Ecolab Saw Significant Increase in Market Share

Case Type: improve profitability.
Consulting Firm: Capgemini first round full time job interview.
Industry Coverage: chemicals.

Case Interview Question #00974: Your client Ecolab Inc. (NYSE: ECL) is a global chemical manufacturer headquartered in St. Paul, Minnesota, United States. It was originally founded as Economics Laboratory in 1923 and its major line of product is a chemical preservative that is used to preserve foods in containers.

A preservative is a substance that is added to products such as food, beverages, and many other products to prevent decomposition by microbial growth or by undesirable chemical changes. Preservative food additives reduce the risk of foodborne infections, decrease microbial spoilage, and preserve fresh attributes and nutritional quality.

Despite an significant increase in market share, the client Ecolab has experienced a decline in profits. The CEO of the company is worried about this trend and hires your consulting firm to investigate. How would you go about it?

Possible Solution:

1. High Level Plan of Attack

The first thing we need to figure out is what does “an significant increase in market share” mean? Remember, the term “market share” is a percentage, and not an absolute number. It could imply that the company has increased its share of the market by beating out the competition, or the competition exiting the market. It could also mean that the market is actually shrinking, but the sales of the company are decreasing by less than those of its competitors.

2. Lay Out Your Thoughts

Consider using the profitability framework: Profits = Revenue — Cost = (Volume * Price) — (Fixed cost + Variable Cost)

* Focus mostly on the revenue side, taking into consideration the economic and competitive landscape.

3. Dig Deeper: Gather Facts/Make Calculations

Candidate: Has the client company experienced any significant increase in cost in the last couple of years related to any additional fixed or variable cost?

Interviewer: No, costs have been steady.

Candidate: On the revenue side, has there been an increase in the volume of output?

Interviewer: Slightly, a little bit higher than the industry average.

Candidate: What about the competition? Have there been any new entrants on the scene?

Interviewer: Actually, competition has decreased. A number of players have exited the industry.

Candidate: Why has that been the case?

Interviewer: They were losing money. They felt that the industry had gotten saturated, so they left.

Candidate: Has sales decreased for the industry overall?

Interviewer: Yes, there has been a general negative trend in the last few years. There certainly has been less demand for
the product.

Candidate: Are any substitute products being used?

Interviewer: Not really. Preservatives in general are being used less and less in foods. Fresh food is now the preferred choice for many consumers.

Candidate: What about the makers of food? Are they experiencing decreased volume?

Interviewer: Yes, the entire industry has been slowing.

Candidate: Are they forced to lower their prices to survive?

Interviewer: They certainly are. Additionally, to lower costs, they are using their leverage to renegotiate price structures of raw materials.

Candidate: So is the company in question forced to lower its prices?

Interviewer: Yes. They are gaining market share, but it’s because of a number of competitor fallouts.

Candidate: But costs have stayed the same?

Interviewer: Yes.

4. Key Findings

* The industry overall is shrinking. To survive, the client company Ecolab has been competing on price. It has gained market share at the expense of its competition, forcing some to exit the industry.
* Its sales have only increased slightly.
* The decrease in price has caused the company to lower its profits, despite the increase in market share.
* Profit margin has been lower on a per volume basis.

5. Recommendations

* Focus on cost reduction. If price is the only way to compete, then costs must decrease.
* Collaborate with the competition to increase leverage in negotiation.
* Diversify into other chemicals that are in demand. Reduce the risk of market trends via a portfolio of products.