Professional Documents
Culture Documents
December 2006 Dear Reader, Thank you for entrusting us with the challenge of helping you to navigate the notorious consulting interview process! We have made significant changes to the book this year changes we hope will improve your skills so that you can land a coveted FY internship and then a full-time offer. For the first time, the Fuqua Consulting Club interview preparation guide is proud to present: Actual interviews from management consulting companies An industry guide, to clue you in on the basics of some typical industries you will encounter along the way. A tip sheet to give you the critical edge in the interview process.
We owe a debt of gratitude to our fearless FY Consulting Team: Mahesh, Ioana, Vinod, and Bogey. The learning curve was intense, but they proved up to the challenge. Without their contributions, the book would not have been made a reality. Thank you, team! We also extend our gratitude to the second years who took time out of their schedules to contribute cases from actual interviews and iron out some of the wrinkles along the way. Sincere thanks to you all. Finally, we wish you the best of luck in your upcoming interviews. It can be grueling, but you will learn a lot along the way. Keep up the enthusiasm, and enjoy yourselves. This is business school, after all. Best, Louis Amoroso & Darren Parker
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TABLE OF CONTENTS
Interview Insights..........................................................................................5
Consulting Industry Overview.........................................................................................6 The Crucial Behavioral Interview....................................................................................9 Behavioral Interview: Key Evaluation Criteria.............................................................10 Behavioral Interview: Common Questions....................................................................11 How to Behave During the Case....................................................................................13 The Case Interview: Overview......................................................................................14 The Case Interview: Background and Insight................................................................15 The Case Interview: A Short Example..........................................................................16 The Case Interview: Key Evaluation Criteria................................................................18
Frameworks.................................................................................................19
Frameworks: Overview..................................................................................................20 Frameworks: A Primer...................................................................................................21 Frameworks: The Three Cs..........................................................................................22 Frameworks: The Four Ps.............................................................................................24 Frameworks: Porters Five Forces.................................................................................25 Frameworks: Profitability..............................................................................................27 Frameworks: VRIN Model............................................................................................28 Frameworks: New Market Entry...................................................................................30 Frameworks: Mergers and Acquisitions........................................................................31 Frameworks: Market Estimation....................................................................................32 Frameworks: Supply Chain............................................................................................33 Industry Cheat Sheet......................................................................................................34 Tips to Put You over the Top.........................................................................................35
Practice Cases..............................................................................................37
Case Feedback Form......................................................................................................38 Case #01: Japanese Golf Ball Market............................................................................38 Case #02: Chicago Piano Tuners...................................................................................40 Case #03: Disposable Diapers.......................................................................................41 Case #04: Chewing Gum Market...................................................................................42 Case #05: Publishing......................................................................................................43 Case #06: Yellow Cab Taxi Company - McKinsey.......................................................44 Case #07: Direct Mail Retailer......................................................................................47 Case #08: Airlines Accenture Final Round................................................................49 Case #09: Slick Hicks Farm Equipment......................................................................50 Case #10: Heavy Equipment Manufacturer Huron Consulting Group, Final Round. 52 Case #11: Purified Water...............................................................................................53 Case #12: Nabiscos Market Share................................................................................55 Case #13: Bank Commissions - Accenture 2nd Round.................................................59 Case #14: Schwarzenegger Defense-Accenture, Round 1.............................................61 Case #15: Napoleons Pizza Pies...................................................................................64
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Case #16: Las Vegas Hoops Bain, Round 1...............................................................67 Case #17: Luxury Brand Jewelry Bain Mock Interview............................................70 Case #18: Nextel Cup Racing Team UPS #88- Accenture............................................72 Case #19: Eagle Eye Drops............................................................................................75 Case #20: Portuguese Cement ......................................................................................78 Case #21: Life Science Technology Startup..................................................................80 Case #22: Hospital Chain - McKinsey...........................................................................82 Case #24: Shaky Construction Firm..............................................................................88 Case #25: Scotch Bar.....................................................................................................94 Case #26: Yahoo, Google & YouTube - Katzenbach Partners, Final Round ...............97 Case #27: Sgt. Slaughters Construction Co Accenture.............................................99 Case #28: DMB Satellite, Inc......................................................................................103 Case #29: Tipsys Distillery.........................................................................................106 Case #30: Chemical Brothers International ................................................................111 Case #31: NoPerx Consulting Company.....................................................................115
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Interview Insights
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Increasing globalization of consulting firms provides access to global informational resources, spanning different geographical locations. This provides and unparalleled opportunity to gain exposure to business worldwide. Getting Hired Consulting revenues have increased over the last several years, but the recent geopolitical turbulence and economic swings have caused a good deal of belt-tightening. While historically 30-40 % of MBAs entered this field, current trends have caused this number to settle between 1020%. Most major consulting firms are still active in on- and off-campus recruiting initiatives. They usually host special presentations on campuses to inform and educate MBA students about their unique missions and cultures. Hours and Compensation Consultants hours generally arent nearly as grueling as those of investment bankers. About 60 hours per week is the norm, although some say they only work 45 to 50. Crunch periods can be more intense, with teams working 75-80 hours a week. These periods dont usually last for more than a week or two. Whether you are an associate or a partner, you can expect the same general schedule. Hours are pretty similar for all consultants, regardless of rank and position, says one insider. Just out of business school, you can expect to make anywhere between $85,000 and $150,000. Packages may include benefits and bonuses and some offer additional perks. Travel Most consultants travel three to four days a week. The typical schedule is Monday to Thursday on the client site and Friday in the home office. Of course, this can vary from project to project and firm to firm. Sometimes you will be lucky enough to have a client in your home city or nearby. A few consultants only have to travel one to two days a week or 25-30% of the time- but they seem to be the exception. Office Culture Collegial, friendly and close knit are terms that come up often in discussions of the atmosphere in this industry. Team bonding is an important part of most projects. There are many happy hours and team dinners, especially when working out of town. Though a couple of conservative companies still cling to dark suits and ties, many consulting firms these days are business casual. An important caveat: the consulting culture varies not only from firm to firm, but also from project to project and partner to partner within the firm. People and Diversity The overall consensus from the consulting crew is that they love the people they work with. The concept of work-fun balance surfaces again and again. In some areas, like strategy, almost everyone has an MBA. Other sectors are more academically diverse. Many of the large consulting firms are more international. Smaller or start-up firms are the most diverse in the industry. There are also more women in this industry than in banking or finance.
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Consulting at Fuqua Several top consulting firms hire the best and brightest from The Fuqua School of Business. The consulting club at Fuqua supports the efforts of students to pursue a career in this field. The club develops and nurtures relationships with the premier consulting firms in the industry and organizes interactive forums such as symposiums, career fairs and informational sessions to enable students to network with industry representatives and develop a deeper understanding of the profession. It also assists students in developing skills in case and behavioral interviewing through coaching and mock interviewing. Lastly, club members participate in local and national case competitions.
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PRE INTERVIEW
DURING INTERVIEW
POST INTERVIEW
Industry through: o Website o Fuqua alumni o Recent press release o Career services materials o Library materials (e.g. Wetfeet and Vault) Research your interviewer: o Obtain a biographical summary o Develop question related to the interviewers experience Customize your message: o Focus on key competencies o Tie your skills and experience to their culture and desired qualities Anticipate, structure and rehearse answers to potential situational questions Prepare Tell me about yourself question Practice behavioral interviews with CMC and other students
Follow-up answering the questions o Thank you notes o Situation Ask for feedback if you plan o Action to interview next year o Results Focus on key competences Selling yourself o Identify your key selling points o Balance I versus We Package the product o Be concise o Tie each answer to a competence The Closing o Feel free to ask questions o Provide concise summary but do not oversell yourself o Exit with confidence
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varied weightings or priorities for each of the criteria. In addition to preparing for the general criteria, identify firm specific criteria through SIPs, company websites, or other research materials. Ensure that you are prepared to explain what distinguishes that particular company, and that you highlight how your skills, experience, and personality are a great fit for the firm.
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Consulting Fit What qualities do you have that would make you a good consultant? What do you think makes a good consultant? Please rate yourself on each of these qualities and give supporting examples. Give me an example of a time you have demonstrated [leadership, communication, analytical thinking, problem solving, initiative, teamwork]. Tell me about a situation when you had to handle criticism/complaint from a client/customer. What was the circumstance and how did you handle it? What feedback did you receive? What was the result? Describe a recent example when it was important for you to establish rapport quickly. What were the circumstances? What challenges, if any, did you face? How did you deal with them and what were the results? Describe an occasion when you took responsibility for making a key decision. What was the circumstance and what was the decision? How comfortable were you with making the decision and why? How did you implement the decision and what were the results? Tell me about a time when you had to manage multiple priorities. How did you deal with conflicting demands? What approaches did you use? What were the results? Tell me about a situation where you had to work closely with other people to get things done, and you had to influence their actions without having formal authority over them. How did you influence the group? To what extent were you effective? Explain. Describe the most difficult analytical problem you have ever had to solve. What qualities do you think a leader needs? What would make you a good manager? Why Consulting Firm X Why do you want to work for this firm? And this office in particular? Who else are you interviewing with and why? Where is this firm on your list of priorities? What do you think the key differences are between Consulting Firm X and other firms? What do you think you can offer us? What are your strengths/weaknesses?
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Refine Answer
1. As the interviewer describes the situation, think about key issues facing management. Restate the question in a way to add value
Ask clarifying questions
2. Create a framework and develop an early hypothesis Ask for a moment (<~1 minute) to create framework
Determine the key issues Use structure and logic
4. Test hypothesis Evaluate which facts are critical to key issues 5. Refine answer Probe for more detail in critical areas
6. Make recommendation
Take a stand: Deliver your conclusion with conviction Give evidence to support your conclusion State pros and cons be fact-driven Be brief
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From the NASA research, we could get the approximate Market Size: 300 million (total American Population) x 2% = 60,000. Then we get the total potential Market Revenue: $9 billion
Conclusion: Taking into consideration the big potential market and less competitive environment in the initial years, Space Tourism will be a good investment for Virgin. Note: If you could finish the above calculations and analysis through the interview process, Congratulations, you are now a good interviewee. However, if you want to be an excellent one, you should think further about the business. Excellent Answer: Building on the Good Answer, utilize Porters 5 Forces to check the EXTERNAL aspects, and VRIN to have a deep and comprehensive INTERNAL analysis. . Questions you should also ask during the interview could be like: Is Space Tourism a good business? (punch up 5 Forces) o How much demand will there be? At what price? o How easy is it for competitors to enter? o Will customers bargain down prices? Is this an industry where reputation matters? If so, what are the key elements of reputation that matter and why? o Will firms compete aggressively once they enter? (e.g. will China, Russia, and others use this not as a source of profits based on full costs but just to subsidize space research? If so, what will happen to firms that are trying to make money?) o Will environmental regulation get in the way? Who is going to profit most from space tourism? (Add to supplier part of 5 forces; list things like reputation, patents, etc.) o Who are the suppliers of the technology? Early entrants? Will Virgin thrive in this business? Why? (capabilities list, resources list) o Does it have the right skills / capabilities? o Does it have other complementary resources it can leverage or that will benefit from space tourism? o Will this be too much for Virgin to manage? Is it getting stretched too thin? If not Virgin, who will do well? Why? Note: You should work hard to develop a comprehensive response like the one illustrated above.
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Framing/organizing the Identifying and prioritizing problem key issues as they arise being asked Prioritization of issues Sanity check Does the Develop an approach to answer make sense? answer the question Identifying relevant Ability to use the original information Always draw final approach and logic to sort conclusion relating Synthesizing and filtering out a problem discussion to initial problem data provided by the interviewer Comfort with numbers and ability to make reasonable assumptions Drawing conclusions from facts Identifying key implications and next steps Understand the question
SUCCESS-ORIENTED BEHAVIOR PRESENCE / COMMUNICATION PROFESSIONALISM & ENGAGEMENT
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Frameworks
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Frameworks: Overview
The following frameworks provide a fairly comprehensive set of tools for a successful case interview. The case book suggestion is to learn these frameworks thoroughly so that during the interview it is easy to recall and utilize a framework and valuable time is not wasted deciding which framework to use. Remember that a specific framework is not needed to crack the case.
Key Frameworks in Case Interviews
To crack the case you must first separate the problem horizontally and then drill down vertically: Make your framework MECE or Mutually Exclusive and Collectively Exhaustive. Do not force a case into a particular framework and be prepared to use elements from multiple frameworks.
Example: A clients profits are declining. Why?
Revenues
Costs
Price
Quantity
Mix
Fixed
Variable
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Frameworks: A Primer
Knowledge of the following frameworks can be critical to conducting a successful case interview. These tools help to structure a candidates thinking logically and ensure that multiple angles are studied.
The interviewer is not looking for a cookie-cutter approach to solving problems. During the interview a candidate should be sure to incorporate their own intelligence and creativity. A single framework is often inadequate to identify all of the issues present in a case. It is therefore recommended that candidates look at more than one framework and combine the positive elements of each approach into the recommendation. Interviewers generally are not impressed when candidates explicitly state the framework or frameworks that are being utilized. Moreover, this approach demonstrates a lack of creativity on the part of the candidate. Students should note that (a) they are panning for gold and are not on a treasure hunt most interviews. are chances to make good points not find a single hidden right answer and (b) any tool (compass, map, knowledge of geology...) will be helpful in finding gold in any terrain but only if it that tool is understood well enough to apply. I hope this (overwrought?) imagery will help students to be relaxed and confident going into and during their interviews and that it will encourage them to study a few frameworks deeply rather than trying to know a little about many frameworks. --Scott Rockart, Assistant Professor, Fuqua School of Business
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CUSTOMERS
COMPETITORS
COMPANY
Demographics Segmentation Do they have unmet needs that we could serve? The what, where, how, when, and why of the buying decision they? Who are anyone else Is thereDemographics that we might be able to sell to Segmentation (growth)? unmet needs that Do they have we there any services that Arecould serve? they what, where,useful? The might find how, when, and why of What is ourthe buying decision share of customer market?
the overall market like? How well have they been doing? How are they different from us in products, services, or costs? Can newthey, and what is the Who are competitors easily overall market like? enter the market? How well have they been Do we have to worry about doing? substitute products? How are they different from us Doproducts, services, or costs? they have deep pockets? in What will their response be Can new competitors easily if we pursue a certain course of action?
