WHARTON CONSULTING CLUB WHARTON CONSULTING CLUB

CASEBOOK
December 2010, Wharton Consulting Club
List of Practice Cases
Case 1 Whisky Brand Turnaround
Case Description
51
Page #
50
Case 1: Whisky Brand Turnaround
Case 2: Copper Ore Mining Investment
Case 3: Telecommunications Service Provider
Case 4: Major Magazine Publisher
51
56
61
63
Case 5: Tulsa Hotel - OK or not OK?
Case 6: The Coffee Grind
Case 7: FoodCo
Case 8: Candy Manufacturing
68
74
81
85 Case 8: Candy Manufacturing
Case 9: [Link]
Case 10: Skedasky Farms
Case 11: University Apartments
85
93
103
108
Case 12: Vidi-Games
Case 13: Big School Bus Company
Case 14: American Beauty Company
112
118
123
Case 1: Whisky Brand Turnaround
Introduction
Problem Statement Narrative
Introduction
51
Our client has been in business for close to 90 years. The original founder started in the whiskey business and over time expanded the
product line so that today it is a multi-million dollar business with less than 5% of sales coming from whiskey.
The whiskey market in the US (our relevant market) has been declining at 2% over the last 20 years and our clients brand has been
declining at the same rate.
While the company has great passion for the whiskey brand, in recent years they have been paying limited attention to it. Last year
however, events happened that caused our client to pay attention to their whiskey brand. While sales of the market declined at 2% our
clients brand declined by 15%, despite selling 10m bottles.
Our client has come to us to understand what has happened and how to grow the brand back without lowering the profits they were pp g g p y
making on it.
Overview for Interviewer
To help understand why our clients whiskey brand has declined it helps to use an
i t l t l f k P ibl i t l
Information to be Provided Up Front
The information provided in the statement is all the
candidate receives at this point Once the internal vs. external framework. Possible internal reasons:
Reduction in marketing spend
Decline in quality of marketing or product quality
Product availability (production/supply chain)
Some possible external reasons:
Negative PR
candidate receives at this point. Once the
candidate reaches the point of talking about
competitors and their products the hand out (next
page) should be given.
Negative PR
New competitor launch
Increase in competitor marketing
Pricing effects
Case 1: Whisky Brand Turnaround
Provided Data
C i A l i
Provided Data
52
Interviews with advertising experts and an examination of competitors ad pages have shown that while marketing spend hasnt changed
significantly, there has been significant changes in prices within the industry.
Brand Place of sale Cost to produce 2007 price 2008 price 2009 price
Client Grocery Specialty $8 00 $14 75 $14 75 $15 00
Competitor Analysis
Client Grocery, Specialty
stores
$8.00 $14.75 $14.75 $15.00
Competitor A
Premium
Specialty stores $8.25 $15.00 $17.00 $19.00
Competitor A Own Grocery $6.50 Not launched Not launched $9.00
brand
Competitor B
Premium
Specialty stores $8.25 $16.00 $17.75 $19.75
Competitor B Own
brand
Grocery $6.50 Not launched Not launched $9.75
Case 1: Whisky Brand Turnaround
Questions to Answer
What conclusions can we draw from the table? How could we determine if there has been change in relative
marketing spend against our major competitors?
Questions to Answer
53
We have 2 main competitors, each with two different
brands (premium and own brand).
Competitors have been steadily raising prices in their
premium category, aiming at a segment of consumers
marketing spend against our major competitors?
First we need to gather information on our own marketing spend to have a
basis for comparison.
Secondly, we need to determine our competitors marketing spend, which we
could do through several sources:
Internal interviews
who are willing to pay more. These consumers it seems
prefer to buy at specialty stores. It is likely that our
competitors have succeeded to capture a lucrative
share of the market.
Additionally both competitors have launched this past
year own brands and selling them through grocery
Internal interviews
External benchmarking through competitor company reports
Analyze number of pages in various publications
Interviews with experts within the advertising and marketing industry
After discussions about the industry and the competitors the handout should
be given to the candidate and they should be given a couple of minutes to
year own brands and selling them through grocery
stores. These own brands are significantly cheaper
than the premium brands and have a lower cost to
produce.
It seems that competitors have been capturing the
lucrative top end of the market while also launching
take in the data.
What are the options our client has assuming they want to stay in
the whiskey business and how should they price their whiskey
p g
new own brands that have captured the price sensitive
consumers, effectively squeezing our clients brand out
of the market.
the whiskey business and how should they price their whiskey
brand?
It is important for the candidate to realize that our clients product is a
premium product and that is based on the cost to produce. Given this
information it would seem that our client needs to try and increase prices in
order to be perceived as a premium product comparable to the competitor
premium brands.
It would be reasonable to suggest a price of $19.00-$20.00 for our clients
brand. The candidate should be asked to justify any answer provided.
