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News> Articles > Some Data May be Cheap, but Could Prove Expensive: the Untold Stories

Some Data May be Cheap, but Could
Prove Expensive: the Untold Stories


 

Mark DeDecker and Ian Butcher

 
Contact Mark | Contact Ian | Kline Knowledge Hub
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June, 2015

Data Oversupply

Companies are confronted on a daily, even hourly, basis with the need for data about their own businesses and intelligence about their competitors. Easily available, secondary data may be adequate for the purpose provided that they are reliable. Unfortunately, that is the essence of the problem: is secondary data reliable?




Complex Strategies Based on Questionable Data
All too often companies spend an inordinate amount of time and effort constructing complex strategies based on questionable, unvalidated data. Companies prepared to spend hundreds of millions of dollars on an acquisition appear ready (or resigned) to pay for good legal, tax, and environmental advice, but may base the commercial analysis on casual data found on various unsubstantiated websites.

On many occasions, at the eleventh hour and just before pulling the trigger on product launches, companies hurriedly seek confirmation that their back-of-the-envelope calculations and market assumptions are grounded in reality. Here are some of those stories.


New Construction Product Based on Uncertain Data Struggles to Win in the Market
A client had acquired a technology and plant for a construction product. They had roughly estimated the market and fixed the target price based on production costs and aspirations rather than market reality. Unaware of the incumbent products already on the market, the new sales force targeted the “wrong” end of the value chain – the construction contractors. Somewhat puzzled by their lack of success, they turned to Kline. We found out the following: these products are specified much earlier in the value chain by architects, specifiers, and the like which our client had been ignoring; there were two similar, well-entrenched, and cheaper products already on the market; that their estimated pricing was far too ambitious; through Conjoint Analysis we found that potential users valued other features of the product, which had been largely under-emphasized by marketing material; that the product could only be cut and modified off site—a great inconvenience—and that, critically, the current and potential market size was a fraction of what had been optimistically but groundlessly estimated. Our client was disappointed, but grateful that they had discovered the reality before it was too late and was able to recalibrate its marketing plan.

Underestimating the Size of the Hyaluronic Acid Market Proves Costly
Another client had estimated the size of the hyaluronic acid market by looking at internet activity and counting the number of companies offering the product—often Chinese companies. There appeared to be hundreds. Kline was asked at the last minute to cut through this data “noise” and—by a program of industry interviews—establish who were the true primary suppliers of the product rather than those reselling and repackaging. Looking at the website “evidence” had caused them to vastly inflate the true market size, thus they had a market strategy built on sand. When the truth emerged, our client decided that the size of the market and the way it worked was not compatible with their expectations and sold on their technology.

Official Statistics Offered Conflicting View on the Ceramics Market in China
One of our clients was struggling to get a good understanding of a key supplier of raw materials to the ceramics industry in China. Although extensive official statistics are available both on raw materials, as well as ceramics production, when comparing the data sets, they simply did not match with each other, making it impossible to draw any meaningful conclusions. Kline conducted in-depth field research, which enabled our client to obtain a clear view of the real positioning of raw material suppliers.

Unreliable Data Uncovered in Construction Chemicals Litigation
Kline was retained for a litigation case for a dispute involving a construction chemicals firm’s dissolution of a joint venture with its local partner (plaintiff). The opposition in the case had simply modeled what the market development would be based on a few data points found in secondary sources. This data turned out to be extremely wide of the true situation, leaving them exposed in their legal arguments. Kline carried out an extensive analysis of the competitive playing field in all construction sectors, as defined in the joint venture agreement. Based on this analysis, Kline developed sales projections and profits of the joint venture over a ten-year period. Kline then prepared an expert report with all the justification for the projected level of sales and lost profits. In addition, Kline addressed all rebuttal arguments put forth by the law firm representing the defendant. The plaintiff had approached the analysis based on a high level analysis, calculating the value of the construction chemicals based on the construction activity. Based upon the report and testimony provided by Kline, our client was awarded over $12 million.

Huge Discovery Halts Major Plant Investment in the Paper Industry
We have seen clients on the point of making huge decisions based on flimsy data. Kline got involved with a client convinced that they would invest big money into a liquid chemical used in the paper industry. The whole plant economics were based on the fact that they could also produce a 100% powder co-product used in a number of specialty applications, including as a pharmaceutical reagent. Their in-house estimate was that the world market was 800 tonnes at $35 a kilo. Kline’s exhaustive primary interview programme with suppliers and consumers proved beyond doubt that the current market was barely 200 tonnes, a quarter of the addressable market.The $35/kilo was somewhat ambitious and only obtainable when the product was sold in lab quantities. This discovery was very traumatic for our client as staff were in place and construction plans at a very advanced stage. The project group had been so excited by the prospects of the venture and the company politics had blinded them to the actual situation. The irrefutable evidence from the industry interviews was quite clear and our client shelved the plans for the plant. Kline and the client remained close after this incident as they valued the outside-in view.

Uncovering Hidden Facts Saves $5 Million on Acquisition Purchase Price
In an acquisition pre-due diligence, our client had relatively good data provided by the vendor. However, there were three issues which our client felt had been swept under the carpet as they would have been detrimental to the deal. Our client asked Kline to carry out some focused industry interviews with raw materials suppliers, competitors, and other players up and down the value chain. Kline found out that indeed there was a major problem with some key raw material contracts that would only break about the time our client would take over the firm. This raw materials supply issue alone would have significantly affected the profitability of the company. Kline also found that there was a Chinese supplier who had broken ground to build a similar plant to produce the same derivatives. All issues which did not appear in the offering memorandum. For a modest investment with Kline into good data, our client was able to leverage a $5 million reduction in the purchase price.

It Seems Counterintuitive to Remind Companies that Good Decisions Require Good Data!
Secondary data are useful, but how were they developed? Where did the data come from? Have the data been triangulated by validating from several sources? How have those growth rates been built up and what is their rationale? Do the geographic, product and application definitions correspond to the ones used in your company? Just how transparent are they? Frequently, secondary data are built up and extrapolated from other unverified secondary data, and falsehoods are built upon other falsehoods.

At Kline, we say "actionable insight often makes a difference between a bad and a good strategy.” The oversupply of data and shortage of insight is something we hear a lot from clients. Additionally, they commission extensive studies, but struggle to get the organizational buy in when it comes to action because people in the field do not see the reality reflected in the research. Data is everywhere, but good data takes time, skill, and effort to put together. Good decisions are built upon good data, and using poor data could prove costly.