Potential 4th C
COLLABORATORS
Buyer Selection: Purchasing potential Growth potential Structural position Cost of servicing Supplier Strategy: Stability and competitiveness of the supplier pool Optimal degree of vertical integration Allocation of purchases among qualified suppliers Creation of maximum leverage with chosen suppliers.
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The first step in analyzing a specific corporate action plan is to identify the Product and understand its current positioning (real and perceived). By understanding the products current position, the strategy implemented can be tailored for maximum impact. Additionally it is important to examine factors such as first-mover advantage and product adoption when analyzing any given action plan. After analyzing the product, the next step is to consider how customers are made aware of the product and its benefits. Promotion specifies which customers are targeted and by what method. In certain circumstances it might make sense to implement a pull campaign and in others a push campaign. It is important that the overall promotional plan incorporate the analysis of all 4Ps. The third P is Place. When conducting analysis of the corporate action plan, it is crucial to understanding the choice of channels used to move product and channels move information. The place analysis should emphasize the value contributed to customers and the channel members motives. Once the product has been promoted properly and set in the appropriate market place, the firm must create profits from its sale. Price is the only P of the 4Ps that captures value from consumers and determines firm profitability. Therefore is extremely important to the overall action plan. In addition to determining base prices, it is also important to account for channel costs and price sensitivities of the market and how these variations will influence the overall analysis.
PRICE
PRODUCT
What will price be? the most closely Which channels are What are the competitors prices for aligned with the companys strategy? competing products? the company want to What functions does What discounts or other the channel to serve? incentives will be offered? more appropriate to go direct to Will it be Will prices vary across geographic lines? the end-user or deliver the product through intermediaries? target customers value How much do the the product? economics of the channels? What are the Will the product beis the company willing How much control priced at or below its perceived value? delivery of the product? to give up on the How would the company address any potential shifts in power to the channel? - 24 PLACE/DISTRIBUTION
Does the product the company trying to What message is have the right positioning
communicate? What in the marketplace? is the objective? o Does some of a particular segment of What are it serve the barriers to the market communicating the desired message? o Istheapromotion/branding focus on the Does it mass market or niche market? What kindview of relationship building long-term of brand equity does the product uphold? consumer? with the o What are some of strategy differentcan How is the marketing the features that be added to the product that would add from the competition? to the value or the perception? Which vehicles will the company use to What are the packaging issues? influence the decision making process? o Does the packaging reflect the How much money is being allocated to positioning of the product? marketing? PROMOTION o How does the product fit in the overall strategy?
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The analysis of the five forces can help identify a defendable position for an organization within an industry in terms of positioning, exploiting shifts between forces, or identifying a new industry for diversification.
POWER OF BUYERS POWER OF SUPPLIERS INDUSTRY RIVALRY
How many buyers does the How many suppliers serve How does the industry
industry serve? How many firms serve the buyers? How big are buyers relative to industry? How critical is your product/service to the buyer? Who are they? Demographics Segmentation the industry? How many firms within the industry does a supplier serve? How big are suppliers relative to industry? Do the suppliers serve other Who are they, and what is the overall market industries? like? How critical is the been How well have they suppliers doing? product/service to the Do they have unmet needs that industry?they different from us How are we could serve?
The what, where, how, when, and why of the buying decision
compete? Price Product differentiation Is the market expanding or contracting? Is the industry concentrated? Companys strengths & Many small players weaknesses One bigwe compete (e.g. low How do player and several small players, etc. cost vs. high end)? Whatwell can we keep new How are our companys competitors from being strengths/ weaknesses a threat (e.g. pre-emptive actions, relative to competitors?
THREAT OF SUBSTITUTES
THREAT OF ENTRY
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Frameworks: Profitability
PROFITABILITY = REVENUES + PRICE COSTS
What are the business economics? Cost/benefit Market share Are there any synergies or overlap issues with existing businesses? Likely response from competitors?
Price trends? How do prices compare to industry? Is it possible to raise/lower prices? Price sensitivity of customers?
QUANTITY
What are they selling? Products & Related Services Sales Trends? Why? New markets? Geography? Underserved Customers New Products/Services Are they gaining or losing customers? Why do customers buy?
MIX
Selling high/low margin products? Product and margin mix shift among different customer segments or geographies?
Fixed Costs Factory Equipment Land Unusual Charges Variable Costs Wages Materials Inventory Shipping Selling ------------or------------------- Raw Mats Procurement Price, Quantity, and Efficiency Production Costs Process Labor Distribution Costs Channels Transport
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Valuable
Rare
Inimitable
Non-substitutable
Is there firm-specific learning? How imitable is the resource? If imitable patent protection not
possible, so small entry lag If inimitable, big entry lag, what other special resources can be built Are there casual ambiguities that prevent would-be imitators? Mobility barriers that create prohibitive switching costs & entry barriers. The nature and process by which the resource is attained Non-tradable assets developed within firms
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What are the business economics? Cost/benefit Market share Are there any synergies or overlap issues with existing businesses? Likely response from competitors?
INDUSTRY ATTRACTIVENESS
REQUIRED CAPABILITIES
How big is the industry and the profit margins? Identify the level of competition in the market Look at market dynamics. Use Porter s 5 Forces. Is this industry growing, stagnant, or declining?
What resources and capabilities are used to succeed in this market? Does the client have these resources or capabilities? Can the client obtain these resources or capabilities? How? Partnership Acquisition Alliance
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customers perceive both the client and the target? Analyze target performance market share, profitability, product, etc. What are the relevant strengths & weakness of the target?
Synergies customers? How do these Cost: SG&A, R&D, Mfg, Revenue: Enhanced
product, improved distribution, robust customer solutions, crossselling opportunities, new customer segments, etc. Softer Synergies (Management capability, technology, etc). Compare base line valuation + synergies to the purchase price etc.
CULTURAL ISSUES
ALTERNATIVES
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TOP DOWN
BOTTOM UP
250-300M people in US Uniform distribution Average lifespan = 80yrs Age range of digital camera owner is 20-60 ~150M people 150M people are ages 20-60 10% own digital cameras = 15M people 10% are Wal-Mart customers = 1.5M people 20% will use photo finishing kiosk = 300K people Average person prints 50 prints per year = 15M prints/year
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Automobiles
Insurance reimbursement, Occupancy Rate Specialty labor, facilities and equipment, IT systems
Moderate
Financial Services Business vs. Consumer segments, Portfolio IT systems, Customer service, Moderate to High of products, Cross-selling opportunities Fraud detection Pharmaceuticals Retail (Apparel) Relationship-driven sales R&D, Advertising Expenditures High Low to High (it depends)
Converted customers*average Store costs, Commissionsales*frequency, Premium Brand vs. Private based sales Label, Same-Store-Sales metric Software vs. hardware, subscription vs. license model (recurring vs. one-time) Monopsony buying from oligopoly R&D, Labor (software), Fixed assets (semiconductors) R&D, Technology spend
Hi-Tech
High (software), Low First-to-market vs. leapfrog strategy, short life (hardware) cycle, product and process innovation High Long-term relationship, contracts, and sales cycle, Security concerns, Patents, Government regulation Seasonality, Cyclical business
Defense
Hospitality
Business vs. Leisure segmentation, Capacity Utilization, Price discrimination (happy hour, seasonality), Tips
Telecom
Subscriber revenue (wireless), Customer Customer Churn, Cell phones segmentation (frequent vs. infrequent), as loss leaders Cross-selling and integrated services (DSL) High demand with ability to manipulate supply Resource exploration, extraction, and refining, High PPE
Moderate to High
High
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Interviewees
Try to avoid coming up with a 3 Cs or 4 Ps framework. These concepts are important and frequently employed, but dress them up with different names (for example, say End User instead of Customer). Do not be afraid to ask for moment to collect your thoughts, at any point in the interview. Haste makes waste. While you are cracking the case, do not forget that the interviewer is analyzing your behavior as well. Do not neglect the behavioral portion of the interview. We can say it until we are blue in the face, but some of you will underprepare in this area anyway. Dont be that guy! Expand your practice interview network. Change case partners. Use this casebook early and often. Understand the differences and nuances between the firms themselves. There are differences and this question does come up on occasion. Turn your page with your framework so that your interviewer can better follow. The more the interview can follow and remain engaged, the better your interview will be. Be personable. Smile. Some personality can take you a long way. If it looks like youre not enjoying the case interview, why would your interviewer expect you to enjoy consulting as a career? If you really dont enjoy cases, ask yourself if you will really enjoy consulting as a career. Get plenty of sleep and eat breakfast when you have a morning interview. Be vocal with the math. People get lost and lose interest in your numbers when they are not engaged. To that end, walk your interviewer through your thinking throughout the case.
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Always keep the original case question in the back of your mind. What are you trying to solvedont get lost in the tall, thick weeds. Listen and take cues from the consultant. They are there to help you. For every numerical conclusion you come to, you should be doing two things: o Is this number reasonable (is it logical)? o What does it mean (drive the process forward and find inferences)?
Finish strongyour conclusion is the last impression you make in the case. o Take a stand: In looking at(insert original goal/question here), I recommend(put a stake in the ground). I feel this way because(list two or three or four analyses from the case that buffer your position). o Other factors to consider: If I had more time, I would look at(show the interviewer some depth of thought here: run sensitivity analysis, explore international expansion, conduct further market research).
Practice math in your head. The book, How to Calculate Quickly, by Henry Sticker, is really helpful. People on your project teams at school will be amazed at your mathematical dexterity.
Send thank you notes and make them personable. You dont have to write a novella, but a quick note is appreciated. This is not just for you, but makes the school look good as well.
Interviewers
When you give a case for the first time, prepare the case well for the candidate sitting across the table. The better you know the case, the better it will flow and the more realistic it will seem. Give the candidate honest feedback. If you are not being candid with them, they will continue to make the same mistakes. Use our Case Feedback Form to give valuable feedback to the candidate. Give cases. Give cases. Give cases. You learn quite a lot by giving cases.
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Challenge the candidate. On thought-provoking, brainstorming questions, ask What else to generate more creative responses from the interviewee.
Practice Cases
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Scenario: You are going to visit a client who sells golf balls in Japan. Having had no time for background research, you sit on the plane wondering about the size of the market for golf balls in Japan, and what drives demand. Your plane lands in fifteen minutes. How do you answer these questions? In estimation cases there is no one right answer. You make up the numbers as you go along, so try to make your calculations as easy as possible. A good rule of thumb: use nice, round numbers. The interviewer will expect you to think out loud, outline a general framework for how you are going to solve the problem, and then come up with reasonable assumptions about the inputs that you need. Approach: Golf ball sales are driven by end users. Population of Japan: 125 million. Proportion that play golf: 1/5. Purchase Frequency: the average golfer plays 20 times per year and uses four balls per time. 125 * 1/5 * 20 * 4 = 2,000 million. The estimated market size for golf balls in Japan is 2 billion.
Estimate a piano tuner can tune five pianos a day, 250 days a year, therefore: 112,500/250 = 450 pianos a day to tune 450/5 = 90 pianos tuners needed. How could you check this? Look in the yellow pages. Would all the piano turners be in there? You can guess half might be, while half work on word-of-mouth advertising. By the way there are 51 piano tuners listed in the Chicago Yellow Pages.
Profitability
Profitability
Analysis: Assume that we stay at the airport. In this case we pick up a fare to NYC. This would generate revenue of: $4*1 (for the first mile) + 2*11 = $26.00 base fare Tips = 15% of base fare = $3.90 =========== Total $30.00 (approximately) Now lets look at our costs in this scenario: Given 24 miles/gal, we use gallon of fuel for the entire 12-mile trip. At $2 per gallon: Fuel Costs = $1.00 Taxi Cab Company Cost 50% of $26.00 (meter cost) = $13.00 ======= Total Cost $14.00 Profit = Revenues Costs = $30.00 - $14.00 Operator Profits = $16.00 Question: Say we leave and head back to Manhattan without a passenger. What is the net margin for the cabbie? Interviewer: Make sure the candidate understands the reasoning as to why he/she is doing this. The candidate should deduce that the time spent sitting at LaGuardia could be used to get fares in Manhattan and make money. Let them proceed with the following data about fares in Manhattan: Toll to be paid to go back to the city : $5.00 Time to search for fare once in Manhattan : 10 min Distance to be driven for fare pickup : 2 miles Time fare engages cab : 10 min Distance fare travels : 2 miles Same fare rate. This is a cycle and the candidate needs to identify the revenues generated in such a 2hour cycle with the equivalent 2-hour wait and passenger pickup at La Guardia calculated earlier.
