduce costs by an • Results include increased market
additional 15% share and down-sizing of US market
leader's European operation
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Economics
GXC Presentations
New strategies
Superstore Co. Cup Co.
• A shifting competitive enviornment forced • Looking to expand reusable cup

Superstore Co. to rethink its growth production, Cup Co. was unsure of
strategy potential competitive reaction and
• RCP showed that Superstore, despite cannibalization of its disposable
being efficiency leader, could not be low share
cost due to its small scale • RCP showed that Cup Co. was low
• Superstore merged with a competitor cost--preventing drastic competitive
superstore to achieve the Superstore reaction, and that reusable and
efficiency with the combined scale. disposable could be simultaneously
sustained
• Cup Co. has since opened two new
reusable cup production facilities
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Economics
GXC Presentations
RCE Examples - Earnings Underperformance
Murray
• Bike manufacturer was losing money on every unit sold
• RCP identified cause of loss as expensive domestic labor for production
• Production moved to Asia, immediately restoring profitability
Eastern Electricity
• Bain analysis predicted that EE's 1993 earnings would fall 10% below investor's
expectations
• RCP diagnosis identified a cost reduction potential of 26%, with labor as the main cost
driver
• With Bain assistance, EE reengineered its core processes to reduce labor
requirements, achieving a 12% cost reduction
Anheuser Busch
• AB was unsure that its beer strategy would be effective as market growth slowed
down
• Relative cost position analysis showed that being low cost was important to future
profitability, and highlighted plant age and capacity utilization as major cost drivers
• A joint Bain/AB team assessed that capacity utilization would be optimized by closing
a plant, and is in the process of phasing out the aging Tampa, Florida facility to
drastically reduce fixed costs going into the future
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Economics
GXC Presentations
RCE Examples - Industry Turbulence
Armstrong
• Changing distribution structure and introduction of low price competitive product put
increasing pressure on market prices
• RCP determined scope and cause of Armstrong's cost disadvantage
• 19% cost reduction plan in place, $54MM reduction achieved to date
Kraft
• Concerned that a growing shift towards private label mayonnaise might induce a
branded price reduction, Kraft wanted to become low cost
• RCP determined that Kraft was the low cost producer and identified actions to
widen cost advantage
• Kraft outsourced its unprofitable egg production and is in the process of closing a
plant to boost capacity utilization
Canal Plus
• Due to deregulation of French cable TV, the national provider needed to establish a
competitive cost structure
• RCP analysis revealed that the company paid 10% more than other providers for
film rights, the largest cost segment
• With a clearer understanding of market pricing, a Bain/Canal Plus task force
reduced film rights costs by $40MM, a 7% reduction
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Economics
GXC Presentations
RCE Examples - New Strategic Initiatives
Trane
• Industrial air conditioner producer wanted to enter lucrative residential air conditioner
market
• RCP was used to develop business plan for Chinese joint venture Trane had entered
• To date, division has achieved or exceeded cost and share goals
GFT USA
• GFT clothing design subsidiary Emanuel requested an investment to expand into
men's clothing design
• To determine feasibility of the business plan, an RCP was used to determine
Emanuel's competitive position
• Bain found investment to be profitable, but management earnings estimates overly
optimistic
Baxter
• Looking to expand its reusable hospital gown facilities, Baxter was unsure of the
competitive reaction to expansion and whether expansion would cannibalize its
disposable division's market share
• RCP analysis showed that Baxter was low cost by a large margin, preventing strong
competitive counter measures, and that if positioned correctly, the disposable
production was sustainable with expanded reusable facilities
• Baxter has since opened two new reusable gown facilities
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Economics
GXC Presentations
Industry Cost Variation Drivers
Variations in cost per unit within an industry can be attributed to differences in
scale and differences in operational efficiency.
Resilient Flooring
6
Operational
variation
5
4 Total
Cost per Unit
Variation
Scale
3 Variation
2 • Average Cost
per yd^2
1 • Variation of
cost with
0 scale
0 20 40 60 80 100
Units per Year
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Economics
GXC Presentations

Relative Competitor Economics

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Earnings Turbulence in Validation of new

• Decline or anticipated • New competitors / • Entry into new market

50% of RCE Cases 30% of RCE Cases 20% of RCE Cases

Cost reduction New capabilities New strategies

• Outsourcing / supplier • New technologies • New markets /

Cable Co. Airline Co.

Carpet Co. Ship Co.

• Changing distribution structure and • International shipping leader Ship Co.

Superstore Co. Cup Co.

• A shifting competitive enviornment forced • Looking to expand reusable cup

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