Brother USA to Charge Customers for Technical Support

Case Type: improve profitability.
Consulting Firm: Roland Berger Strategy Consultants 2nd round full time job interview.
Industry Coverage: office equipment.

Case Interview Question #00964: Our client, Brother International Corporation, is a large manufacturer and seller of office appliances and peripherals. It is the U.S. subsidiary of Japanese multinational electronics and electrical equipment company Brother Industries, Ltd. Headquartered in Bridgewater, New Jersey, the company employs approximately 1,200 colleagues in the United States.

Brother International is one of the leading firms in the market, with significant penetration and a devoted customer base that likes the firm for its advanced technology and great technical support staff. However, the firm has failed to meet its profitability goals, and is being criticized by investors and industry analysts. Brother International has engaged Roland Berger to help them with this issue. The two questions facing them are:

1. What is/are the main driver(s) of their poor profitability?
2. What possible steps could the company take to address these issue(s)?

Additional Information:

If the candidate asks for more information on the firm or their products, provide the following data.

The client Brother International specializes in making three products: printers, scanners, and fax machines, as well as peripherals for those machines, such as power cords, toner cartridges, etc. They currently sell their products directly to consumers, mostly small business users. Currently, each of their three products sells for $150, while each peripheral sells for $50.

Possible Answer:

1. Suggested Framework

Let the candidate drive the case. The candidate should draw out a profitability framework and flesh out potential causes of poor profitability. Guide the candidate to the cost side of the profitability equation, and eventually get them to focus on customers.

Profits = revenues — costs = (price * volume) — (fixed costs + variable costs).

While the candidate may use the framework to generate ideas and hypotheses as to why profitability is declining, it may not be specifically useful in this case.

2. Analysis

The client company isn’t sure why it can’t meet profitability goals, but they think it may have something to do with their customer base. They conducted a survey that’s given them a better sense of their 50M global customer base.

* 60% of all their customers buy at least two products (meaning a scanner and a fax machine, or a printer and a scanner)
* Of the portion of customers that purchases at least two products, one-third purchase all three products.
* The remaining customers buy only one product.
* With regard to peripherals, they are pretty integral to the machines. Every customer who buys at least two products also buys two peripherals, while a customer who purchases only one product only buys one peripheral.

The candidate should use this survey information to build a matrix of the different customer ‘types’ as illustrated in the chart below. Feel free to ask the candidate to compute any of the numbers included in the chart, as it will be helpful during the remainder of the case.

At this point, ask the candidate what they think about this information. Although they may try to jump right to profitability, try to get some preliminary hypothesis about what might be the problem or what the company might want to do given this customer base. Potential answers could include upselling Type ‘C’ customers, bundling, targeted marketing or other creative solutions.

With this information, guide the candidate to focus on profitability. The candidate may begin asking questions about the cost structure of the firm’s operations. Although this will not be part of the solution, feel free to ask candidates what kinds of information they would want or any hypotheses they may have.

We don’t have a lot of information on the cost structure of the firm’s manufacturing operations. The firm is a global leader in the space, so it’s safe to assume they have the most efficient manufacturing and distribution operations. We do know that the firm earns a 20% margin on each product it sells, as well as a 50% margin on peripherals.

The candidate may jump to the conclusion that the firm should sell more peripherals than products based on the margin discrepancy. But guide them to calculate the profits earned on each unit sold, as well as the profits for each customer type. The results of their calculations are illustrated in the table below:

At this point, the candidate may think the problem is clear, that a large percentage of customers aren’t very profitable. However, press the candidate to think if there are any possible costs that haven’t been accounted for. Remember, the client firm is known for its great technical support. This support comes at a significant cost.

The firm maintains call centers with support personnel. These employees are well trained and skilled. Unfortunately, they are also expensive. The firm estimates that each call answered and addressed by the staff costs the firm $25. The number of calls for each customer type also varies. Customers who purchase two or more products are generally more sophisticated and typically call support once. However, customers who purchase only one product often rely on them for many issues, calling them an average of three times.

This makes the profitability of each customer much different, as illustrated in the chart below:

3. Solution

A good candidate will take the initial information regarding product lines and work to figure out how many units are sold and how profitable the firm is. With the customer survey information, he/she should be able to ascertain the total firm revenues ($5.5+$8+$2 = $15.5 Billion) and revenues by segment as illustrated in the matrix presented above.

Following this information, the candidate may look to learn about the cost structure of the firm and whether that has changed significantly. With only the margins to go on, the candidate should be able to calculate margins for each customer segment, but may be unsure how to proceed.

It is important to ask the candidate if they have considered all potential costs, particularly if they begin to make recommendations. Once the service costs are given, the candidate should have no problem arriving at the conclusion that the Type ‘C’ level customers actually cost the firm money due to their service needs. At that point, the interviewer may ask the candidate for possible solutions.

4. Recommendations

Interviewer: The client has asked us for our recommendation. What would you tell the client?

Here is a possible response:

The client firm’s profitability issues stem from customers who don’t generate substantial revenue but impose substantial costs through their service needs. Although they generate $2 billion in revenue (Type C), ultimately the firms lose $400 million on these customers. There are a number of potential solutions to the problem, which include increasing their revenue, decreasing their service costs, or changing the service model.

The candidates may think of many options to address the issue, such as:

* Charging customers to receive technical support.
* Creating other service options (web knowledge base, email support, etc) that are more cost effective for simple problems.
* Replace expensive customer service representatives with cheaper alternatives for the low profitability customer segment.
* Bundle products to make low-value customers profitable.

5. Additional Considerations

Interviewer: What are some of the potential risks?

Here are some potential answers:

* Any change to the company’s service model may hurt the brand identity.
* Would customers switch providers if they know service will cost them?
* Would changes to cater to low-value customers hurt the higher value customers?
* Working to increase revenue from low-value customers may not succeed.
* Survey data that we’ve based these assumptions on may not be accurate.
* There may be other reasons behind profitability concerns that we have not yet explored.