Profitability Candidate continues Break down the revenues generated per cycle: 4*1 (for first mile traveled) + 2*1 (for the second mile) = $6.00 Tip 15% of the base fare = $0.90 = $1.00 (approximately) ====== Total $7.00 Lets break down the costs: A sharp candidate will realize that there is a cost associated with driving back. Cost of fuel (12 miles takes up 0.5 gal, @ $2/gal) = $1.00 Toll booth cost (yes, both ways) = $5.00 ========= Total Cost (to get back to Manhattan) $6.00 Cost associated with each cycle: Cost of driving around (2 miles) to find a fare = (2/24) * 2 = $1/6 = $0.16 Similarly cost of driving the fare (2 miles) = $ 1/6 = 0.16 cents approximately Now we know 50% of the fare goes to Taxicab Company. We know fare = $6. Therefore company nets 6/3 = $3 and operator keeps $3 Therefore Net cost of a cycle = ($0.16 + $0.16 + $3.00) = $3.33 Net margin per cycle for operator = ($7.00 - $3.33) = $3.66 At this point the Candidate has identified one-time cost to Manhattan as $6.00, and the net margin per cycle to be $3.66. Candidate should continue with analysis Given each cycle lasts 20 minutes and we have 2 hours equity time we can expect the taxicab operator to generate six revenue cycles. Adding up the margins operator stands to make: Total margin in six cycles = (6 * 3.66) = 21.96 From this we need to subtract the one time cost to get to Manhattan ($6.00) Therefore, operator generates profits of (21.96 6) = $16.00 (approx) Bottom-line: Both the approaches net the same margins for the operator. So neither path confers a bigger advantage. Question: Why are the bottom lines for the two strategies comparable, and can one expect this in real life? A good answer would be merely the observation that its interesting that both the routes net the same result. A superlative answer would consider why that makes logical sense., and tie in supply and demand equilibrium, explaining why the market steers itself towards the equilibrium point. Discussion along the lines of if too many cabbies stay back then they wont get their fare in 2 hours, but they will notice that other cabbies are getting fares quickly by heading back and so they will also head back, leading to equilibrium. The alternate of too many cabbies heading backresulting in equilibrium is left as an exercise for the student.
Profitability
The candidate should calculate the revenues and profits from the information given for 2005. Every 100 catalogs will result in 3 orders, plus 3*(1,500/6,000) = 0.75 additional reorders, for a total of 3.75 orders placed per 100 catalogs mailed. The 3.75 orders will result in 3.75 * 66.67 or $250.00 in revenues. The candidate should continue with the profitability analysis, now looking at costs. At a profit margin of 15%, approximately $250 in sales will return a profit before postage of $37.50, which is not sufficient to cover the mailing cost of $40. Conclusion: The client should not accept the printing arrangement at $0.40 cents per copy. Question: The client is interested in improving the revenues per catalog metric. How might they achieve this? Brainstorm. Be intelligent. Relax. The best answer might have the candidate take some time to come up with a structured response. One example might be the book itself (bigger pictures, layout, more product selection, print in color, etc.). Tweak sales strategy through better-targeted advertising or by offering a pre-holiday sale to spur volume.
Profitability
No. of Reorders (within six months) 200 600 1000 600 1500
Profitability
Profitability
Profitability Solution: Prices have been raised to cover the costs of improvements, but customers do not place a high value on the improvements, so the price increase has resulted in a drop in sales. The client needs to incorporate a cost/benefit analysis procedure into its product improvement process. The client should also evaluate their marketing plans to ensure their customers are aware of product improvements and understand their value. Before scaling back their product improvement process, the client needs to evaluate competitor's R&D and product improvement positions.
Profitability
Case #10: Heavy Equipment Manufacturer Huron Consulting Group, Final Round
Scenario: Your client is a manufacturer of heavy equipment. Revenues have been increasing but margins have been dropping. The CEO, Peter South, has asked you to figure out what is going on. Note: This is a straightforward profitability case. Candidates should use a profitability framework, but add 2 Cs for segments/products and competition. An initial hypothesis could be that product mix has changed. The following information should be given if requested: 1. Product Mix: The client sells construction equipment (bulldozers, backhoes, etc.) similar to Caterpillar. The product mix has not changed recently. 2. Pricing: List price has been increasing at 3-4% annually. We have not changed our discount policy. 3. Fixed Costs: Ask the candidate what he/she thinks the fixed costs are (SG&A and PP&E come to mind). There have been no changes in these recently. 4. Competition: There is no real competition in our segments. We have been doing great and we have a backlog of orders. Our factories are running at 100% utilization. 5. Variable costs: The candidate should list out some variable costs (fuel, raw materials, labor are three biggies). Labor probably contains a union component. However, no major changes here. We have, however, passed fuel cost increases onto our customers. 6. Manufacturing for export: Overseas transport is not a concern. We are not impact by those exchange rates and high fuel usage. 7. Quantity of equipment sold: Growing 8. Sales Force: The sales force negotiates with each customer, and is compensated based on top-line growth Solution: The candidate should realize that the sales force is giving away freebies to get the sale maybe additional service, better payment terms, etc., which is reducing profitability.
Profitability
Profitability the drinking fountains will cost $35*2 every other day or $70 x 10 = $700 per month. At more than 2,000 patrons, it costs $70 x 20 = $1,400.
Consumers Cost of Option: Purifier Bottled Fountain 0 $500 $0 $450 500 $500 $250 $450 1,000 $500 $500 $700 1,500 $500 $750 $700 1,700 $500 $850 $700 2,000 $500 $1,000 $1,400 2,500 $500 $1,250 $1,400 3,000 $500 $1,500 $1,400
The candidate should review the possibilities for the interviewer, and should synthesize his/her inferences without having to be prompted. For example, at very low numbers of patrons, bottled water is the cheapest solution. Question: The manager finds some daily count data over the past year and reports back that the average number of customers is 1,700. What option should we choose now? IT DEPENDS. The average monthly number of customers is 1,700, but individual months may vary widely. If he/she said this, then tip your hat to him/her. For example, if the cafeteria is in a school, then for several months out of the year there might be few people juxtaposed with several very heavy traffic months. This is the best answer. Other suggestions might include tracking how the volume of water that people are drinking is changing over time. The capital required for the purifier (the cheap option at 1,700) might be cost-prohibitive if were required to pay it upfront.
Profitability
The candidate should ask the following questions to test the above framework. Provide the following information on request: Market Size or Company Sales (Show Exhibits 1 & 2). The candidate should be able to figure out the following from the above chart: Change in market size over 2 years: grown from $15 to $17 billion. Change in client's total dollar sales: grown, but not kept pace with the market Did the candidate make remarks about the mistakes in the charts? Get over it, buddy, the data is the real-world lives of consultants is not always clean. Main competitors: Largest competitors are two multinational consumer products companies that feature complete lines of snack foods. Together, the two companies have about 50% of the market share. Differentiation from competitors: Nabiscos sales reps are regarded as the best in the industry. Change in clients product line: None Change in client's costs over the period, as % of selling price (Show Exhibit 3) Exhibit 3 may generate questions about promotion, sales force reductions, sales channels, reasons for changing the marketing budget, etc. When asked, provide
Profitability the following information about sales channels, sales force, promotions, etc: Reason for sales force cut: Sales force cut to reduce costs, but number of outlets unchanged. Cause of change in the marketing budget: The changes come from reduced trade promotions. Sales channels: Products primarily sold in large grocery store chains and convenience stores. Sales force/customer interaction: Sales force visits each customer at least once per quarter. Timing of promotions: Promotions usually occur at the end of each quarter. Impact of promotions: Promotions required for end of aisle displays and advertising space.
Conclusion: Please inform CEO John Keebler of your findings. The candidate might come up with the following conclusion: The data show a large decrease in sales force and marketing expenditure. Most of the marketing reduction was in trade promotions. Product is sold through grocery chains and convenience stores, which are traditionally driven by periodic trade promotions. The reduction in trade promotions brought about a loss of shelf space, which led to a decrease in market share. Also, the product line did not change in a product category where new products and line extensions are routine. The market has been growing, indicating a missed opportunity for new products in the market. Lastly, profitability increased due to lower costs, but it may not be sustainable.
Profitability
2004 2006
$3.07
$3.02
Profitability
Market Entry
Market Entry
C: Well, it looks like that works out to $80 profit per product. So imagine we can pay out a portion of that as commissions. I: What forms can the commission take? For the candidates answer again use the What else format and push for at least four answers. C: A fixed fee per product, a percentage of the profits, a fixed fee for a certain number of products sold that would decline after a threshold, or a variable commission depending based on products and spreads. I: So what information would you need to determine which form to take? C: The ease of sale of the products, if all tellers are equally as effective at selling the products, the possibility of tracking the profits on a per teller or per customer basis, what type of an increase in the salaries would the commissions mean, and what type of costs would that mean to the bank? I: You can assume that all the tellers are equally as effective and that all the products can be sold with roughly the same effort. The other parts of your answer well tackle further down the road. So what would you base the commission on then? The point of giving him some information but denying another piece would be to throw the candidate off balance a little bit to see if he can maintain his composure. C: Then Id like to use the fixed fee option, which means Id need to understand how much the tellers make so I can tell what would be a reasonable incentive or increase to their pay. Perhaps 10% of their salary would be a big enough bonus if it is reasonable to achieve. How many products per year can they sell? I: Thats two questions you just asked. Lets start with salary: they make between $18,000 and $32,000 per year, and as I said theres no difference in how well they sell based on experience. Secondly, the bank thinks the tellers can sell 5 products per week. C: OK, so Ill take an average teller salary of $25,000 per year from that range. And 5 products per week * 50 weeks per year = 250 products per year. Therefore, if we want to give the tellers an average 10% bonus, we can pay them $10 per product. That would still leave a $70 profit for the bank. I: What does the bank need to do to make this program happen? C: They still need to track in their accounting systems a field that shows who sold the product to make sure they receive credit. Changes in payroll systems may need to be made. Also, tellers would have to be trained on how to sell the products.
Market Entry
Market Entry particular contractor?). Lastly from an investment perspective this makes good sense. We would have incurred the $30 million capital investment cost anyway in order to stay competitive and bring our costs down to increase margins. The industry term for this is capital avoidance. b) Return on Assets: (Net Income / Total Assets) ROA = 10 / 100 = 10%. The fixed assets of our facility are $100 million before the government funding (prior to the 30 million investment). After potential capital investment using our own $30 MM, the ROA = 9 / 130 = 7%. However, we should consider the commercial opportunity, too, where the cost was $20 million and the selling price $22 million. With the new machinery, the cost drops to $18 million while the price stays fixed at $22 million. Profits will increase by $2 million. Therefore, incremental profit will be $1million. (-$1 million in Government and + $2 million in commercial). c) Should we bid then? Regardless of the source of money, we need to make the changes to lower costs and stay competitive. We could also use this capitalization to become competitive in new markets. Conclusion: Schwarzenegger Defense Inc should bid!
Market Entry
Customer
Army Navy Other (Commercial)
Exhibit 1
Paris Population By Region
20 18 16 14 12 10 8 6 4 2 0 Cumulative Population in millions
Exhibit 2
Pizza Hut Information
Sales in millions (Pizzas) Stores Market Share Market Segments, % of sales Paris City Metropolitan Areas Paris Suburban Areas 1.2 95 85-95% 20% 35% 45%
Exhibit 3
Pizza Prices
$26 $22 $18 $14 $10 Pan Pizza HandTossed Style Pizza Stuffed Crust Pizza Lower Fat Pizzas Cheese Lover's pizza Meat Lover's pizza Pepperoni Sausage Lover's Lover's pizza pizza Veggie Lover's pizza Chicken Supreme $22 $20 $17 $24 $22 $19 $21 $20 $18 $23 $21 $18 $18 $16 $21 $19 $15 $17 $15 $13
$20 $16 $14 $17 $13 $17 $15 $12 Napoleon's Price Pizza Hut Before Entry Pizza Hut After Entry
Question: What are the major sources of revenues? There are three main revenue sources to discuss: parking, concessions, and tickets. If the candidate asks for data like how many people does the stadium hold, have the candidate make some assumptions. A great candidate will show structure in breaking down the problem. One example follows: Avg. revenue per game x Number of games in season = Avg. revenue for city per season Total Revenue = Tickets + Parking + Concessions Tickets: In stadiums, there are luxury boxes, nosebleeds, and courtside seats, and everything in between. Lets say that the average ticket price is $50. The average attendance is 15,000 people. Remember, the interviewer should try to choose nice, round numbers. Total ticket revenue: $750,000. Parking: for a 20,000-person stadium, lets say that 2,000 cars show up to the parking lot on any given game night. They pay a nice, round $10 parking ticket. Total parking revenue: $20,000 Concessions: $20 in refreshments and $10 in merchandise, on average, for a total of $30 per person. Total concession revenue: $450,000 These revenue estimates generate $1.22 million * 10% = $125,000 (approx) for the city per game. There are roughly 40 home games during the NBA season (if the candidate does not know this, they should at least know enough to ask how many games will be played there). $125,000 * 40 games = $5 million per season. Therefore, the payback period is 30 seasons. Candidates should comment that this seems like a long time before recouping the money, but may note that there are other revenue benefits like the ones discussed earlier in the case. Question: The analysis that you have done yields a 30-year payback period. The mayor flatly states that 30 years is too long. How can you shorten the payback period? The terms of the deal (10% cut and $150 million investment) are fixed. Some suggestions that the candidate may offer include: Improved external revenues from hotels and restaurants Other stadium uses: Conventions, other sporting events, one-time events like the circus or the rodeo or Monster Truck show Mass transit money collection (if a tram is installed connecting the Strip to the stadium, for example)
Question: You mention to the mayor that we could decrease the payback period by increasing attendance at the games. What are levers that could lead to changes in attendance? Some suggestions: Substitute leisure activities (gambling, entertainment), caliber of overall team play, star power (the LeBron effect), and celebrity appearances at courtside seats. Question: Your firm is also advising the NBA team owner. What are some issues, both good and bad, regarding the move to Vegas? The candidate might address the issue of brand. The NBA team is leaving a known market with solid brand recognition for an unknown brand market. How will the image of Vegas impact the value of the brand? Will the team rely on tourists to fill the seats, or will the fan base be people from Vegas? (Many visitors to Vegas come from Los Angeles, for example, where there are already two teams. They come to gamble, not to watch basketball.) The candidate may address overall market risk: Can Las Vegas handle an NBA team? What television rights or sponsorships could they hope to attract? The initial marketing expense to increase fan base awareness. Conclusion: The mayor and the NBA team owner walk into the room. Should the deal go through? At this point the candidate should synthesize findings and deliver a recommendation. What is good for the NBA team owner may not be beneficial to the mayor, and so a balanced, win-win solution should be given.