Case 1: Whisky Brand Turnaround
Math
M th
Math
54
Math
Once the options have been discussed the following information should be provided:
Based on market research our client believes that if they increase their price to $20.00 they will be able to sell 8m bottles. The costs
of producing whiskey are 75% variable and 25% fixed.
The candidate should now calculate the total profit of the two options to see which one is better. Notice that they all ready know the price
today ($15.00) and the quantity today 10m and this information should not be given again.
Today:
New Pricing Option:
(The fixed costs do not change!)
Examining the two options it seems that an increase of price to $20.00 would increase total profits by $22m an increase of ~30%.
Case 1: Whisky Brand Turnaround
Final Questions and Conclusions
It ld th t th hi h i i ti i C l i
Final Questions and Conclusions
55
It would appear that the higher pricing option is very
favorable to our client. What complication might arise
from such a price increase?
In the short term, we need to be aware of how our competitors
react to this move in pricing, branding and advertising. Our move
Conclusions
Recommendation:
Our client should increase its price to $20.00 per bottle. This
increase will generate an additional $22m in profits, an increase
of 30%!
could provoke additional price increases from our competitors
leaving us in the same position we were before. We should also be
aware of possible difficulties in marketing our brand in the
premium category as the third mover.
Further complications could arise given that our changes in our
Some potential risks of this move include: competitor response,
optimistic data from client and consumer perception of our brand.
Some next steps include: Validating data, creating marketing and
advertising plan, preparing the market for significant price
increase.
Further complications could arise given that our changes in our
whiskey brand may impact negatively our wider liquor portfolio, if
customers who stop purchasing our whiskey brand will also stop
purchasing other liquor brands that our client owns.
Lastly we should be careful with the number of 8m bottles as given
to us by the client. If this number is too optimistic the results could y p
be significant.
Case 2: Copper Ore Mining Investment
Introduction
Problem statement narrative
Introduction
56
Our client in this case is Excavator Mining Co, a large diversified mining company. Excavator is considering developing a mine site to
produce copper ore. Excavator has two options for developing the site. Develop alone, or enter a JV with a competitor Drillhammer
Mining Co. In addition, Drillhammer owns a nearby mining site which it could develop to produce copper ore, supplying the same market.
Should Excavator develop the mine alone, with Drillhammer, or not at all? What arrangements should be made with Drillhammer, if any?
Problem statement narrative
This case has two main components. First, evaluate the financial
Overview for interviewer
The information on the following page is to be given
Information to be provided upfront
(hand candidate attached exhibit)
This case has two main components. First, evaluate the financial
attractiveness of each option for both Excavator and
Drillhammer. Some cost and pricing information will be provided
to do this. After this analysis, it should be evident that the JV is
the preferred option as it creates the highest overall value for
the industry. The second question is how should the value be split
The information on the following page is to be given
immediately. And provides an overview of the situation. The
page that follows shows the calculation that the candidate
should be working towards estimated the value for each
player under the different scenarios.
between the players under a JV arrangement.
After the candidate presents his/her framework, give candidate
the handout containing an overview of the situation. The
candidate can then be given cost and pricing as requested.
Case Type Investment decision/JV negotiation Case Type: Investment decision/JV negotiation
Case Style: Command & Control
Case 2: Copper Ore Mining Investment
Financial Analysis of Investment Options Financial Analysis of Investment Options
57
Excavator
owned site
Rail link
Rail from mine
to rail link
Road from rail
link to market
Copper ore
market
link to market
1 million tones pa
stand alone
2 million tones pa
under JV
20 year mine life
Road from mine
to market
Drillhammer
owned site
to market
1 million
tonnes pa
20 year 20 year
mine life
Case 2: Copper Ore Mining Investment
Financial Analysis of Investment Options
58
MINE FINANCIAL ASSESSMENT
Financial Analysis of Investment Options
MINEFINANCIALASSESSMENT
Excavatoralone Drillhammeralone JVatExcavatorsite
Capacity Tonnespa 1,000,000 1,000,000 2,000,000
i lif Minelife Years 20 20 20
Copperoreprice $pertonne 50 50 50
OperatingCosts
Miningcosts $pertonne 20.0 28.0 15.0 Mining costs $ per tonne 0.0 8.0 5.0
Railtransportcosts $pertonne 10.0 10.0
Roadtransportcosts $pertonne 5.0 25.0 5.0
Totaloperatingcosts $pertonne 35.0 53.0 30.0
Operatingprofit $pertonne 15.0 (3.0) 20.0
Totalprofitoverminelife $Millions 300.0 (60.0) 800.0
Capitalinvestment $Millions (180.0) (140.0) (340.0)
TotalValue $Millions 120.0 (200.0) 460.0
Case 2: Copper Ore Mining Investment
Discussion Points
K di i i t
59
Discussion Points
Industry overview
The overall industry is not particularly relevant here, so steer the candidate away from any five forces analysis or similar
Financial calculations
Provide information as requested by candidate
Key discussion points
Ignore time values of money
A relevant question is why the mine production at Excavators site is larger under the JV this can be attributed to capital
requirements for Excavator alone, or regulation
JV discussion
Once the value of each option has been calculated, it is clear that the JV is the highest value option
The next question is what JV arrangement would be acceptable to both parties? Is a straight 50/50 split ($230M) fair? The next question is what JV arrangement would be acceptable to both parties? Is a straight 50/50 split ($230M) fair?
