The Crane Company to Increase ROIC from 10% to 20%

Case Type: improve profitability; organizational behavior.
Consulting Firm: Ernst & Young first round full time job interview.
Industry Coverage: conglomerate.

Case Interview Question #00916: Your client The Crane Company (NYSE: CR) is a 5 Billion dollar conglomerate with 50 plants nationwide. As a large holding company with a diverse portfolio, Crane Co.’s business segments include Aerospace & Electronics, Engineered Materials (fiberglass paneling and telecom equipment), Merchandising Systems (vending machines), Fluid Handling, and Controls (sensing and control systems).

Headquartered in Stamford, Connecticut, United States, the Crane Company was formed by acquisition of various small firms over the last 10 years and currently there are still some integration issues within the organization. The CEO would like to increase the ROIC (Return on Invested Capital) of the company from 10% to 20% in the next 3 years. Is it possible and how would you achieve this?

Additional Information: to be given to candidate if asked

1. ROIC Definition

* ROIC is Return on Invested Capital. This can be achieved by growing the profits of the firm and/or by decreasing the invested capital.
* There are firms in the industry that have 20-30% ROIC. Hence the client’s target of 20% ROIC looks achievable.

2. Customers and Products

* The client has 30% customers in Europe, 10% in Asia, 50% in North America and 10% in the rest of the world.
* The client has 2 types of products — Standard (almost a commodity) and Engineered (designed specifically for the client).
* The standard products are getting commoditized, hence have significant price pressure.
* The engineered products have good margins in the 1st year and then the margins decrease in subsequent 3-4 years.
* The client has 30,000 SKUs in their product portfolio.

The industries that the client serves are as follows:

NOTE: The interviewee should recognize the following by now based on the Customer/Product information

* The client % revenues from Electronics industry are quite low and that industry has the highest % of Engineered products. The client should focus more closely on the Electronics industry.
* Engineered products offer much higher margins.
* 30,000 SKU seem like a lot, and should address that in the case as well. There will be interdependencies among these products.

3. Competitive Landscape

* This is a highly fragmented industry with 20,000 competitors.

4. Investment/Cost

* There are integration issues among the small companies under the client umbrella. The issues pertain to decentralized sourcing, sales staff and back office operations. These should be centralized to decrease cost (economies of scale) and improve coordination.
* The product portfolio needs to be optimized. Evaluate profitability of each product along with its interdependency, i.e. its importance in a product portfolio supplied to important clients. Evaluate profitability of each client as well. Suggest using databases for this analysis.
* Divest assets pertaining to certain non-profitable low volume standard products to decrease capital investment. If these components are still needed for a client portfolio investigate outsourcing their production and having exclusive contracts to maintain quality.
* Evaluate the capacity utilization and supply chain for the 50 plants. Decrease investment if possible.

Possible Solution:

The client can increase the ROIC from 10% to 20% by the following initiatives:

* Optimize product mix while keeping product interdependencies in mind.
* Sell more engineered products by growing business in electronics industry.
* Decrease cost by improving the internal integration.