Question: How can the client leverage its existing portfolio of assets to test market jewelry? The client could test a small storefront inside an existing hotel in Las Vegas. Question: Based on the storefront idea inside an existing hotel in Las Vegas, what do you think are the basic costs involved in running a jewelry store? Let the candidate brainstorm and guide them toward these four basic costs: Rent (allocated): 200sqft @ $10/month = $2,000/month (Its cheap, just go with it.) Utilities: 20% of rent (x $2,000 = $400/month) Employees: 2 employees @ $20/hour x 10 hour shifts = $400/day x 30 days = $12,000/month Marketing, all other promotions, miscellaneous items: $600/month This means that total fixed costs = $2,000 rent + $400 utilities + $12,000 labor + $600 misc. = $15,000 in costs. Notice that given the assumptions we make, there are now variable costs except for cost of goods (which we only know in terms of gross margin). Dont let the interview bog down in terms of fixed vs. variable costs. Just get right to the breakeven. Question: What is your breakeven number of customer sales per month? Average selling price (ticket): $1000 Gross margin: 20% so gross margin in dollar terms = $200 This means that the breakeven customer traffic = $15,000 costs/$200 profit per customer = 75 customers per month. Candidate should not only arrive at the number, but good candidates will not have to be prompted to analyze if this number is reasonable. A focus on reasonableness: ~2.5 sales per day, buthow many customers are browsing (conversion rate)? How big is the hotel? How many browsers do our competitors get? Does our casino attract non-guest traffic? Vegas, baby, Vegas! Thank you for your time.
10% 5%
The candidate should continue within the profitability analysis, now looking at costs. Better-prepared candidates may dissect the discussion into fixed and variable costs. Again, let the candidate name some cost categories and ask for additional information, as opposed to just giving away the cost structure. Before revealing the total cost percentages below, explain to the candidate that Total Costs are $20 million.
At this point a solid candidate will drive the conversation forward in order to answer the initial question. To do so, the candidate needs to understand the incremental costs associated with adding another team to the fold. If the candidate is unsure of where to go, one potential question to get him/her back on track could be to ask: What is the minimum amount of money that the client should ask for from Home Depot? This should spark a discussion of what expenses the new team is expected to incur. The costs that will be impacted by adding a new team are Salaries, Equipment, and Travel. The other two cost components are associated with the engine shop. How will Salaries be impacted? Race-Facing costs will double. (Since race-facing costs represent half the salary costs, Home Depot would have to pay $4 million.) How will Equipment be impacted? Equipment costs will double. (Home Depot would have to pay an additional $5 million.) How will Travel be impacted? Travel costs will double. (Home Depot would have to pay an additional $1 million.) Next question: You have calculated that your client needs to ask Home Depot for $10 million ($4 million + $5 million + $1 million). Can we get a premium from them? Can we ask them for more than just $10 million? The candidate may say yes or nolisten to his/her rationale. Multiple answers are acceptable here. This answer key is not exhaustive. Yes, we could charge a premiumHome Depot came to us. Also, having already talked to a driver, the company seems highly interested. Therefore we have bargaining power. Yes, we could charge a premium if we show Home Depot an acceptable Return on Investment analysis. No, we could not charge a premiumthere are many alternatives for Home Depot as a sponsor, including 1) another race team, 2) another sport (e.g., baseball), 3) another racing circuit (e.g., Formula One) Conclusion: The owner of the UPS #88 racing team calls you for an update. Please inform him of your findings.
Interviewer notes: The candidate may take this case in several different directions, including questions about the Nextel Cup season, driver eligibility, and if points are tallied based on team or individual driver performance (individual driver). Some candidates might recommend waiting until the beginning of the next racing season in order to spread costs across more races. Other potential points include the natural tension between adding a new team and the allocation of resources (e.g., high quality mechanics from Dales team may work with the Home Depot car, thus diluting the quality of performance of Dale). Potential risks certainly include adding a new driver who has only drag racing experience. This driver would probably not contribute to merchandising revenue, due to his relative anonymity. There is some validity, however, to the point that salaries for the new team may be lower because the new driver lacks the name recognition of Dale Jarrett. Finally, the total cost of equipment may be lower than average due to the ability to leverage the engine shop technology. Some candidates might recommend closing the engine shop, but we have no margin information to substantiate this.
Compare the substitutes and evaluate the cost to consumers. If candidate fumbles here, ask if we should be concerned with competing strategies. Glasses assume $100 per year (one pair per year) Disposable Contacts assume $30 per box; one box has 3 pairs that last one month apiece. (Note: total cost to customer would be $120 per year) Laser Surgery $2,400 upfront and lasts 30 years, on average ($80 per year) Our product lasts 24 hours, can be used throughout lifetime. There are 60 drops in one bottle lasts one month.
(Note: The suggested retail price is not giventhe candidate should put a stake in the ground, and substantiate his/ her point. There is no one right answer. The candidate should also realize that the retail price is not the price the company is chargingthe price the company is charging is to the retailer (drugstores). In relation to laser surgery, consumers may see the drops as cheaper than a one-time upfront cost of $2,400 and the hesitancy of undergoing a surgery of that type. Second, one does not need to see the doctor for a prescription. Third, the biggest market segment that we will attract is the contact lens market, which is conditioned to using eye drops already (an incremental cost we did not include). Fourth, our product provides benefits: no surgery, no contacts popping out of ones eye, no inconvenient glasses. Calculate the cost to the customer (we assume $10/month retail price for Eagle Eye):
Economic Value to the Customer Glasses Contacts Cost per year 130 150 Prescription 20 20 Total 150 170 Laser 80 0 80 Eagle Eye 120 0 120
Question: The CEO decided to charge the drugstores a price of $7.50 per bottle, with a suggested retail price of $10. How many of these little guys must we sell to break even? Amazing candidates may have already suggested the breakeven approach. Information to Provide: Fixed Cost: Facility-related = 150 million Variable Cost: $5/bottle Calculate the Breakeven Volume: Breakeven Volume = Fixed/(Price VC) Breakeven Volume = 150 million/(7.50-5.00) = ~60 million bottles If we sell to three million people, we will sell (3 million*12 months*1 bottle), or 36 million bottles in the first year. At this rate, we break even in just under two years.. A great answer will also state whether or not this timeframe is reasonable. Conclusion: The founder of Eagle Eye calls your secretary, who patches him through on line #4. What do you have to say?
The candidate should synthesize the findings and make a recommendation. Solid candidates will mention alternative distribution channels, competitive response, negotiating power vs. drug stores, and fixed-asset management as capacity utilization and consumer adoption rates increase.
Question: Can you graph the fixed costs at 100% utilization for the company? Hopefully, the candidate draws a straight line on a graph, where the y-axis represents utilization, and the x-axis represents time. It should look like the solution in Exhibit 1 through 5 periods. Dont give the candidate Exhibit 1. Question: Now please draw the fixed costs if the client wants to go to 110% of current capacity. Some candidates will mark the y-axis at 110% and draw a straight line. Other candidates may do wacky things that are ignored here. Quality candidates will build a
new plantwe cannot simply increase capacity by 10%. We must double capacity. This means that capacity will jump from 100% to 200% of current capacity.
200%
150%
100%
50%
0% 1 2 3 4 5 6 7 8 9 10 11 12
Acquire a company that provides manufacturing and marketing capabilities Joint venture with another company Outsource manufacturing, marketing and distribution channels Grow skill sets organically, ergo more slowly
Question: What are some pros and cons of the different strategies? Given that ORI is a small R&D lab, it is probably not in ORIs core competencies to move into manufacturing, marketing, and sales. ORI should certainly pay attention to the profitability of these strategies, but also bear in mind the risk (while going alone may allow ORI to keep all the profits, it has many more pitfalls than teaming with an established player in the industry.) The candidate might run the following comparison matrix to demonstrate a comprehensive knowledge of the pros and cons: Criterion Speed Cost Benefits Growth / Future capabilities Develop capability internally Slow Expensive Fast and sustainable growth Get external partners Fast Cheap Slow growth
Question: ORI has decided to sell the patent to an established pharmaceutical firm. How could the pharmaceutical company come up with an acceptable price for the product? The candidate might come up with the following answers: Conduct Economic Value to the Customer (EVC) analysis Surveys to potential customers in order to conduct a conjoint analysis Chance to price discriminate among segments (if it can tweak product attributes) Analyze past introductions of new products for historical sales trends Focus group experiments in separate, comparable regions (to find price elasticity) - Lower the price in one and raise the price in the other - Compare the sales volume over a period of time Question: The new market has two segments, healthcare providers and home users. How might their needs differ? The candidate might come up with following matrix:
Criterion Users preferences Who is making decisions? How to get to the segment? What are the required resources Healthcare Provider Cost, Maintenance Doctor / Procurement Manager Trade shows, Direct marketing Experienced sales force to convince Home User Easy to use, Is cost reimbursable? User / Parent / Spouse Doctor(push) / TV, or print ads (pull) Convenience, ease of use
Q*$200 $100,000 = -$50,000. Q = 25 Another way to look at this is the value of lost customers to the business over time, taken as a perpetuity. Or, loss / hurdle rate = exit cost. Assume a discount rate of 10%. Loss / .10 = 50,000. Loss = $5,000, which equals 25 patients that you would have to lose below breakeven to close the hospital. 500-25 = 475 patients to remain open. Question: If fixed costs change to $150,000, how many patients will you need to break even? How many patients would you have to lose to close the hospital? $150,000 / $200 = 750 patients to stay open Loss / .10 = $50,000. The loss of future value that one gives up by incurring the exit costs equals 25 patients. Below 725 patients, the facility should close. Question: The hospital does some research and finds that 3/8 of its surgeries will not be reimbursable. A government report says it will save 6-9% by passing the new legislation. You know that someone has botched the research. How is the information contradictory? The candidate should ask for the national market share of the company. Otherwise, the data above is like comparing apples to oranges. The market share for your client is 20%. This means that, according to your client, 7.5% (.375 * .20 = .075) of the government savings will come from its surgeries, which represent only 20% of the total national market.
Competitiveness: Other hotels chains that are thinking of entering the market are Starwood, Peninsula, and Imperial Hotels. Supplier power: The local labor market offers a huge supplier of workers (very positive). Substitutes: You are fighting with every other paradise-type destination, from Disneyland to Vegas to Bermuda. Interest in this area, however, is sky high. Barriers to Entry: Prompt the candidate to list several: government regulations, high capital requirements, unavailable beachfront property. The insights that the candidate should have drawn from this analysis are that the market is large enough, and while competitive, we apparently have the resources to enter it. The level of resources required would be a barrier to entry and maybe there are others that need to be investigated--such as government permits, access to sewage, water, etc. Have a good discussion! Question: The client has already looked at some possible options and has found the following three available lots. Which one should he consider to maximize Return on Investment? (show Exhibit 1) Here is some more information: Occupancy will be 50%, assume 350 nights/year Operating expenses are completely variable The company requires investments to be above break even within a year and with a ROI of at least 10% Note: ROI = Profit/Investment. Give the candidate several minutes to generate these numbers. A solid candidate will be vocal during the calculations, and may even introduce a written version of the math---Hey, what does that mean? That means that instead of just writing numbers, the candidate will write out formulas, such as Revenue = Revs per night * number of nights * number of rooms * nights per year * occupancy rate By doing this, the candidate demonstrates knowledge of the situation. If a math error comes about, it is much easier to correct and the interviewer recognizes that the candidate has already shown a strong grasp of the problem. Option ALovers Lair: Operating Profits: (((($450 revenue 250 operating costs) * 500 rooms)* 350 nights/year) * 50% occupancy rate) = $17.5 million operating profits/year (a) Initial Investment: 30,000 cost/room * 500 rooms + $2,000,000 land = $17 million (b) Net Profit: (a)-(b) = $500,000 (c)
ROI: (c) / (b) = $500,000/17 million = 2.9% Option BParadise Lost: Operating Profits: (((($400-200) * 1000) * 350) * 50%) = $35 million Initial Investment: 28,000 cost/room * 1000 rooms + $4 million land = $32 million ROI: $3,000,000 / $32 million = 9.4% Option CFookwah Heights: Operating Profits: (((($350-150) * 1500) * 350) * 50%) = $52.5 million Initial Investment: $25,000 * 1,500 rooms + $6 million land = 43.5 million ROI: 9 million / 43.5 million = 20.7% Question: What would you focus on to determine the feasibility of the project and why? After the candidate offers his/her insights, tell him/her to focus on ROI, first with the room prices specified in Exhibit 1 and then with the market room price ($500). Conclusion: At this point you can ask the candidate to wrap up the case. Here the candidate needs to give a go/no go decision, supporting it with the insights drawn through out the case, and if he doesnt mention it, ask him to specify some additional concerns the client needs to focus on. Good Concerns: - Competition (what are they focusing on, will it flood the market) - Strategy (Where will you compete--low cost, high service, best in class, packages?) - How should the developer finance the building? Since the hotel will bring jobs maybe the government can help with some tax deductions, free services, etc Great Concerns: - How can they leverage their experience, what values from their other business can they leverage? Would they manage the hotel or build it and then find an operating partner like Starwood or Hilton? - What are the existing barriers to entry, how would you change them to insure a greater degree of success?