A discussion should follow around how each player would view the JV and what their next best alternatives are (we assume neither
has copper ore mining options beyond those here).
Without the JV, Drillhammer will not invest in its site (loss-making) and so the value it receives is 0. Excavator will invest alone, and
will receive $120M of value. The total value for both players is $120M.
With the JV, the total value for both players is $460M. So the JV adds $460M - $120M = $340M for the industry. This $340M p y y
should be split evenly between the two parties vs their next best alternative. Drillhammer receives $170M + 0 = $170M. Excavator
receives $170M +$120M = $290M. This is the most likely outcome of a negotiation between the two parties.
Other broader discussion points:
History of JVs between the two parties?
Alternative use for the mine site could it be sold for more than JV value?
P l f f h b h ? Potential for infrastructure sharing between the two sites?
Case 2: Copper Ore Mining Investment
Discussion Points
60
Discussion Points
Excavator should pursue the JV
and settle for not less than $290M
worth of value from the site.
Sample
Recommendation Recommendation
BONUS
Sensitivity to pricing assumption:
Forecasting the Copper ore price over the next 20 years
is a difficult exercise - how would a higher or lower
copper price affect the decision? What if prices were
BONUS
high enough for Drillhammers site to be profitable?
Case 3: Telecom Service Provider
Introduction
Our client is a telecommunications service provider They have been experiencing customer retention problems What do you think can be
61
Introduction
Our client is a telecommunications service provider. They have been experiencing customer retention problems. What do you think can be
drivers of such a problem?
Drivers of Retention Problems
Voluntary
Information to be Provided If Asked
Information to be provided if asked: Voluntary
Deliberate
Technology (Handsets, Features, New Technology)
Economics (Per minute, Activation, Subscription fee)
Quality (Coverage, Call quality, Customer Service,
Billing)
Information to be provided if asked:
There are 3 major players in the market
Our client has the higher coverage on average
g)
Social (Image, Family and friends)
Convenience (Internet, Retail Channels)
Incidental
Finances
Location
Its voice services are more expensive than other providers.
Major life changes
Involuntary:
Fraud
Non payment
Case 3: Telecom Service Provider
Question 2
Question 2 What can our client do to decrease the churn
rate?
Question 2
62
A recessionary environment is expected next year and churn rate is
expected to increase in favor of cheaper service providers. To maintain
the current number of subscribers, how many customers should the firm steal
from its competitors?
I f ti t b P id d If A k d
rate?
Recommendations:
New price plans. Customized price plans for each
customer/segment
Predict defection. Create an offer for the possible
Information to be Provided If Asked
Market size: 100M
Market growth rate:1%
Market shares for the companies:
Our client: 50%
defectors
Sell them other products. Create switching barrier
Thank and survey existing customers
Send customized product and service offerings
Customize the response and communication to customers
R i l ti
Firm A 30%
Firm B 20%
Current churn rate 3%
Recession increases churn rate by 50%
Review usage real time
Set up referral programs
Develop a loyalty program
Watch the seasonal churn
Improve coverage: Number one reason for churn
Calculations
Number of current subscribers: 50% of 100M= 50M
Assuming that our client gets 50% of new subscribers as well: 0.5 M new
customers
Ch t thi i 3%*1 5 4 5% Churn rate this year is 3%*1.5=4.5%
50M(1-4.5%)+0.5M+ Customers to be stolen from competitors=50M
47.75+0.5 + Customers to be stolen from competitors =50M
Customers to be stolen from competitors=1.75M
Case 4: Major Magazine Publisher
Introduction Introduction
Problem Statement Narrative
63
Problem Statement Narrative
Your client is a Major Magazine Publisher. Currently, they own a Womens magazine (similar to Cosmopolitan) and a Personal Finance
magazine (similar to Fortune). They are considering launching a new magazine about Fine Living, targeted to Wealthy Males (similar to
GQ). What is the market size, and should they do it?
Overview for interviewer
This is a straightforward case, covering Profitability, Go/No Go Investments and Market Sizing. Information will likely be given at the
beginning of the case, and then more throughout the case, as calculations are made.
Information to be given with handout
Is there a goal that the company is trying to reach with the launch of the new magazine?
Yes, the company would like to hit $10M in annual revenue.
