TransDigm in 2017: The Beginning of the End or the End of the Beginning?
Posted: 9 Jul 2020
Date Written: May 14, 2020
TransDigm is a highly acquisitive company that manufactures a wide range of highly engineered aerospace parts with highly successful, but controversial strategy. On the one hand, its stock price had increased by over ten times in ten years since its IPO in March 2006, and both its revenues and non-GAAP EBITDA had grown at compound annual rates in excess of 20% since the company’s founding in 1993. But in early 2017, government officials, a major investor, and even some customers had begun to question the implementation, sustainability, and ethics of the firm’s strategy. That strategy consisted of acquisition-driven growth (i.e., a “roll-up”) and value-focused operations emphasizing three value drivers: value-based pricing, cost reductions, and new product development. With the firm’s stock price down 30% off its recent high, TransDigm CEO Nick Howley must decide whether to respond to the rising level of criticism and, if so, how. In the longer term, he has to decide whether to change the firm’s “value-focused strategy.” If he were going to change the firm's proven operating strategy, what aspects should he change and how should he justify the changes to his loyal shareholder base?
The case has three pedagogical objectives: First, it allows students to analyze an extremely effective strategy that has generated stellar financial returns for more than two decades and to assess the criticisms leveled against it. Second, it challenges students to define value creation and distinguish it from value capture. Who along the value chain is "winning" and who, if anyone, is losing? And third, it provides an opportunity to understand bargaining power as a key determinant of market attractiveness (buyer and supplier power are two of Porter's Five Forces) and an important kind of competitive advantage (a "bargaining advantage" in Van den Steen's framework). The chosen setting, spring 2017 when the company's stock price was down ~30% and investors, customers, and government officials were questioning the firm's "value creation" strategy, naturally raises the question of whether the firm's advantage will last for another five to ten years?
Keywords: Value Creation, Value Capture, Bargaining Power, Buyer/Supplier Power, Value-Based Pricing, Competitive Strategy, Acquisitions, Roll-Up, Business Ethics, Private Equity, Defense, Aerospace, Competitive Advantage, Industry Attractiveness
JEL Classification: L1, L11, L26, L8, G34, D43
Suggested Citation: Suggested Citation