Exhibit 1:
Possible deals:
Lover's Lair Paradise Lost Fookwah Heights Notes:
Occupancy will be 50%, assume 350 nights/year Operating expenses are completely variable The company is looking to flip these investments at the end of one year, and requires a 10% ROI
Land Cost Cost / Room Op Cost Rooms Price / Night 2,000,000 30,000 250 500 450 4,000,000 28,000 200 1,000 400 6,000,000 25,000 150 1,500 350
Powers of Suppliers Since a few major buyers that purchase in volume versus a large number of suppliers (both labor and materials), the largest commercial and industrial construction firms have significant bargaining power. Power of Buyers This industry is essentially an oligopoly (handful of major players and a large number of small players). The builders have significant power. However, large corporations have deep pockets and can be quite demanding, giving them the ability to extract concessions. They usually submit their projects to the major builders for bid. Government Regulation Initially, regulators might scrutinize the entry of a large foreign firm into such a key industry in the U.S. market. Ultimately, however, no significant opposition or excessive regulation is expected. Opportunity Cost Shaky has evaluated other investment opportunities in its home market and elsewhere. Given the analysis, entry into the U.S. represents the best investment opportunity for the firm.
Through asking the right questions and receiving the responses given above, the candidate should reasonably conclude that entering the U.S. market is a promising course of action. Question: Shaky decides to enter the market. What are the entry options, which one is the best, and why? At this point, the candidate should think about strategic options: 1) Go it alone Enter the market and build up scale and capacity through steady capital investment. 2) Acquisition buy a major player in the U.S. market 3) Partner enter into a joint venture with one or more players in the industry Once the candidate has identified these options, prompt him/her to evaluate these options from a financial perspective. This discussion should center on financing, costs, and future profits. Ultimately, Shaky wants to obtain 10% of the market in two years. Guide the candidate to analyze the Go it alone option first. Inquire: Question: Shaky decides to go it alone. Management wants a 10% market share in two years, regardless of the strategy. How much is that? After Year 1, the market size is $200 B x .05 = $210 B. After Year 2, the market size is $210 B x .05 = $220.5 B (the candidate should round this to $220 B. Shaky needs to obtain $22 B in revenue.
Question: Shaky requires a 10% operating margin by year 2, regardless of the strategy. Can they achieve this? The candidate should now inquire about fixed and variable costs. Present the candidate with Exhibit 1. Upon evaluation, the candidate should inquire about the estimated number of projects in Year 2 and the average expected contract price. Estimated # of projects: 220 Average expected contract price: $100 million
The candidate should perform the following calculations: Revenue = 220 x $100 M = $22 B Variable Costs = (40 + 60) * 100 = $10 B Fixed Costs = 9,000 + 1,000 = 10,000 M = $10 B Therefore, the profit = 22 (10 + 10) = $2B The profit margin = 2/22 = 9.09% < 10% Question: Shaky is not sold on the margins it can achieve, and so it is considering acquiring an existing major player in the U.S. market. Assuming that Shaky can obtain $50 billion to finance an acquisition, which firm is the most attractive acquisition target? Shaky expects to pay a 20% premium. At this point, the candidate should ask for data on the major U.S. firms. The interviewer should now present Exhibit 2. If the candidate inquires about free cash flow, tell him/her that net income (profits) can be considered a reasonable proxy. The candidate should also inquire about the required rate of return (15%) and an expected growth rate (5%). Assume that the expected growth rate is uniform for all firms. For simplicity, tell the candidate that the valuation should be treated as a perpetuity. Given the previous discussion about market share and profitability targets (both 10%), the candidate should immediately focus on Bidwell and Crayton. The perpetuity formula is C/(r-g), where C = cash flow, r = required rate of return, and g = the expected growth rate.
The calculations for all four potential targets are as follows: Firm Revs A $40 B $30 C $60 D $16 Margin 8% 13% 11% 15% Profits $3.2 $3.9 $6.6 $2.4 Purchase Price Discount Rate Valuation (w/ premium) 10% $32.00 $38.40 10% $39.00 $46.80 10% $66.00 $79.20 10% $24.00 $28.80
Since Shaky can only obtain $50 B in financing, it would make sense to target Bidwell. Question: Lets think about how possible joint ventures would work. What should Shaky look for in a partner? The candidate should ask about Shakys area of expertise and how it compares to the major players in the U.S. market. For Shakys skills, capabilities, and area of expertise, see the Strengths section above. The interviewer should present Exhibit 3 for the candidate to analyze. The candidate can take this discussion in a number of directions, but the interviewer should get the candidate to review the exhibit and explain his/her thought process as to who is the best partner. There is really no clear right answer, but the candidate should use the data from the exhibit to craft a logical, well-reasoned response. Shaky may be best served, however, finding a U.S. partner with complementary skills, expertise, and capabilitiesthe two partners should be able to leverage one another for mutual benefit. Of course, revenue, profit potential, and market share would also serve as considerations. One possible answer:
Firm Analysis Firm's strength in commercial sector complements Shaky's strength in industrial sector. Solid market share, but low margins--probably due to low bid strategy. Market share and profitability are reasonably high (above 10%). More of an emphasis on industrial sector rather than commercial sector, though. Could lead to in-fighting? Hitting deadlines is a strong positive. Partner?
Alpha
No
Bidwell
No
Excellent market share and solid margins (above 10%). Its focus on commercial side complements Shaky's focus on the industrial side. For new entrant, strong connections are Crayton highly important to winning future business. Low market share and high margins. Probably more of a niche player--especially with focus on premium quality. Strong emphasis on industrial sector is potentially less Devlin-Wilson attractive to Shaky.
Yes
No
Conclusion: Given your analyses, please provide a recommendation to Shakys executive team. Interviewer notes: The candidate should take a clear position: enter alone, acquisition, JV, or do not enter. Next, the candidate should briefly summarize the evidence to support that position, and briefly state other considerations. Naturally, there are a number of different directions that the candidate could explore. Regardless of the final recommendation, the candidate should supply convincing arguments to support that position, and demonstrate a strong understanding of issues. The conclusion should not exceed 1 minute. Various things the candidate may mention: Shakys investment criteria and metrics for success The firms core competency Fit with firms overall strategy Ability to compete in the U.S. market (distinct competitive advantage, ability to form business relationships, access to suppliers/customers, etc) Time to market Cost Risk tolerance Desire for control of venture
Exhibit 3
Partnership Candidates
Firm Alpha Construction Bidwell Construction Crayton Partners Devlin-Wilson Company Rev - % Industrial 20% 65% 30% 75% Rev - % Commercial 80% 35% 70% 25% Profit Margin 8% 13% 11% 15% Reputation Low Price Hits Deadlines Strong Relationships Premium Quality
Variable costs are 20% of total revenues, and fixed costs are $120,000. After the candidate has subtracted costs from revenues, he/she should generate a number around $600,000. Do not forget that we need the after-tax cash flow number (approximately $600,000 * (1-40%) = $360,000. You now have the annual cash flows generated by the bar. At this point a great candidate will drive the process forward and recognize that they need to figure out a stream of cash flows going forward. The interviewer may have to nudge less-savvy candidates toward the next step (discounted cash flow analysis). How does one perform a valuation of the business? To perform a valuation in this case, the candidate must estimate the cash flows from the business and discount them back using a perpetuity formula. The discount rate typically used for bars of this genre is 13%. When the candidate inquires about growth rates, say the bars cash flow is growing at 3%--the rate of inflation. Thus, whatever numerator the candidate arrives at should be divided by .13 - .03 = .10, an easy calculation. Use the CF / (r g) formula for a perpetuity. In this case, the answer is around $360,000 / .10, or $3.6 million.
$4,800
Case #26: Yahoo, Google & YouTube - Katzenbach Partners, Final Round
Scenario: You have been hired by the internal strategy group at Yahoo. You are asked to analyze the recent acquisition of YouTube, an online video community, by Google for $1.6 billion. Is it a competitive threat? Wow! There is a case in this book with real-life companies! The candidate should think about the acquisition against the backdrop of the core competencies that each firm brings to the table. A quality candidate will imbue the discussion with structure, add thought-provoking comments, and demonstrate knowledge of current business landscape. There is not necessarily a right answer, but here are some ideas. Yahoo has positioned itself as a destination site. It wants consumers to go to Yahoo! and explore all of its wonderful services, spending time and money there. Time means that advertisers ads are more likely to be clicked. Money means that Yahoo! is making e-commerce transactions, or selling subscriptions to premium online services. It tries to promote a sense of community among its users. Google has spent its early years as a search engine. To google has become synonymous with search. To take advantage of this brand-name recognition, Google pioneered advances in ad-based software that allowed businesses to better target consumers segments based on the particulars of the search. Google has the eyeballs of the consumers, but it doesnt have the wallet of consumers. It wants to monetize all this traffic. The acquisition of YouTube by Google is a competitive threat. You Tube is a move toward creating a community. The company spent $1.6 billion because it believes it will be able to monetize this traffic somehow. Question: Yahoo wants to counter this threat. Lets suspend feasibility and cost concerns for this question. What can our competitive response be? Be as creative as possible. The candidate should ask for a moment to collect his/her thoughts, and then be creative. Some ideas (from most boring to most creative) Create an offering to counter YouTube for the Yahoo community Buy Google Find a way to share real-time videos among friends from mobile devices or wristwatches. This would involve a cross-selling strategy with a partner Create backdrops (or allow open source coders to create them) from historical events or sporting arenas or famous movies, and enable people to be able to re-enact scenes or create new ones (An example of this might be a
rock stadium backdrop and you and your friends can jam on instruments and make a rock video Question: Google decides to use your brilliant ideas. The ideas are so brilliant that the company believes that it can charge $150 per user annually and make 67% margins. How long will it take to recoup customer acquisition costs? The candidate should realize that he/she doesnt know how many customers were acquired in the deal. Tell the candidate 40 million users when he/she inquires. If necessary, ask, What do we need to know in order to do this calculation? Discount rates should be ignored. Assume no user base growth or attrition. Each customer will net Google $100 per year, using the above numbers. With 40 million users, each user must contribute $400 ($400*40 million = $1.6 billion) to recoup customer acquisition costs. This will take four years.
Question: First we need to understand the nature of the business relationship between the suppliers and the Government. What information do we need to accomplish this? Possible questions and analysis: What kind of contracts do they have, long-term or short-term? What are the advantages/disadvantages of being in long-term contracts or shortterm? How constant is the demand? Does the government always spend $6 billion on this contract or is it expected to grow or decline? How many suppliers? Is there volatility in the demand or supply? What is Sergeants competitive advantage? Is there competition for the contract? Give the candidate the relevant information below. Contracts between suppliers and the Government division are short-term in nature. The company has only one supplier. The supplier offers the best cost/quality ratio and Sgt. Slaughter would like to keep it, if possible. The client is not the only customer for the supplier but is one of the largest. The company is the main supplier for the Government. They are the best at what they do. They do not need to worry about the competition as long as they maintain the present prices and quality.
Note: The interviewee should ask about the volatility of demand and infer that a longterm contract with the supplier will be less beneficial if Government spending on military bases is volatile (for example, if the Iraq war ends tomorrow, demand will drop). Also, a single supplier could be grounds for diversification to improve negotiating power. See what ideas the candidate can generate. Remember that Sergeant Slaughter cannot negotiate a better price from Uncle Sam. The proposed solutions should not dwell on competitive issues. Possible proposals: 1. Try to identify multiple suppliers or negotiate a better deal with the current one using this possibility as bargaining power. 2. Create long-term contracts that should offer better pricing, but negotiate a call clause if the Government drops the demand. 3. Try to identify synergies with the Oil & Gas division (see #3 above) Question: What organizational questions should we ask about the people? Possible questions and analysis: Are the people that deal with the suppliers experienced enough? Are there incentives in place? What can be changed? Is their staffing model efficient? Do they work enough? Are they efficient? What is their level of productivity? Can/should we lay off workers? Do they have enough training? Here is some information to relay to the candidate. Consider it to be like a data dump see how well the candidate can drink from the fire hose. The staff is not necessarily the most experienced in the field. They are not very good at negotiating with the supplier, due primarily to lack of experience. The VP of Procurement is actually a newly hired, former lawyer. The workers do not focus on negotiating with the supplier, as they spend most of the work on troubleshooting the contracts and enforcing them (have the items delivered on time, ordering the supplies ahead of time, forecasting demand etc). The productivity of the workers is an issue. They have a target of 88% productivity time for the workers (88% of the time they are paid, they should work productively for the company) but the workers are productive only 80% of their time billed. There are no training and learning processes in place for the workforce. Also, the bonus structure is fixed. They receive a 10% undifferentiated bonus at the end of the year if the company makes a profit. Possible proposals: 1. Try to hire more experienced workers 2. Offer training 3. Incentivize them with bonuses connected to the money they save from the supplier
4. Reduce the workforce; put a productivity check in place to raise it to the 88% mark. 5. Have the Procurement manager get an MBA! Question: Lets address bargaining power and find synergies with the Oil & Gas division. What can we ask Sergeant Slaughter? Possible questions and analysis: Do they have the same supplier? How much is the Oil & Gas ordering comparing with the $6 billion for Government. Are the divisions interacting? Do they collaborate to have a stronger bargaining power? Do they share information and data about their suppliers contracts and demand forecast? Can they combine the procurement departments for the two divisions and have one larger for the entire company? Here is some background information for the candidate: The Government division does not communicate efficiently with the Oil & Gas division. They use the same supplier but they have issues integrating data therefore one of the recommendations should address technology and information sharing issues. They do not have a common database with prices across the globe and former experiences. The Oil & Gas division accounts for $2 billion in orders from suppliers. Possible proposals: 1. Coordinate better with the Oil & Gas division and try to integrate orders to obtain stronger bargaining power over the supplier 2. Try to institute a common system to communicate future orders/demand and try to negotiate them together 3. Build a database accessible to both divisions with prices negotiated with multiple suppliers in time to have a common negotiating basis 4. Organize meetings with the procurement teams of both divisions to share best practices and negotiating tips 5. Unite the two procurement departments into one larger, company-wide solution Conclusion: The VP calls you for an update. Please inform him of your findings. The student should wrap up the case in 3-4 sentences (30-60 sec) such as: 1. State a position 2. Give evidence based on case 3. Other considerations and/or creative aspects To reduce cost, the VP could combine the two divisions from a technology, procurement, and workforce perspective. Additionally, the productivity of the workers needs to be
increased through training and new hires. Last, the company should try to negotiate longterm contracts with the government and aim to obtain lower prices from suppliers.