Does the company have the resources to launch a new magazine?
Yes.
I h i ff d l i i li ll? Is the new magazine offered only in print, or online as well?
It will be offered only in print.
In what ways can the magazine be purchased?
It is offered as a yearly subscription - 12 issues per year.
It can also be bought retail - one issue at a time.
What is the target geography for the magazine? What is the target geography for the magazine?
It will be offered in the U.S. only.
What are the costs of the magazine?
Costs can be ignored in this analysis.
Case 4: Major Magazine Publisher
Market Size
Potential approach to solving the case
Market Size
64
Potential approach to solving the case
Q1. Market Size
Q2. Profitability
Q3. Recommendation (Risks and Other Considerations)
Q1: What is the market size (in people)?
Information to be given if asked:
300M people in the U.S.
50% Male 150M males in the U.S.
Age demos split evenly (Age 0-20, 21-40, 41-60, 61-80)
Market research shows that 10% of Age 21-40 demographic is Wealthy, that 10% of Age 41-60 is Wealthy and that 5% of Age 61-
80 is Wealthy
People under 20 are too young for the magazine
Calculations:
Can be split evenly by age group Can be split evenly by age group:
Age 0-20: 25% 150M(25%) = 37.5M
Age 21-40: 25% 150M(25%) = 37.5M
Age 41-60: 25% 150M(25%) = 37.5M
Age 61-80: 25% 150M(25%) = 37.5M
Can be broken down further by target demographic y g g p
Age 21-40: Assume that 10% are Wealthy 37.5M(10%) = 3.75M
Age 41-60: Assume that 10% are Wealthy 37.5M(10%) = 3.75M
Age 61-80: Assume that 5% are Wealthy 37.5M(5%) = 1.875M
Total market size = 3.75M + 3.75M + 1.875M = 9.375M people, or rounded to 9.4M people
Case 4: Major Magazine Publisher
Profitability
P t ti l h t l i th
Profitability
65
Potential approach to solving the case
Q1. Market Size
Q2. Profitability
Q3. Recommendation (Risks and Other Considerations)
Q2: What is the market size (in $)?
Information to be given if asked:
There are two ways that the magazine can be purchased.
Subscription: 12 issues per year, $3 revenue/issue p p y , /
Retail: Assume 4 issues per year, $5 revenue/issue
Assume that the market is split 50/50 subscription and retail.
Calculations:
9.4M(50%) = 4.7M subscribers, 4.7 retail customers
S b 4 M( 2 )($3) $ 69 2M Subscription revenue = 4.7M(12 issues)($3) = $169.2M
Retail revenue = 4.7M(4 issues)($5) = $94M
Total market size = $169.2M+$94M = $263.2M
Case 4: Major Magazine Publisher
Recommendation
P t ti l h t l i th
Recommendation
66
Potential approach to solving the case
Q1. Market Size
Q2. Profitability
Q3. Recommendation (Risks and Other Considerations)
Q3: Should they do it?
Information to be given if asked:
Market is not growing
Competition is made up of:
GQ: 60% of the market
Other magazines/fragmented: 40%
Survey data shows that we can capture 5% of the market
Calculations:
Potential revenue for client = 5%($262 2M) = $13 16M Potential revenue for client = 5%($262.2M) = $13.16M
Case 4: Major Magazine Publisher
Recommendation
The client should move forward with the launch of the new magazine We expect to get $13 6M in
Recommendation
67
The client should move forward with the launch of the new magazine. We expect to get $13.6M in
revenue per year, which is higher than the stated goal of $10M per year.
Recommendation
Risks
Costs need to be less than $3.6M. Costs can include fixed cost for a new manufacturing plant, R&D
for new topic, etc..
Need to consider cannibalization of Finance magazine revenues - may be targeting the same
audience/have content overlap.
Cost synergies for client may be able to be achieved by adding another magazine to the portfolio. y g y y g g p
Synergies may include manufacturing, marketing and distribution.
Case 5: Tulsa Hotel - OK or not OK?
Introduction Introduction
Problem Statement Narrative
68
Our client a major hotel chain. They are considering acquiring an existing hotel in Tulsa, OK for $20M and expect an ROI of
20% over three years. Should they make the investment?
Overview for interviewer
Information to be given with
handout Once the interviewee has explained their handout Once the interviewee has explained their
framework, give them the following page. Also
tell them the following:
Assume single occupancy (only one guest per
room).
If several rooms are reserved at once (for a group
This is a profitability case. Discussion should quickly turn to P=R-C and the
various drivers of costs and revenues.
On the revenue side, price and volume (hotel occupancy) should be
considered, with some discussion about different price and occupancy
i i hi b i h l i l i ? D
( g p
traveling together) a discounted group rate is
given to each group member.
