Rationalizing production of
The company was a leader in manufacturing launching vehicles for satellites. The sector was global and consolidated, and three players accounted for 50% of the market. Margins had fallen as manufacturers were caught in a price/cost squeeze. As a result, the business was not earning its cost of capital. Large investments were required to continue to service customers. The objective was to determine how to remain competitive in a consolidating industry given the company’s large cost structure, the large base of fixed assets, and required continued investments.
We recommended forming a strategic alliance with one of the leading competitors to start rationalizing industry capacity together.
- Formed a strategic alliance with one of the top players in the industry
- The alliance allowed rationalizing investments and reducing costs
- Return on sales improved from 3% to 10%
- Asset leverage (Revenue / Average Net Operating Assets) improved from 2.0 x Revenue to 2.7 x Revenue
- Overall Return on Net Assets achieved 27%, well above the company’s cost of capital of 11%
We analyzed the industry, its financial determinants, and various scenarios for competitors to earn their cost of capital.
INDUSTRY AND MARKET ANALYSIS
Estimated supply and demand of launch vehicles worldwide
Estimated market size in terms of satellite launches
Forecasted future growth over the next 4 years
Analyzed commercial launch prices, historical trends, and future projections
Calculated competitors’ market share by customer segment, including
- technocrats
- entrepreneurs
- block buys
- captive customers
SCENARIO ANALYSIS
Determined the industry cost of capital and overall Return on Invested Capital (ROIC)
Analyzed various industry scenarios based on the number of players (4, 3, and 2)
Determined that a 2-player industry scenario would be the only feasible option for companies to earn their cost of capital
COMPARATIVE VALUATION OF POTENTIAL ALLIANCES
Computed feasibility of alternative strategic alliance partners based on the following metrics
- market share
- combined capabilities
- combined contributions
- combined benefits, including
– rationalization of production facilities
– cost savings (one time, recurring)
– rationalization of investments
For each strategic alliance, determined financial implications for the company, including
- profitability, and
- asset utilization
Also determined the total amount of shareholder value creation
FINAL DETERMINATION
Determined best opportunity based on two factors
- strategic end game
- financial value
