Case Situation:
Hammer Jack is the third-largest retailer of hardware products in the U.S. home improvement market, with annual sales of $5 billion.
Hammer Jack has experienced a steady decrease in profits over the past five years, and the CEO foresees another shortfall in earnings this year. He is concerned about not meeting the earnings expectations of Wall Street analysts. Your team has been hired to identify and recommend ways to generate a minimum of $25 million in additional operating profit within the next year.
You and your case team will arrive at Hammer Jack抯 headquarters next Monday for a brief project kick-off meeting with the CEO and his direct reports, Lorraine Smith (Chief Operating Officer), Henry Lee (Executive Vice President of Business Development), and Jacques Laporte (Executive Vice President of Marketing and Sales).
You will need to prepare for this initial client meeting by gathering some background information and thinking through the questions you would want to ask during the meeting to focus your efforts going forward.
Step 1: Introduction
We learned that Hammer Jack is the third largest player in the industry, with $5 billion in annual revenues and declining profits. Our objective was established ?identify ways for Hammer Jack to increase operating profits by $25 million within one year.
As part of routine background information gathering, we estimated the size of the retail home improvement market: $100-200 billion (100 million U.S. households spending an average of $1,600 per year ?from small maintenance to major remodeling projects). We also estimated the industry growth rate: 6.4% (given 1996 revenues of $125 billion and 2000 revenues of $160 billion and recognizing that growth compounds; the compound annual growth rate formula = ($160/$125)^(1/4)-1).
Step 2: Fact Gathering
Given a chance to ask the client four initial clarifying questions, we focused on high-level issues to identify the causes of declining profitability: revenues vs. costs; industry-wide vs. company-specific problems; etc. Our questions were:
- How does Hammer Jack抯 performance compare to competitors? Hammer Jack抯 top three competitors have all performed as well as, or better than, the industry, which has been growing. Hammer Jack has been losing market share. This suggests a company-specific issue.
- How have Hammer Jack抯 costs changed in recent years? Three years ago, Hammer Jack went through a major reengineering initiative, and costs as a percent of revenues are still falling, though less rapidly than initially. Therefore, profits must be falling as a result of declining revenues.
- Has Hammer Jack made any changes to its products or prices? Hammer Jack maintains a competitively wide array of products, and prices have held steady. Therefore, falling revenues are not the result of dropping prices. The issue is likely to be volume and/or product/service mix.
- Who are Hammer Jack抯 customers? Hammer Jack has three types of customers ?Professionals, Do-It-Yourself, and Maintenance ?but Hammer Jack has never served them in a differentiated way. Perhaps Hammer Jack抯 products and services are not as relevant as they could be for its most valuable customers.
Step 3: Analysis
The key to conducting the analysis is having a structure or a framework. We chose to apply Mercer抯 business design framework, because it covers all the elements of a company抯 business that impact performance and profitability: customer selection and value proposition, value capture, scope, strategic control and organizational architecture. Our initial fact gathering suggested that solutions to declining profits likely lie within the customer selection and value proposition of Hammer Jack抯 business design.
- Customer selection/value proposition. Through customer survey data, we found that Hammer Jack抯 three customer segments have different levels of profitability (they purchase a different mix of products, which have different margins). Do-It-Yourself customers generate the most profits and are growing rapidly. Maintenance customers are highly profitable, but are a smaller and more slowly growing segment. The Professional segment is shrinking in size and represents the least potential. Therefore, Hammer Jack should target the Do-It-Yourself and Maintenance segments with a differentiated, highly relevant value proposition.
- The customer surveys identified unmet needs related to training, store hours, financing, and simpler shopping and project execution experiences ?clear opportunities for Hammer Jack.
Before proceeding with the recommendations, we quickly overviewed the other elements of Hammer Jack抯 business design:
- Scope: We reviewed opportunities to grow profits by opening new stores (market expansion) or through acquisitions. The market expansion study showed that given Hammer Jack抯 current network of 150 stores, it is at the top of the revenue-per-store scale curve and new stores will likely generate revenues in range of $30 million per store. Since $30 million is the break-even revenue for a new store, this strategy will not produce sufficient new profits to meet the company抯 goal. The acquisition assessment showed that there are no attractive acquisition targets, and the company has no experience with integrating acquired companies, making this strategy very risky, while the benefits (if any) may be three or more years away.
- Strategic control: We hypothesized that the company has been losing share and profits because it does not differentiate itself sufficiently from competitors. Hammer Jack抯 product mix, store format, prices, and customer service levels are competitive, but not differentiating. The greatest opportunity for differentiation appeared to be the development of stronger customer relationships, a strategy leading again to better understanding of who the customers are and what they need.
- Value capture: A pricing study showed that Hammer Jack抯 prices have held steady over the past few years, and that they are comparable to those of competitors. Raising prices to increase profits is not a viable strategy. Charging for valuable services will be a new source of revenues for Hammer Jack and can contribute to profit generation. Identifying new valuable services to offer led us back to the company's value proposition.
- Organizational architecture: The initial fact gathering suggested that the opportunities for further cost reductions may be limited. A deeper look into this business design element shows that moving Hammer Jack from its current cost position (#2 in the industry) to 慴est-in-class?could generate $25 million in new operating profits, but that it would take an initial investment in a new procurement system and 2 years of implementation. Therefore, this strategy will not allow Hammer Jack to meet its profit goal within the next year. Moreover, strategically, Hammer Jack cannot "shrink to greatness" and will benefit from exploring non-cost based strategies.
Step 4: Recommendations
After brainstorming possible new services that can address the unmet needs of target customers (Do-It-Yourselfers), we prioritized the initiatives based on their profit contribution (taking into consideration required investment, ramp-up time, cannibalization of existing businesses, and other factors):
1. Longer hours ($14 million in incremental profit)
2. Financing ($12 million in incremental profit)
3. Delivery ($8 million in incremental profit)
4. Project packages ($7 million in incremental profit)
5. "How-to" classes ($2 million in incremental profit)
Given the goal of $25 million in new profits, we recommended rapid implementation of a combination of the top two or three initiatives, focused on Do-It-Yourselfers, with other initiatives following as soon as management and company resources allow.