Assume 50 weeks/year or 350 days/year in your
calculations. Round yearly profits to the nearest
million.
scenarios is this a business hotel or a vacation location? Do occupancy
rates/prices vary throughout the week? Seasonally? The interviewee should
also include other sources of revenue, such as a restaurant in the hotel,
events, etc.
On the cost side, fixed and variable costs should be discussed, such as hotel
upkeep utilities labor insurance booking system etc
Assume no seasonality in demand. Assume no
growth. Ignore time value of money.
upkeep, utilities, labor, insurance, booking system etc.
Additional factors:
Changes in the economy and hotel industry that might affect number of
guests or guest WTP
Competitor response and potential for new entrants into the market
Specifics about our client such as synergies with other hotels in the chain,
name recognition, hotel management expertise
Risks such as lower than expected demand, entry of new competitors, etc..
Case 5: Tulsa Hotel - OK or not OK?
Information sheet
On weekends Tulsa has 600 visitors/day and 50% stay in our hotel
Information sheet
69
(The rest stay with friends/family, or at small bed and breakfasts)
Group room rate is $120/night
Individual room rate is $150/night Individual room rate is $150/night
On weekends 75% of guests are individuals (i.e. not groups)
On weekdays 40% of guests are individuals
Weekend hotel occupancy rate is 60%
Weekday hotel occupancy rate is 75%
It costs the hotel $30/room/night for each occupied room It costs the hotel $30/room/night for each occupied room
Fixed costs for the hotel are $5750/night
Assume no growth, ignore time value of money
Case 5: Tulsa Hotel - OK or not OK?
Question 1
Profitability Question
Question 1
70
Should our client make the investment? (Do not remind interviewee that the client plans to invest $20M, or that they expect an
ROI of 20% over three years, this information was given up front and should be remembered)
Solution Method 2
Weekend da s
Solution Method 1
W k d d Weekend days:
600 town visitors * 50% stay at our hotel = 300weekend guests
Revenues from individuals: 300guests*75%*$150/room = $33,750
Revenues from groups: 300guests*25%*$120/room = $9,000
Variable costs: 300 guests*$30/occupied room/day = $9,000
Fixed costs=$5750/day
P f / k d d ($33750 $9 000) $9 000 $5750 $28 000
Weekend days:
600 town visitors * 50% stay at our hotel = 300weekend guests
Average weekend rate=0.75*$150+0.25*$120=$112.5+
$30=$142.5
Average weekend day profit /guest= $142.5-$30 = $112.50
Weekdays:
Profit/weekend day = ($33750 + $9,000) - $9,000 - $5750= $28,000
Weekdays:
Hotel is 60% occupied on weekends with 300 guests = 500 rooms in hotel
On weekdays, hotel is 75% occupied = 500*75% = 375 guests
Revenues from individuals: 375guests*40%*$150/room = $22,500
Revenues from groups: 375 guests*60%*$120/room = $27,000
Hotel is 60% occupied on weekends with 300 guests = 500 rooms
in hotel
On weekdays, hotel is 75% occupied = 500*75% = 375 guests
Average weekday rate=0.4*$150 + 0.6*$120 = $60+$72 =
$132
Average weekday profit / guest = $132-$30 = $102
Variable costs: 375 guests*$30/occupied room/day = $11,250
Fixed costs = $5750/day
Profit/weekday = ($22,500 + $27,000) - $11,250 $5750 = $32,500
Total profits:
/week = 2($28,000) + 5($32,500) = $218,500
/year = 50weeks*$218,500 = $10,925,000, round to $11M
Total profits:
/week = (300*$112.5*2) + (375*$102*5) (5750*7) =
$218,500
/year = 50weeks*$218,500 = $10,925,000, round to $11M
over 3 years (assuming no growth/TVM) = 33M
20% ROI on 20M is 4M, so require $12M over 3 years to meet /
over 3 years (assuming no growth/TVM) = 33M
20% ROI on 20M is 4M, so require $12M over 3 years to meet goal.
$33M>$12M, so invest!
, q y
goal.
$33M>$12M, so invest!
Case 5: Tulsa Hotel - OK or not OK?
Question 2 Question 2
71
Average Rate Question
Now instruct the interviewee to disregard the numbers given in question 1 and use only the information given in the following question:
Suppose that on each weekend day, 100 rooms are occupied at a group rate of $100, and 300 individual rooms are occupied at a rate
of $150 On each weekday 200 rooms are occupied at the group rate and 200 at the individual rate There are 500 rooms in the of $150. On each weekday, 200 rooms are occupied at the group rate, and 200 at the individual rate. There are 500 rooms in the
hotel. It costs the hotel $30/room/night for each occupied room.