The candidate should conduct a profitability analysis, and request the following info:
Low Orbit Revenues Each Year 1 customer pays $50,000 per month Each Year 2 customer pays $30,000 per month Each Year 3 customer pays $20,000 per month There is some competition entering the market and you can assume that you will need to reduce the prices for the multiple customer solution every year to attract incremental revenues. Prices for the contract you sign in year 1, however, fall to new rates in year 2. 80% of customers generated in a given year will remain the following year. Note: Data has been intentionally left out. The candidate should ask for the expected number of customers in each of the 3 years (see solution Exhibit 1). High Orbit Revenues The high orbit customer pays 2,500,000 per month This is a specialized market, where we have found only one potential customer who is ready to sign up The candidate should continue with the profitability analysis and cash flow calculations comparing the three options: sell now, low orbit, and high orbit. If the candidate asks, the discount rate is negligible. Summary of profitability calculations: Option #1 - Sell today for a $35 million dollar pre-tax profit. Strong candidates will recognize that the $10 million acquisition cost is a sunk cost. Option #2* - Operate single satellite offering data transmission service to multiple clients: $80,000,000 profit (pre-tax). One key trick is that in year one youll have 50 clients, in year two those 50 clients become 50*80% = 40 clients. In year three those 40 clients have been reduced again to 40*80% = 32 clients. Option #3* - Operate single satellite system to offer voice and video transmission. Requires increased upfront investment: $85,000,000 profit (pretax). * Candidate should verify that company has access to capital for purchase and launch. Conclusion: Carter Beauford, DMB Satellites President, wants some answers during your morning elevator ride. What do you say? Ruminations Option 3 generates the highest profits. However, Option 3 has highest initial cost and offers strong bargaining power for the single client. Also, what if we lose the client somehow to bankruptcy? There are also few available customers. The risk is high. Option 1 gives us a nice chunk of change. But, do we have other viable investment opportunities for the cash generated in that sale? If the market value of the satellite is $45 million, its doubtful we can find another for only $10 million. Option 2 offers a diversified client portfolio, and seems to be the optimal choice
Question: What do you think are the main costs? (The above is a generic list) At this point, the candidate should ask about specific cost components and how the industry or Tipsys has changed.
COGS, R&D, SG&A, PP&E, are unchanged Overall, Distribution and Advertising Costs have sharply increased
The candidate should first draw the value chain to identify the various parties involved and the costs in distribution. He/she should also ask if there has been any change from the past to the present. A structured approach is encouraged: what are the components of distribution? What are the various forms of advertising? Also, consider price, quantity, channels, and other key variables. The interview should ask the candidate to form a hypothesis. Several possibilities might be mentioned: Distribution Have third-parties handling shipment increased their rates? No. Have our employees unionized? No. Has the government recently levied fees on distribution? No. Has the frequency of deliveries increased? Yes. Advertising Have media outlets (TV, Internet, etc) increased their fees? No. Are companies moving to new, more costly ad channels? No. Have trade promotions for the stores dramatically increased? Yes. At this point, read the following to the candidate: There are two general market categories: privatized and state-owned. In 23 states, liquor is only sold through state-regulated liquor stores. In the other 27 states, liquor is sold in privately managed supermarkets and liquor stores. In the privatized market segment, stores have become less willing to hold inventory, requiring firms to deliver smaller batches of product more frequently. Also, shelf space in the privatized market is very expensive. Liquor companies must compete vigorously for shelf space through costly trade promotions. In the other 23 states, liquor is only sold through state regulated liquor stores (i.e. in North Carolina ABC Stores). Distribution costs in these states are much lower, as there are fewer outlets to service and there are central warehouses for the staterun stores. Also, since alcohol is more tightly regulated, advertising costs are lower. Question: What conclusions can you draw from this information? It is now apparent to the candidate that there are two different market segments, and that the higher advertising and distribution costs in the privatized segment are hurting everyone in the industry. The candidate now understands the cost picture; he/she should now focus on the revenue side. In terms of volume, sales in the privatized markets are outpacing sales in state-owned markets.
Though volume sales are higher in the privatized market, it is a much more costly market to serveoverall, margins are getting squeezed. A natural next step for the candidate is to inquire about the shares that each firm has in these two segments. Refer the candidate to Exhibit 2. As he/she assimilates the information, the candidate should show insight and conclude the following: Tipsys is the top player in the privatized market, so it is realizing solid sales growth. But, margins are slim. As the number three player in the state-owned marketwhich is more profitableTipsys is gaining less than its competitors. Question: What strategic options are available to the client in order to increase profits? The candidate should think about a number of possibilities: Decrease Distribution and Trade Promotion Costs 1) Investigate ways to decrease distribution costs in the privatized market. Outsource distribution (if not done already) and/or find less expensive distribution partners. 2) Access the profitability of various relationships with retailers in the privatized market. Though the overall picture is negative, some relationships are probably more profitable than others. Shift resources depending upon market share of retailer and profitability to the client. 3) Consider other distribution channels in the privatized market, including superstores and large discounters (e.g. Costco, Beverage and More, etc). These outlets can handle more inventory, and thus require fewer deliveries. 4) Investigate a merger with another player in the industry. This would give Tipsys a greater share of the more profitable state-owned market, and increase negotiating power with retailers in the privatized market. Note: candidates should be cautious with this suggestion. Mergers are seldom easy, and could potentially create more problems than they solve. 5) Investigate possibility of forward integration into the privatized market. Tipsys could establish its own retail outlets and bypass retailers. Though very costly in terms of capital investment, it could pay off in the long term.
Other 6) Compete more effectively in the state-owned market. Establish a sustainable competitive advantage. 7) Investigate expansion into new geographical markets (international) where the industry dynamics may be more favorable. 8) Investigate expansion into new product categories (e.g. gin, tequila, other liquors) to drive profits in the state-owned market. The states might be more inclined to partner with a firm that offers products that cover a wider spectrum. Achieve economies of scope and increase bargaining power. Conclusion: The CEO of Tipsys Distillery has just walked into the room. Please offer a final recommendation. Interviewer notes: The candidate should take a clear position, summarize the evidence to support that position, and briefly state other considerations. Naturally, there are a number of different directions that the candidate could explore. Regardless of the final recommendation, the candidate should supply convincing arguments to support that position, and demonstrate a strong understanding of the current market dynamics. The conclusion should not exceed 1 minute.
Exhibit 1
Firm Tipsy's Distillery United Spirits Jake's Distillery Sales Growth (2004 - 2005) 5% 4% 6% Profit Growth (2004 - 2005) 4% 4% 5% Sales Growth (2005 - 2006) 7% 5% 7% Profit Growth (2005 - 2006) 2% 3% 4%
Exhibit 2
Firm Tipsy's Distillery United Spirits Jake's Distillery Market Share - Privatized 45% 20% 35% Market Share - State-Owned 20% 40% 40%
Question: What do you want to know to make a decision on the acquisition? The following information may be given upon specific request: Market Analysis: o End-users come primarily from the automotive industry o Market size has been slowly declining over the last five years o Within the last couple of years, prices have declined rapidly Competition / Industry Analysis: o There are 10 major producers; the largest one with a 35% share; number two has 25%, and POA is third with 20%; the remaining share is divided amongst others o The two largest competitors earn a small return; POA is slightly above break-even; the rest are operating at break-even or at a loss o Relative capacity utilization in the industry is 60 to 70 % and has been so
for the last 3 years. POA is also currently working at 75% of capacity o The two largest competitors are highly diversified with this particular product line representing no more than 20% of their revenues o Highly regulated industry with expensive pollution control equipment o High barriers to entry because of the low profits and high investments required Product value proposition / brand portfolio: o The price has been driven by self-destructive cuts from the leaders to gain temporary share points o We do not foresee the development of any significant byproducts. o Other possible uses: None. o Complementary Assets: 50% of POAs sales are to the automobile industry Finance and Operations: o Cost is based on size/efficiency/age of plant, etc. Within the industry, POA is in an above-average position. o There are several operational improvements that could be implemented, and management has not been aggressive in its pursuit of quality and cost controls. o Great economies of scale exist in marketing and transportation. (Not quantifiable) o Operational synergies could represent an additional $30 million in profits Note: When the candidate brings up value, hand out Exhibit 1. However, make sure the candidate discusses the qualitative aspects. Skillfully manage the conversation. When looking at Exhibit 1, the candidate may whine about how the discount rate minus the growth rate is 9%, and not 10%. Let them use 10%. Dont let them calculate the discount rate at 9%. This is a waste of time, because real consultants use calculators and Excel. Ask them instead if the NPV will be higher or lower if we do our calculations using 10%, instead of 12%-3% = 9%. The NPV will be lower. Ask them by how much. Now, the math is easy in this case because the discount rate is .09 and the revenues are 90. 90/.09 = 1,000. The difference is $100 million. a) Basic: NPV analysis: Based on the information from Exhibit A, the net present value of the target company is = $90M / (10%) = $900 million (assume perpetuity), which is less than the purchase price tag of $950 million. Industry Attractiveness: not particularly attractive, unless the larger competitor can use economies of scale and dominant position for economic gain. Additional qualitative insights from the information given above such as the fact that since this is a small part of conglomerates for the profitable large ones, there are great synergies to be achieved. b) Good:
A more comprehensive NPV would include the new cash flow from synergies, as well as the previously calculated NPV. Therefore the $900 million + [Synergies 30M/(12%-3%) = 333M] = $1,233M value of target > 950 price tag The additional cash flows are coming only from synergies but there could be additional cash flows from economies of scale, as well as tax advantages of paying for the acquisition with debt that would further improve the deal. The competitors and regulators might not be too keen on the level of concentration in the industry and some reactions should be expected. At what multiple of operating profits have other acquisitions been valued?
Conclusion: Once the candidate has concluded the major calculations ask him to wrap up. Any logical conclusion should include a go / no go decision followed by quantitative (valuation) and qualitative (industry and compatibility analysis) facts. Other ideas might include the evaluation of the competitors, for if they are also in the same markets as the Chemical Brothers, this might be a good defensive move.
Exhibit 1
Information (POA) Purchase price Yearly operating income before tax Cash Employees Return on capital Market risk premium Growth rate Tax rate $950 $90 $20 2,000 12% 7% 3% 40%
Other interesting points might explore the key success factors in the consulting industry. What differentiates top tier firms from middle ones? Do any firms have specific sustainable competitive advantages? How does the marketing mix differ among firms? Does your firm have any specific advantages that set it apart from other companies? Determining likely future scenarios is more ambiguous. There are at least several key points: how soon and to what degree will demand for consulting services bounce back? Will top tier firms be affected differently than others? How has the mix of products demanded changed and what will it be after the economy recovers (e.g. cost-cutting studies vs. market expansion studies)? Will the consulting market expand evenly or will certain geographical areas expand (Pacific Rim, Eastern Europe) faster than others? Again, the thought process is more important here than actual answers. Question: What information do you use in this process? How is this information obtained? Answer: Information gathering is a key reason companies use consultants. You should have a decent knowledge of business information sources and how to gather information. Information can be broken into two groups: secondary and primary. Usually one begins with secondary material, specifically, a complete review of published literature (a ''lit search") pertaining to the study (e.g. journal and newspaper articles, investment bank research, specialized studies, books, etc). This often points toward other good sources (e.g. industry experts, associations, major competitor's, government sources, etc.). Hypotheses are often created from the secondary information. Primary research is then used to focus in on the key issues. This research includes telephone interviews, in-person interviews, mailed questionnaires, focus groups, laboratory experiments, etc. Question: What do you believe is most likely to happen in the consulting industry given your present knowledge? How did you arrive at this conclusion? Answer: This answer will depend upon the material covered in the first two. Ask the questions: What trends are likely? What is a positive scenario? A negative one? If you had any information at your disposal, how could you get a better handle on this issue? Question: What strategy do you propose to the management committee? Answer: There is no right answer here. However, you can provide some structure. What are the key factors for success in the industry? Is there any way to achieve sustainable advantage (cannot be duplicated by competitors)? Can non-traditional methods be used to achieve competitive advantage, such as leveraging through technology? Given your firm's competitive strengths and core competencies, what is the best strategic route?
