The Rise and Fall of Husky Injection Molding Systems – Part 2
This article is part of a series on what causes a firm’s value to increase
Part 2 of the Husky article poses the question: Is Robert Schad a genius or insane in the strategy he forges in the face of the crisis discussed in Part 1 last month. I think it is a classic example of what not to do in strategy. You might disagree.
Recall from last month the crisis Husky Injection Molding Systems was in by late 1995:
- Competitors entered Husky’s most lucrative segments with injection molding equipment sold at much lower prices and at perceived comparable quality in the medium tonnage segment. Recall Husky did not compete in the small and large tonnage segments.
- At the same time there came to be huge shortage of resin, which gets liquefied and molded in the machine to make the end plastic products.
- This caused Husky’s customers to cancel machine orders and make do with what they had.
- The resulting excess capacity for Husky and its competitors triggered a market share battle.
We also discussed that Husky was a small boutique that custom made its machines for its customers and historically before this crisis was able to command at least a 20% price premium. We reviewed several laws of strategy, which give this kind of advice:
- A premium priced differentiator should only drop its prices as a last resort. As costs are higher due to the added value and benefits, dropping prices quickly could result in financial distress or causing increased demand this kind of company could not fill.
- Any firm should not take on too much complexity, too quickly.
What would you have suggested Husky do?
Here are my suggestions:
- Move to either the small or large tonnage segment, but not both, as an experiment. Move to the segment that allows the easiest transfer of its current competencies and requires the least amount of change management.
- Robert Schad to meet with key loyal customers to build the case that lowering prices unilaterally will not allow Husky to fund the long term R&D to keep latest advances in the field progressing
- Lower costs that do not detract from the quality of the Husky machines:
- Pick one supplier in every major component category and ask for their price declines. In exchange they get a long-term contract to follow Husky as it comes out of the crisis.
- Reduce work week cutting payroll and freeze pay increases
- Allow normal attrition of people and no new hires unless directly tied to key customer accounts
- Freeze all additional spending on things like the wellness programs, day care center, etc.
- Do not drop prices on machines but offer “Customer Loyalty” incentives like reduced prices for spare parts, technical service calls and the like
- Keep vigilance on when the resin supply will get back in balance
What do you think of my recommendations? I think they balance the strategic with the practical and are a prudent approach. Do you agree?
Here is what Husky actually did:
- Invested hundreds of millions of dollars to become the “absolute leader” in all aspects of injection molding equipment. They:
- Produced less engineered, less expensive machines
- Moved to small and large tonnage machines
- Expanded manufacturing floor space by 60%
- Built a new third campus in Vermont
- Built a factory to build their own components parts for their machines
- Increased commitment to continue to build their “factory of the future”
- Strengthened sales and technical service with more investment and people
- Eliminated two layers of hierarchy
- And – dropped prices everywhere by 20% to the delight of the sales force!!
Is this genius or insanity? Lowering prices while increasing costs and investment and taking on huge amounts of complexity quickly goes against just about every Law of Strategy we have discussed in prior articles and does not seem to make much common sense either. The only justification for these moves in my mind is that the force of the response could have forced competitors to retreat and/or consolidate. Also, Husky could appear to customers that they are investing for the long term for them.
What happened? The financial results were very disappointing and Husky ended up selling out to the private equity firm Onex for just 1.5 times revenue. What are the lessons here? I think the major take away is that every firm must be very careful in deciding that the laws of strategy do not apply to them. My hypothesis is that a firm will suffer more than it gains by breaking the laws of strategy. I think all of the laws we have discussed before should be assessed in terms of agreement with or against before making any key strategic decision. This is kind of like the pilot going through his/her checklist every time before taking off.
Next Up: Fascinating New Developments in the Field of Strategy
Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty five years in the strategy consulting industry before returning to academia full time at LSUS. He is the immediate past president of the board of directors of the Association for Strategic Planning, one of the leading professional associations in the field of strategy. He can be reached at firstname.lastname@example.org