What is the average revenue per customer per day for any day of the week? Round your answer to the nearest 10 dollars (e.g., if the
room rate is $147, round your answer to $150)
Suggested Solution
Average weekend day: (100*$100 + 300*$150)/(100+300) = ($10,000+ $45,000)/400 = $55,000/400 = $137.50
Average weekday: (200*$100) + (200*$150) /(200+200) = ($20,000 + $30,000)/400 = $50,000/400 = $125.00
Overall average rate: (2*$137.5 + 5*$125)/7 = ($275+$625)/7 = $900/7 = $128.57 = $130 revenue/room/night
Case 5: Tulsa Hotel - OK or not OK?
Question 3
Strategy Question
Question 3
72
Now suppose that our client would like to increase revenues at the hotel. What would be some ways that they could accomplish this?
Assume that costs are held constant.
Suggested responses
Th l i b i id i P h i i id id ibl The goal is to brainstorm ideas to increase revenues. Push interviewee to provide as many ideas as possible.
Answers might include:
Increasing room price, perhaps positioning hotel as a luxury destination
Partnering with a local convention center to attract large groups of guests, or building their own conference center
Accommodating wedding receptions or other large social gatherings
Conducting an advertising campaign- with a travel agency, online, on TV, etc. Conducting an advertising campaign with a travel agency, online, on TV, etc.
Expanding the hotel to accommodate more guests
Opening a restaurant in the hotel, or adding additional dining options if interviewee assumed there was already a restaurant
Breakeven Question Breakeven Question
In order to increase profits, your client is considering launching a three
year advertising campaign. The campaign will cost $1.5M. Use
information from question 2 in your calculations. Do not use any
information from question1. Ignore fixed costs.
H ddi i l ill d h h l f
$1.5M over 3 years = $500,000 per year spent on the campaign
From question 2a, the average revenue/room/night = $130.
Variable cost/room/night = $30
Profit/room/night = $100
$500,000/$100 = 5,000 additional guests/year
How many additional guests will need to stay at the hotel for our
client to break even?
Should they launch the campaign?
$ , /$ , g /y
5,000/350 = about 15 additional guests per night
Since the hotel occupancy is 400 on both weekends and weekdays,
and the hotel has 500 rooms, this increase seems reasonable
Case 5: Tulsa Hotel - OK or not OK?
Recommendation
Our client should acquire the hotel because its projected profits exceed the expected ROI by
Recommendation
73
Our client should acquire the hotel because its projected profits exceed the expected ROI by
$21M.
However, if the $20M investment could be used for another project with an even higher ROI, the
other project should be prioritized ahead of this one. ( Bonus answer!)
Our client should also launch the advertising campaign because the required additional 15 guests
per night to breakeven seems reasonable. Some other options to increase revenues might include
Recommendation
p g p g
partnering with a conference center or contracting with a travel agent to attract additional guests.
Some potential risks include:
Risks
National or global economic downturn could reduce business travel and tourism in general
A new unfavorable local economic environment in Tulsa could lead to businesses leaving the
area and reducing business/visitor traffic (e.g. higher local taxes on businesses)
A competitor could build a large hotel in Tulsa
Government could impose new taxes on hotel profits, reducing projected ROI
Case 6: The Coffee Grind
Introduction Introduction
P bl t t t ti
74
Problem statement narrative
The CEO of a major client has requested a short-term study examining a small part of the clients product portfolio. The company has a
small division that manufactures automatic drip coffeemakers for the US and Canadian market. The division has been steadily producing
coffeemakers for 20 years, and has made few changes to the business over its history. The client has always enjoyed healthy margins for
the coffeemaker division, and annual volumes have been steady. Recently, however, the coffeemaker division's profits have been declining.
Th CEO d d h i i Wh b d i i h ld l fi h CEO i ? The CEO wants to understand what is going on. What broader insights would you want to explore first to answer the CEOs question?
Overview for the interviewer
Although this looks and feels like a profitability case (which it
Information to be provided (if asked)
Regarding changes in fixed or variable costs the production lines Although this looks and feels like a profitability case (which it
ultimately is), the point here is to push the interviewee to develop
a framework beyond the standard profitability setup.
Additionally, the case is meant to train the interviewee to listen to
the question being poised: the interviewer is asking for broader
insights, not basic profitability analysis.
Regarding changes in fixed or variable costs: the production lines
and facilities are mature, the business has been steady, overall
production is rather efficient given the advantages of a long-term
steady state. No major changes to fixed or variable cost inputs
have occurred recently.
g , p y y
If the interviewee tries to go down the typical profit = price x
volume fixed + variable costs, push him or her a little harder to
think bigger picture. This case was done at the partner level, and
thus involves a little more ambiguity.
Production: All production occurs at a facility in Michigan. The
plant is operating at about 90-95% capacity.
Volume: Relatively constant.
Product Mix: The division produces 4-cup, 10-cup, and 12-cup
coffeemakers. The overall mix between these categories has been
fairly consistent.
Case 6: The Coffee Grind
Potential Frameworks Potential Frameworks
C did t ti i
75
Market
How are competitors performing?