Magna's revenues o Price paid by employer for employee health coverage. o Number of employees covered by Magna. Magna's costs (or fixed and variable costs) o Magna's main cost components consist of administrative (non-medical) and medical costs (e.g., hospital, drugs, outpatient care) o Outpatient costs can be split into internal physician costs versus external referral costs Magna's patient base demographics/overall risk profile which may affect medical costs
The team discovers that the demographics of Magna's subscribers have changed significantly in the past 5 years, from majority industrial workers/laborers to majority office employees. Knowing this, are there any specific areas you would investigate first?
Claim costs, as the change in the subscriber base will change the profile of diseases (e.g., more heart disease/stress and less work related injury) External referral costs, due to the change in the disease profile for which they have in-house competency
After reviewing the basics of Magna's business, your team believes that one of the root causes of Magna's financial problems is how it manages medical costs, particularly the cost of referrals to specialists outside of its physician network. Your team has gathered the following information on Magna and its primary competitor, Sunshine HMO: Number of patients 300,000 500,000 Average cost of referral(per member per month) $20 $15
What are the most likely reasons that the average cost of referral at Magna is higher than at Sunshine? (At this point you should feel free to offer hypotheses, and you could ask your interviewer questions to clarify the information)
Although there are a number of possible responses, you might have the following suggestions:
Referral pricing: Magna might be paying more than Sunshine for specialist services (e.g., its outside contracts with oncologists might be at higher rates than Sunshine's contracts). Number of referrals: Magna's physicians might have different practice patterns than Sunshine physicians, i.e., they may be less comfortable treating heart disease patients or have different training/protocols. Mix of specialties: Magna's mix of specialties that requires referrals (cardiology and neurosurgery) are probably more expensive specialties (than cardiology and psychiatry, Sunshine's referral specialties). Mix of patients: Magna has sicker or older (>65) patients (individuals over 65 are more likely to need medical care in the specialty areas outside of Magna's network, particularly cardiology).
What analyses would you do if the things you suggest were contributing to this problem?
You might take the following approach, where weve outlined different areas of analysis:
Referral pricing: o Gain data on prices currently being paid by Magna for a sample of common specialties o Gain similar data for a competitor if possible for an industry average (perhaps through interviews with non-Magna specialists) Number of referrals: o Interview Magna physicians and non-Magna physicians to see if any obvious behavioral differences exist o Consult industry publications on this issue Mix of specialties: o Check number of referrals by specialty for Magna and estimate similar for Sunshine o Interviews with external specialties used by Sunshine may help again here Mix of patients: o Compare demographic data for Magna and Sunshine: should be easy to obtain from Magna; a scan of the employee schemes covered by Sunshine should give a good general picture of their demographic profile
o
See if Magna's referral cost has increased in line with the change in demographics of the subscribers
Helpful Tip - In giving the answer, it's useful if you are clear about how the analysis you are proposing would help to answer the question posed. Magna's CEO has a hypothesis that Magna is paying too much in cardiology referral costs for its patient population. He asks the McKinsey team to look at Magna's cardiac patient population more closely and tell him how many referrals he should expect on an annual basis. Assume the following:
Magna has 300,000 patients in any one year 20 percent of its patients are age 65 or older In the U.S., patients with serious heart disease visit specialists (cardiologists) on average of five times per year
You should always feel free to ask your interviewer additional questions to help you with your response. In this case, you should recognize the need to know the prevalence rate of serious heart disease to complete this calculation. Once asked, your interviewer would provide you with the following information:
The prevalence rate of serious heart disease in the 65+ population is 30 percent
The prevalence rate of serious heart disease in the under age 65 population is 10 percent
Based on the correct calculations, your response should be as follows: Magna should expect 210,000 cardiac referrals annually based on its patient population. You should have approached the calculations as follows to arrive at that answer:
300,000 total patients 20 percent x 300,000 = 60,000 patients age 65+ 18,000 x 5 = 90,000 referrals per year 240,000 Magna patients under the age of 65 240,000 patients x 10 percent = 24,000 patients under age 65 with serious heart disease and 24,000 x 5 visits per year = 120,000 visits per year total 90,000 + 120,000 visits per year = 210,000 total Magna patient external cardiology visits
When the team tells Magna's CEO that based on Magna's patient population he should expect about 210,000 cardiology referrals a year he exclaims, "We currently pay for 300,000 annual cardiology referrals for our patient population!" Why might Magna's annual cardiology referrals be significantly higher than U.S. averages? What would you do to try to verify if any of these were a key cause of
Company Website Cases this problem? There are a number of answers to these questions, and you are on the right track if your responses included some of the ones below:
The prevalence rate of heart disease in Magna's patient population is higher than average. To see if this was a cause of the problem, McKinsey should audit the internal data on heart disease prevalence and compare it to US National data. Magna's primary care physicians are referring patients who do not have serious heart disease to specialists. The team should interview specialists to get their opinion, or follow through a sample of patients who were referred. Primary care physicians are not comfortable (e.g., they are poorly trained or inexperienced) treating cardiac patients, even those with minor problems; they want to avoid malpractice suits. McKinsey should interview Magna physicians and institute an external review. Magna doesn't have clear guidelines on when physicians should be referring patients to specialists (or if guidelines exist, physicians are not complying with them). The team should gain an expert opinion on the current guidelines to see if this was a key cause of the problem. There are no incentives or penalties to prevent physicians from referring patients with less serious problems to specialists. In order to verify this is a key cause of the problem, the team should review incentive schemes if they exist. They should also compare similar companies/situations (e.g., prescription control mechanisms, etc.).
Helpful Tip We would not expect you to come up with all of these answers, but we hope some of your answers head in the same direction as ours. Yours may bring some additional insights. In either case, be sure that you can clearly explain how your reasons will bring you closer to why the referrals might be higher. At this point in the study, you bump into Magna's Head of Health Services in the corridor. He is responsible for all matters related to the provision of services to subscribers, both inside and outside the Magna Network. He asks you if you have made any progress. How would you respond? The ability to come to a logical, defensible synthesis based on the information available at any point in an engagement is critical to the work we do. Even though we'd consider ourselves to be early in the overall project at this point in the case, we do want to be able to share our current
Company Website Cases perspective. One ideal answer would include the following points: Findings
We have investigated all the drivers of profit for Magna. Although there is likely to be room for improvement in a lot of areas, it seems the claims cost is a big area for improvement. Relative to the market and to competitors, Magna seems to have high claims cost per patient. Our initial indication is that there may be highest room for improvements in the cost of referrals outside the network. There are a number of reasons as to why this may be happening (list as in previous question).
Next Steps
We are working to pin down the most significant reasons why Magna has high claims cost per patient. We are going to be looking into other areas such as reduction potential in other costs, as well as improvement potential in terms of premiums or other sources of revenue.
After some additional investigation, your team decides that changing the behavior of Magna's primary care physicians has potential to reduce cardiac referral costs while maintaining high quality care. The team believes that introducing some sort of incentive plan for physicians might help reduce the referral rate. You propose the following pilot plan:
Magna pays bonuses of $100,000 per year to each of the 10 primary care physicians with the lowest cardiac referral rates consistent with good patient outcomes. Magna increases overall fees paid to primary care physicians to handle more of their patients basic cardiology needs. Overall fee increases would total $1 million.
How many fewer cardiology referrals will Magna need to have in order to recoup the cost of the pilot incentive plan? For simplicitys sake assume:
The cost of a cardiology referral is $200. Magna currently has 300,000 cardiology referrals per year.
Company Website Cases referrals, Magna will recoup the cost of the incentive plan. One potential approach to the calculation:
$1 million + (10 * $100,000) = $2 million for incentive plan $2 million/$200 =10,000 referrals 10,000 referrals/300,000 total referrals = 3.3 percent reduction would pay for incentive program
Your team projects that the incentive plan has the potential to reduce referrals by 5 percent in its first year, and an additional 2 percent in its second year. If these projections are correct, by how much would Magna's referral costs be reduced over a two-year period with this program? Referral costs would be $4.14 million lower in the second year. Over the two years Magna would save $7.14 million. One potential approach to the calculation: Year 1 Savings with Program
300,000 total referrals 5 percent reduction in referrals = 15,000 referrals 15,000 x $200 = $3.0 million in savings in year 1
285,000 total referrals 2 percent reduction in referrals = 5,700 referrals 5,700 x $200 = $1.14 million in savings $3 + $1.14 = $4.14 million in savings
Therefore, total cumulative savings over the 2 years = Year 1 savings + Year 2 savings = $3.0m + $4.14m = $7.14m. Your team presents its physician incentive proposal to Magnas CEO. The CEO, in consultation with his Medical Director, agrees that this is feasible and says that they will pilot it for cardiac referrals. At the end of the meeting the CEO says, "I like the work youve done, but it's not enough to address our current financial situation. Physicians are professionals who care deeply about patient care and I think there's a limit to how much cost we can expect to reduce utilizing financial incentives exclusively. Besides cardiac financial incentive programs, what other ideas should we consider to reduce the cost of Magna's specialist referrals?"
Based on what we have discussed today, and any other ideas you might have, how would you respond to the CEO? This question is a good one for demonstrating creativity because there's a long list of possible ideas. You might give the following response:
Pursue additional ways to change physician behavior o Provide training on how to treat patients with minor or stable medical problems o Define and clarify medical guidelines for referrals (e.g., establish a medical committee to define the difference between serious and "minor" heart disease) o Institute peer review committee charged with approving a subset of referrals (e.g., those that are considered "high cost") Spend time investigating "outlier" physicians (i.e., those who seem to refer patients to specialists at much higher rates than others) to determine how widespread the referral problem is and whether simply focusing on a few physicians will dramatically reduce referral costs Determine whether Magna can reduce referral costs in the other medical areas where it does not have specialists (i.e., neurosurgery) Look at the contracts Magna has for specialist services to determine if it is paying too much relative to competitors Consider whether bringing cardiology, neurosurgery, and oncology specialists in-house (i.e., within Magna) might reduce cost
Helpful Tip - You may have a slightly different list. Whatever your approach, we love to see candidates come at a problem in more than one way, but still address the issue as directly and practically as possible.
Could the client increase prices? How would customers react? Could the client sell more meals, either at existing branches or through opening new ones? Are there other creative ways to grow revenue (enter into large-scale catering contracts, for example)? Could the client decrease our fixed costs by selling some of our branches or real estate? Could the client reduce the quantity of products they buy, such as ingredients for their meals? How else could they reduce their costs?"
Question 2 At your case team meeting, your manager informs the team the customer is price sensitive, the market is fairly saturated, and that the fixed costs are pretty stable. Thus Bain and the client agree that the team should focus on lowering variable costs. Specifically the client wants to reduce their spending on purchased items (items the client buys from others and then uses or offers to their customers, like the meat in the hamburgers or the ketchup packets). Without knowing much more about the situation, what would you suggest are some ways to do so? Which ideas seem the most attractive and why? Bain recommended answer: Purchased goods in this business fall primarily into 2 categories: food and packaging. Variable costs are a function of: price and volume. Therefore, the client needs to reduce volumes purchased or negotiate lower prices. Food:
We could negotiate lower food prices with our suppliers (consolidate our purchasing, etc.). We could look for cheaper ingredients. This sounds risky because it could lower the quality of the food that we sell. We could reduce the volume used. For the same reason, this sounds risky because it would change our recipes, one of our competitive advantages in producing winning recipes.
Packaging:
We could negotiate lower prices with our suppliers or look for cheaper alternatives. We could reduce the volume used.
Recommendation:
Most attractive ideas are: negotiating lower food prices or packaging prices, looking for cheaper packaging materials, or reducing the volume used.
Question 3 At this point in the brainstorming session, the VP adds that two years ago, the company launched a program to centralize purchasing and successfully negotiated much lower prices. Therefore, it is critical to determine if you could reduce the volume of goods that the client purchases. How could you reduce the volume of purchased goods? Bain recommended answer:
Company Website Cases Some good creative answers here include (but are in no way limited to):
Can the client change the shape or size of food containers? Can the client packaging for families be consolidated? Can the client reduce the weight of the packaging while still protecting the food? Can the client reduce other qualities of the packaging including degree of color or logo prevalence without sacrificing their brand? Can the client lock bathrooms so that non-customers do not waste toilet paper and towels? Can the client charge for extra condiments? Can the client reduce the size or number of napkins they purchase?
Question 4 Bain focuses on components that make up large portions of a companys costs: reductions in these areas will have the largest impact on a clients overall costs. Bains philosophy is to always focus on where the value is. At first glance, napkins would not appear to fall within this category because they are so low cost. But there is a new napkin dispensing technology on the market that you have heard about and think could save the client some money. You decide to investigate. One way to reduce volume is to reduce how many napkins a customer takes. Customers in fast food chains often take many more napkins than are needed for the meal, or actively hoard them to take home. One action some chains have taken to combat this is to switch their napkin dispensers from small metal dispensers (from which you pull napkins out in bunches) to larger plastic dispensers (from which you pull napkins one at a time, like a reverse Kleenex box). These dispensers are produced by major paper manufacturers. Lets assume your chain came to you with the following question:
How much money could we save per year in the US from using the new type of napkin dispenser in all restaurants?
