Dyno Nobel to Adjust Ammonium Nitrate Explosives Price

Case Type: pricing; business competition.
Consulting Firm: A.T. Kearney 2nd round full time job interview.
Industry Coverage: chemicals; engineering, construction.

Case Interview Question #00945: Your client Dyno Nobel (ASX: IPL) is a manufacturer of explosives. It is a wholly owned subsidiary of Incitec Pivot Limited. The company offers ammonium nitrate commercial explosives, initiation systems, and setup services for large blasting projects. Dyno Nobel operates in Australia, Canada, the United States, Africa, Indonesia, Mexico, South America, Papua New Guinea and Turkey. It has customers in the mining, quarry, construction, pipeline and geophysical exploration industries.

Recently, one of Dyno Nobel’s long-term customers is approaching the end of a long-term contract and the customer has decided to put the work out for a competitive bidding process. The client has hired us to help determine how to handle the situation. What would you recommend?

Possible Answer:

1. Suggested Structure

Let the candidate make their own structure. The structure should include the basic industry landscape areas, competitive strengths, degree of differentiation in the product/service offerings, deeper dive into % of revenues derived from each stream and customer, pricing, and possible strategies for how to handle the competitive bidding situation.

2. Background Info

Candidate should pro-actively seek out the following information by asking probing questions:

Additional Information:

* The demolition market is broken into 2 main areas:
– Big players like our client Dyno Nobel handle large scale projects like mines, quarries, etc.
– Small players handle buildings.

* There are 3 main players in large-scale projects, our client Dyno Nobel is one of them. The other 2 players do not offer setup services, and have lower quality initiation systems.

* The market is split up 30% for each of the three top players; the remaining 10% is fragmented.

* The customer we are discussing owns 2 coal mines (one in Kentucky, one in Wyoming).

* The explosives industry has been growing at about half the GDP growth rate.

Key Insight: When our client’s customer opens the work for competitive bid, there will likely be 3 main bidders. We need to understand their pricing and offering.

3. Pricing Calculations

Behind the scenes: The candidate should pro-actively move from the background info to questioning the existing pricing structure currently under contract with the customer and ways in which the competition may differentiate their offerings.

Candidate: So do we know what our client Dyno Nobel is currently charging vs. what their competitors are currently charging? I would also be interested to know our margins on each.

Interviewer: Our client charges $1,000/ton for ammonium nitrate, and $250/ton for the required initiation systems (setup services are free). The customer we are talking about uses 40,000 tons of ammonium nitrate/year. Margins are 20% for ammonium nitrate and 80% for initiation systems. Our competition is charging $950/ton for ammonium nitrate and $150/ton for initiation systems.

Candidate: Well, first of all, our client is overpriced when compared to their competition. We can calculate the total revenue and profit as shown below.

Key Insight: Our client is charging a 2/3 higher initiation system price than their competitors and a slightly higher price for chemicals. This could hurt them in a competitive bid unless they have a value proposition to backup the higher price.

Interviewer: Why do you think they can realize such a high margin on initiation systems?

Candidate: Do they have a superior product and/or do they command a higher price because of their free setup services?

Interviewer: Yes. Ammonium nitrate is pretty much a commodity, but our client has superior initiation systems and setup services that allow them to provide better control of the size of blast fragments. This saves the customer $16M a year in post-demolition processing costs.

Candidate: Dividing $16M by 40,000 tons, shows that our client is saving their customer $400/ton in post-demolition costs. Therefore, the customer is getting an “effective” price of $850/ton ($1,000 + $250 – $400 = $850) vs. the competition’s price of $1,100/ton ($950 + $150 = $1,100).

4. Recommendations

Interviewer: So, what would you recommend our client do to ensure they remain successful when the competitive bid opens up?

Candidate:

* Our client Dyno Nobel should ensure that their customer is aware of the $400/ton ancillary benefit they receive from setup services and superior initiation systems.
* They also should consider adjusting their ammonium nitrate price to $950/ton to match the competition.
* Finally, they should continue focusing on R&D and setup services to retain their position as the technology and value-added service leader in initiation systems.