Have new competitors entered?
Candidate may propose action in:
Customer
Are customer preferences changing?
Has product mix changed?
Channel
How do we reach our customers?
Has distribution changed? p
Have new substitutes emerged?
Are we missing new technological
developments?
Where are our prices relative to our
competitors?
p g
Are customers more or less price sensitive
than before?
Have customers become more
concentrated?
Are customers shopping in new channels?
g
Are retail outlets changing?
How are sales prices established?
Are channels consolidating?
Market
There have been some new entrants,
Customer
Volumes by coffeemaker size have been
Channel
Channel is the real issue. When the
primarily for very low priced
coffeemakers. The clients coffeemakers
are mid-price range and there are
several other competitors at this price
point. New technology and substitutes are
minimal Try to not let the candidate go
relatively steady, indicating that customer
preferences have not undergone dramatic
changes. Again, try not to let the
candidate go too far down this path.
candidate reaches this area, present them
with exhibit 1.
minimal. Try to not let the candidate go
too far down this area, the real issues are
in distribution.
Case 6: The Coffee Grind
Exhibit 1 Exhibit 1
N b f ff k S ld (i th d f it ) b R t il C t
76
Number of coffeemakers Sold (in thousands of units) by Retailer Category
2007 2006 2005 2004 2003
N ti l Ch i 4 10 12 T t l 4 10 12 T t l 4 10 12 T t l T t l T t l T t l T t l T t l
2010 2009 2008
NationalChains 4cup 10cup 12cup Total 4cup 10cup 12cup Total 4cup 10cup 12cup Total Total Total Total Total Total
BestBuy 10 12 12 34 9 12 12 33 9 12 12 33 33 32 32 31 30
Target 29 38 17 85 28 38 17 83 28 38 17 84 84 82 80 78 79
Walgreens 1 1 1 4 1 2 2 4 1 2 2 5 5 5 5 5 5
Sears 1 6 7 14 1 6 7 14 1 6 7 14 15 15 16 18 36
OfficeMax 6 10 15 6 10 16 6 10 16 17 17 18 19 20
Kohl's 1 3 2 6 1 3 2 6 1 3 2 7 7 7 7 7 8
Bed,Bath,&Beyond 8 8 7 24 9 9 8 25 10 9 8 27 29 30 32 33 34
Costco 15 16 19 50 17 16 19 52 17 17 21 56 59 62 67 69 25
BJ's 12 14 47 73 11 13 42 66 10 12 38 60 57 52 48 44 20
Walmart 41 76 71 188 34 65 68 167 28 54 60 142 125 110 93 83 99
TotalNational 119 179 194 492 111 168 187 466 107 158 178 443 429 414 398 388 357
Memo:PercentofSales 15% 23% 25% 63% 15% 22% 25% 61% 14% 20% 23% 57% 52% 52% 50% 46% 46%
NonNationalRetailers 4cup 10cup 12cup Total 4cup 10cup 12cup Total 4cup 10cup 12cup Total Total Total Total Total Total
Grocery 19 25 36 80 23 30 37 90 26 32 39 97 116 109 110 120 104
MediumRetailers 36 24 25 85 45 25 20 90 45 31 33 108 101 109 120 114 102
SmallerRetailers 38 21 15 74 10 24 19 53 16 25 20 61 100 91 95 112 106
Other 10 20 21 51 12 24 25 61 12 29 29 70 76 70 75 104 101
TotalOther 103 90 97 290 89 103 101 293 99 117 120 336 393 379 400 450 413
M P t f S l 13% 12% 12% 37% 12% 14% 13% 39% 13% 15% 15% 43% 48% 48% 50% 54% 54% Memo:PercentofSales 13% 12% 12% 37% 12% 14% 13% 39% 13% 15% 15% 43% 48% 48% 50% 54% 54%
TotalSales 222 269 291 782 200 272 288 760 206 275 298 779 822 793 798 838 770
Memo:PercentofSales 28% 34% 37% 100% 26% 36% 38% 100% 26% 35% 38% 100% 100% 100% 100% 100% 100%
Case 6: The Coffee Grind
Questions for Exhibit 1 Questions for Exhibit 1
Q ti f E hibit 1
77
Questions for Exhibit 1
Opening: We were able to get some quick shelf data on coffeemaker sales by channel.
Question 1: What conclusions can you make from this data?
- The candidate should identify that National chains increasingly make up a greater share of the clients sales
B i if h h il W l M b 25% f h i ff k - Bonus points if they note that one retailer, Wal-Mart, buys 25% of their coffeemakers
Question 2: What are implications for this shift towards National retailers?
- Larger chains have more bargaining power, and are putting more pressure on the division to provide discounts on its products based
on volume, which is squeezing the companys margins.
Math Test
What percent of the market do you think the client has?
