chairco case

- 37 -

ChairCo – BCG Round 1

Our C

lient, ChairC

o manufactures m

etal parts* that are used to m

anufacture chairs. ChairC

o primarily

sells these parts to US

based chair manufacturers.

They are facing declining revenues and the CE

O has

asked us to evaluate the problem and suggest

corrective measures.

*Metal bases that are used in the revolving office

chairs.

�If the candidate asks, tell them

that there are no specific financial targets.

�G

ive the exhibits in the subsequent slides only w

hen the candidate asks for the relevant data.

Problem

statement narrative

Guidance for interview

er and inform

ation provided upon request

Difficulty: Easy

Industry: Manufacturing

Type: Profitability, O

perations, Chart Based

- 38 -

Questions for the candidate

Additional Questions to Steer Discussion

After seeing E

xhibit 1, the candidate should make an observation that prices and volum

e are decreasing and both these issues need to be addressed. � W

hy did ChairC

o have to decrease prices? Because competition has decreased prices.

� Why did com

petition decrease prices? Because metal parts are a com

modity and they m

ight have a lower cost structure than us. � W

hy do you think our competitor has a low

er cost structure? Material and labor could be the tw

o m

ajor reasons. � W

hy is our client loosing unit sales despite decreasing price? Because their customers are

moving to low

cost countries.

� Can the client reduce costs? C

lient is already very efficient and cannot decrease their costs w

ithout shifting operations to China, Indonesia etc.

ChairCo – BCG Round 1

- 39 -

�E

xhibit 1 – Volumes have decreased and so have prices ($10 to $9.5). A

sk candidate why he/she

thinks the price must have gone dow

n. The most logical answ

er should be that since this is a close to com

modity product, prices for the entire industry have fallen dow

n and ChairC

o had to respond. C

ompetitors m

ight have become m

ore cost competitive because their operations are

located outside US

.

�E

xhibit 2 - Com

petition has significant cost savings in material and labor. The m

ost logical reasons are that they are based in low

wage counties such as C

hina, Indonesia and that they are using an inferior/cheaper m

etal.

�E

xhibit 3 – ChairC

o customers are m

oving geographically away w

hich explains the drop in volum

e despite the drop in price.

Solution G

uide

Suggested Solution and Structure

ChairCo – BCG Round 1

- 40 -

To become cost com

petitive and gain proximity to

customers (chair m

anufacturers), ChairC

o has to shift m

anufacturing to Asia.

Risk – dow

nsizing in US

will lead to a P

R

backlash.

Recom

mendation

�A

nalyze which country has low

cost base, high proxim

ity to customers and

low barriers (regulations, etc.) to set up

manufacturing.

Next S

teps

Conclusion

ChairCo – BCG Round 1

- 41 -

Exhibit 1 – C

hairCo S

ales

$500 M

50M U

nits $380 M

40M

Units

20102011

ChairCo – BCG Round 1

- 42 -

Exhibit 2 – C

hairCo V

s. Com

petitor cost

Cost S

tructure

ChairC

o C

ompetitor

Materials

4.9 2.5

Labor 2

1.5

Transportation 0.5

1.5

Tax 0

1

IT 0.5

0.6

Overhead

1.1 1

$1.5 $1.6

$7.5 $7.4

20102011

ChairC

o Costs

SG

AC

OG

S

ChairCo – BCG Round 1

- 43 -

Exhibit 3 - M

anufacturers of Finished Chairs selling in U

S

5.0%

5.0%

5.0%

5.0%

5.0%

5.0%

80.0%

60.0%

40.0%

10.0%

30.0%

50.0%

20092010

2011

Europe

Canada

US

Asia

ChairCo – BCG Round 1