What information would you like to know from the company? (Do not take into account the cost of the dispensers for now.) Bain recommended answer: Key information that would be necessary includes:
Number of restaurants Number of customer visits per store per year Number of napkins used per customer now Number of napkins used per customer after the switch
Question 5 As you talk through the data points that you would need to gather with your colleagues, you learn from a fellow AC who worked for a local restaurant that a case of 6000 napkins cost his client $28. Thus, a reasonable price per napkin is about $0.005. Conduct your estimates as if your client is similar to McDonald's in terms of the number of outlets. Your manager calls you for a quick estimation of the market size before getting the actual data from your client. Use creative approaches to hypothesize values for each of the above pieces of information and then calculate the estimated savings. Bain recommended answer: The interviewer is not looking for you to know the values of each of these buckets, however it is important for you to make reasonable estimates and be able to defend your answer. Were your estimates near these, or did you at least take similar approaches? Number of restaurants Actual answer: ~12,000 McDonald's in the US. One estimation approach: Think of your hometown: How many McDonald's are there for the number of people? Assume there is a McDonald's for every 20-25,000 Americans, with a population of ~275 million people in the US, that would be 11-13,750 McDonald's. Other approaches:
Estimate the entire fast food market and then estimate McDonald's share Estimate the area covered per McDonald's across the United States. Note: With this approach, be careful to account for population differences between 10 square miles of NYC and 10 square miles of Utah.
Number of customers per restaurant per day Actual answer: Fast food restaurants expect around 1,500 customers a day. One estimation approach: Assume the 20,000 people per McDonald's visit an average of twice a month, that's 24 times a year per customer or 480,000 visits / 365 days = 1,315 customers per day. Other approaches:
One might take this a step further during a case interview and attempt to segment these customers. For example, one might assume 50% of the restaurants customers are drive-through and 25% of the remaining take their food "to go." Drive-through customers do not take, but are given napkins. "To go" customers may be more likely to "hoard napkins" as they can not go back to the counter for more. Note: This would influence potential answers to the next question - but for now, assume you did not take this step and all customers are the same.
Number of napkins used per customer per visit Actual answer: Five napkins with old dispensers and two napkins with prohibitive dispensers for a savings of three napkins per customer. One estimation approach: During a case interview you would most likely just use personal experience here - how many napkins do you take or see others take when you're at a fast food restaurant? Other approaches:
Bain would send people to the chain to watch napkin taking behavior or call fast food restaurants with both kinds of dispensers to find out how many napkins they go through a day.
Calculations $0.005 per napkin * 3 napkins * 1500 customers * 365 days per year * 12,000 restaurants = $98.6M dollars saved in napkin purchases. Question 6 -- Does this estimate sound reasonable?
How would you go about feeling comfortable with this figure and pressure checking your assumptions? What would you want to flag for your manager as factors that might significantly alter the answer?
Bain recommended answer: To check the magnitude of the overall number some options include:
Looking at a comparable companys operating income to see what percentage of the expense napkins account for. Find out what your client currently spends per restaurant per year on napkins.
Keep in mind that with a company of this size any small changes in assumptions will significantly alter your answer. Some things to flag for your manager:
The chain you work for probably gets a significantly better deal on napkin pricing due to the magnitude of their orders (in contrast to the single-location restaurant napkin price estimate you received) Up to 50% of customers are drive-through and their napkin behavior should not change. This would reduce the savings by up to 50% The three napkin reduction estimate needs refining. Perhaps a pilot program would need to be done to see if the dispensers really have the desired effect
Question 7 Assume you would need 10 dispensers per store for a total of 120,000 dispensers. Also note that napkins in these dispensers cost more at a price of $.01 per napkin (remember it is the paper companies that make the new dispensers). At what price per dispenser would the investment not be worth doing? Bain recommended answer: 120,000 * cost of dispenser + 2 napkins * .$01 per napkin * 1,500 customers * 365 days * 12,000 stores = 5 napkins * .005 per napkin * 1,500 customers * 365 days * 12,000 stores 120,000 * cost of dispenser = $32.85M The most you would be willing to pay per dispenser would be $273. Note: In an actual case interview you can use round number estimates so that mental math is easier. Question 8 The actual cost of these dispensers is around $50.
Can you see any other factors your client should consider before making a decision? What other advantages and disadvantages might there be to this switch? (Impact on costs and customers.) How might you evaluate the impact of the extraneous factors?
Fewer napkins used per day leads to less restocking which may mean better customer service or lower labor cost.
Disadvantages:
With the new dispenser locking you into a paper provider you may lose buyer power. There is the potential for additional napkin price increases in the future. Customer reaction: Will a customer find this to be poor service? What if he or she needs to grab a handful of napkins after a spill?
Implementation:
Management will need to negotiate a contract that includes limits on future pricing. Bain will need to do customer research and pilot programs to evaluate customer reaction.
And many, many more! As you can see, the keys to a good case interview are logical assumptions, creative thinking, and basic quantitative ability. Take time to think through problems and share your thought process with your interviewer and you will do great.
Sales ($M) Big M Mart R.J.'s Bozo Mart Ace Grocery Shoppers Mart Total Top 5 Total All Distributors Volume (M boxes) Big M Mart R.J.'s Bozo Mart Ace Grocery Shoppers Mart Total Top 5 Total All Distributors
1997 142 157 143 101 57 600 1,000 1997 65 72 65 46 26 274 450
1999 162 185 175 109 62 693 1,079 1999 74 81 77 47 27 307 468
2001 246 200 189 153 67 856 1,150 2001 113 85 80 64 28 370 487
5-Yr CAGR 14.7% 6.2% 7.3% 11.0% 4.0% 9.3% 3.6% 5-Yr CAGR 14.7% 4.2% 5.2% 8.8% 2.0% 7.8% 2.0%
What does this imply about Big M Mart as a distribution outlet? It looks as if the top distributors have been growing more important, but particularly Big M Mart, which is growing faster than all the others. This is particularly true when we look at volume, where Big M Mart's growth is much higher than that of the other four channels. And how could you interpret what these data says about margins? While the client's sales through other distribution channels are growing faster than volume, Big M Mart volume and sales growth are the same, so the average price paid by Big M Mart has remained constant. That implies that sales growth at Big M Mart could have negative implications for our client's margins. Next, I would like to look at how our client is doing in relation to the competition within Big M
Mart. Have they been gaining or losing market share? How might you find that out? I would try to interview Big M Mart's purchasing personnel, since they would probably track those data for their own purposes. Why would they want to talk to you? How might you approach such an interview? I would approach the purchasing personnel and suggest that our client and Big M Mart work together to identify best practices to reduce costs and increase sales of sugar cereals at Big M Mart. Let's say in a perfect world you could get a breakdown of Big M Mart sales for the four largest competitors (see market shares below).
What can we infer about our client's competitors within this channel? Who should they be worried about? It looks like our client is losing market share, as is Tasty Breakfast, while Cereal Co. and Private Label are gaining share. Private Label, however, looks to be growing from a very small base. I would like to explore why our client is losing market share to Cereal Co. at Big M Marts. Are their prices better than those of our client? After a period of price wars six to seven years ago that lowered industry margins, the cereal companies have refrained from price competition within the same channel. If prices are not driving the difference, I would look at other factors such as brand selection, percentage of shelf space, product placement, and in-store promotions. Visits to Big M Marts indicate that each name-brand company holds 30 percent of the shelf space, while private label has 10 percent. Cereal Co. brands, however, tend to be placed lower on the shelf than your client's products. Well, I suspect that children are a large target market for the sugar cereal manufacturers. The lower shelf placement could be especially important to children who are looking at the different types of cereals. Are there any other promotions?
Some Cereal Co. brands have sales promotion tags, and the team notes that store flyers advertise specials on Cereal Co. brands for Big M Mart customer cardholders. So, even if all the companies are maintaining product prices, maybe Cereal Co. is strategically discounting prices to gain market share. It seems as if there is evidence of cooperation between Cereal Co. and Big M Mart. Do we know anything about their relationship? During earlier discussions with Big M Mart, you discovered that your client's competitors have 50 sales representatives dedicated to the Big M Mart account. Your client has seven. Cereal Co. appears to be dedicating more resources to its relationship with Big M Mart than our client is. This may explain its better product placement and promotion programs. I think I have a good sense of distribution and competition. I would now like to look at the customers and understand why they select the products they do. One hypothesis I have is that shifting brand loyalties are hurting our client's market share at Big M Mart. That's interesting. What do you think might motivate purchases of sugar cereals? There are lots of factors, such as the games in the boxes, the price of the cereal itself, how it tastes. To better understand consumer behavior, we might conduct market research, possibly through focus groups, customer observation, and price sensitivity studies. BCG teams often do such research. Let's assume your team conducts some analysis. Your research concludes that most buyers tend to fall into two categories. Approximately 60 percent of buyers go straight to one cereal and grab it. We can call this group the "brand-loyal" shoppers. Another 40 percent of shoppers look at all the cereals and then select one that interests them. Let's call this group the "impulse" buyers. For the brand-loyal shopper, the priority would be product availability, while product placement would be important for consumers who like to shop around. Within these groups, are consumers price sensitive such that one brand can lure shoppers loyal to another brand? In general, your research indicates that consumers are not price sensitive and are extremely loyal to their preferred brand. But when the preferred cereal is unavailable, the brand-loyal customers will purchase discounted cereals approximately 35 percent of the time. Well, from that information, it appears that price is not a major driver of purchases unless the preferred cereal is out of stock. In these stock-out situations, you said, brand-loyal customers will purchase discounted cereals 35 percent of the time. What happens when the customer does not purchase a discounted cereal? In approximately 25 percent of cases, the customer walks away without purchasing any cereal at all. In the remaining 40 percent of cases, the brand-loyal customer will act like an impulse shopper and select another brand. Interesting. It seems as if product availability could be a major driver of total cereal volume for Big M Mart. Of course, we would need to know how often stock-outs occur that cause consumers to walk away without purchasing cereal occur. Since I have a pretty good understanding of customer motivation, I'd now like to ask a few
questions about the client's supply chain. I would want to talk to our client's distribution personnel to understand the distribution process and to determine how often stock-outs occur. Can you describe how our client's cereal is distributed at Big M Mart? Cereals are distributed from the factory to the distributor's warehouse twice monthly. The retailer then stocks the shelves itself. Do we have any knowledge about when the individual stores are out of stock? No, we do not, since our client only delivers to the warehouses and has no direct access to in-store inventory information. Since we identified product availability as a key success factor earlier on, I would want to make sure that the stores were stocking the product correctly. Let's say that in your earlier in-store investigations, you found out that Big M Mart stores averaged 15 percent of sugar cereal brands out-of-stock, across all brands. Stock-outs would be a major problem for our client, since 60 percent of customers look for a specific brand of cereal and 35 percent of them would buy a discounted brand in a stock-out situation. Big M Mart would also have an incentive to reduce out-of-stock incidents, since 25 percent of the time, a brand-loyal customer will walk away without buying anything.
Step 5
Step 5: Summarize and make recommendations Big M Mart is our client's leading customer, accounting for more than 20 percent of our client's sugar cereal revenue. Although sales to Big M Mart are increasing on an absolute basis, our client's margins there are lower than in its other channels and its competitive position is eroding in that channel. At Big M Mart, our client faces competition from both private label and Cereal Co., although the latter appears to be the greater threat. There appears to be a relationship between Big M Mart and Cereal Co. as evidenced by their joint promotions, the superior placement of the Cereal Co. product, and the substantial resources that Cereal Co. has dedicated to the Big M Mart account. We learned that 60 percent of customers are brand-loyal, implying product availability is most important. However, 40 percent like to try different kinds of cereal, indicating product placement is also important. Purchasers do not appear to be price conscious, unless the type of cereal they are looking for is out of stock, in which case there is a stronger tendency to base purchases on price promotions. In terms of distribution, our client is making deliveries twice a month to Big M Mart's warehouses. Big M Mart, in turn, is responsible for stocking the shelves. We currently have no direct knowledge of when our client's items are out of stock at the individual stores, but there is evidence that stock-outs do occur with some frequency. Well, it sounds as if you understand the situation. What would you recommend the client do? The sales through Big M Mart appear to have a negative impact on the bottom line, as they have lower margins than sales through grocery stores. The client could work with grocery
stores to ensure that they are able to compete effectively with Big M Mart in the sugar cereal market. This strategy could be risky, however, since Big M Mart is a large and important customer. Therefore, I would recommend that our client work more collaboratively with Big M Mart. To defend its current position at Big M Mart stores, the client should move toward a partnership with Big M Mart and dedicate more resources to the relationship. The customer and competitor data indicate that our client's first priority should be to improve distribution to ensure better product availability. In addition, it should push for product placement equal to, if not better than, that of its competitors. Why would Big M Mart be willing to enter into a partnership with Foods Inc? Foods Inc could offer to share its information about customer behavior to help increase revenues for both itself and Big M Mart. Stock-outs hurt Big M Mart in two ways. First, some brand-loyal customers simply walk away without purchasing cereal whenever their preferred brand is unavailable. Second, we know that other brand-loyal customers purchase lowerpriced cereal whenever they encounter a stock-out of their preferred brand. Both of these instances lower Big M Mart's revenue. By eliminating stock-outs, Big M Mart could increase its sales by simply ensuring that customers don't walk away without making a purchase. Converting these purchase occasions to sales would increase Big M Mart's sales of sugar cereals by more than 2 percent(1). Better availability also helps Big M Mart and our client increase their revenue by deterring the brand-loyal shoppers from trading down to lower-priced cereals. Recall that 35 percent of the brand-loyal shoppers purchase a discounted cereal if their preferred brand is not available. If improved distribution now makes the preferred brands more consistently available, the customers will pay a higher price for these products. Finally, we could use the information about consumer purchase behavior to help persuade Big M Mart to share information about product availability in its individual stores. We could work with our client and Big M Mart to improve the current distribution system to allow for more economical deliveries, while at the same time ensuring that our client's product is consistently available in the store. Thank you. Those sound like solid recommendations, but I would suggest that you fully understand the root cause of the stock-out situations and the cost to eliminate them before moving ahead.
(1)
15 percent out of stock x 60 percent brand-loyal customers x 25 percent willing to forgo purchase = 2.25 percent