- The candidate needs to start by estimating the number of coffeemakers sold in the US and Canada annually:
- Any logical approach is acceptable. A recommended approach is to start with the population of households in the US and
Canada (there are approximately 100k households in the US, 10k in Canada), estimate the percent that have electric
coffeemakers (its about 65%), and that coffeemakers are replaced about every 5-10 years (can use 7 as an average). Give
bonus points if candidate considers other places with coffeemakers (offices, hotels, etc..).
- In the end, the candidate should have an estimate in the range of 10 15 million coffeemakers sold annually in the US and
Canada.
- Therefore, the client has about a 5-8% market share, and is a relatively small player, so the company has little bargaining
leverage with retailers.
Case 6: The Coffee Grind
Follow up Questions Follow-up Questions
F ll Q ti
78
Follow-up Questions
Question: During a brief meeting with the CEO, you share your early insight that national retailers are squeezing the companys margins.
He states that the dishwashers and cooking appliances division recently launched a website to sell its products. He wants to know if a
website would also work for coffeemakers. Do you think it will work?
A A h i bl if h did l i ll d hi h Answer: Any answer here is acceptable if the candidate can create a logically structured argument to support his or her answer,
although the candidate should at a minimum identify a couple of risks. Additionally, the candidate should want to know more about the
possible profitability of a website.
Possible reasons for a website (sample):
Profitability: allows client to capture the margin that presently goes to the retailer Profitability: allows client to capture the margin that presently goes to the retailer
Channel: reduces clients dependency on national retailers, could add additional volume
Company: the company already has an existing website for dishwashers and cooking appliances, so capabilities may exist
Possible reasons against a website (sample):
Profitability: need to understand economics (how expensive are the fixed costs?)
Customer: coffeemakers are more of an immediate purchase decision than dishwashers or ovens, customers may not want to wait for
shipping times for online purchases
Competition: may face increased competition online from websites such as [Link]
Channel: customers may already be purchasing our coffeemakers from our retailers on their websites, risk of retailers retaliating by
pulling our products from their shelves
C th ff k di i i t h th ti kill d d f li k ti l hi i t Company: the coffeemaker division may not have the expertise or skills needed for online marketing, sales, shipping, etc..
Case 6: The Coffee Grind
Math Question #2
M th Q ti #2
Math Question #2
79
Math Question #2
Question: Given the following information weve collected, what percent of the companys sales would the client need to achieve for the
website to break-even?
The interviewer should tell the candidate the following:
A l b i $500k - Annual website costs: $500k
- Additional marketing costs: $300k
- Average retail price of coffee maker: $60
- An additional $4 per coffee maker will be required for handling sales through the website
- The customer pays for the cost of the shipping
The interviewer should only provide the following when asked:
- The margin on the coffee makers is 40%
Answer
With a margin of 40%, the cost of producing the coffee maker is $36 ( 40% = ($60 COGS)/$60)
Therefore the profit per coffee maker is $24 before the $4 extra handling cost, and $20 after the extra cost is included.
The total cost of the website is $800k
Break-even volume = $800,000/$20 = 40,000 coffee makers
The client sells approximately 800k coffee makers annually, so about 5% of the clients volume
Case 6: The Coffee Grind
Conclusion and Wrap up Conclusion and Wrap-up
C l i
80
Conclusion
Question: The CEO really appreciates all the work youve done so far on identifying the issue with national retailers squeezing margins
and the breakeven analysis on the website. He would also like your insight on other possible ideas. What other solutions might you
suggest?
AAnswer:
Anything here is acceptable as long as its reasonable; the idea is to push the candidates creativity. After the candidate has provided a
few options, continue to ask what else until the candidate cannot produce any more ideas (McKinsey often uses this type of questioning
during its first and second round interviews).
Sample answers: Sample answers:
- Investigate selling the division to another coffeemaker
- Move production overseas to increase margins
- Investigate purchasing other coffeemaker manufacturers to gain leverage with retailers
- Consider exclusive retailing rights to one distributor
- Increase marketing efforts to create a pull-strategy from customers to increase leverage with suppliers
- Seek other channels (Starbucks, hotel chains, etc..)
- Consider international expansion
- Increase focus and attention on small to medium retailers
- Consider raising prices to offset margin loss (but with a further investigation of customer price sensitivity)
Fi l ti A k th did t t th Final question: Ask the candidate to wrap up the case.
Recommendation: The candidate should either recommend the website or another solution identified above.
Risks: In his or her conclusion, the candidate should mention risks such as competition from other websites, retaliation by retailers, risk of
moving production overseas, etc..
Case 7: FoodCo
Introduction Introduction
P bl t t t ti
81
Problem statement narrative
Our client is a private equity firm which has invested in FoodCo, a family-owned $19M branded frozen ethnic foods manufacturer
operating out of the Northeast. They would like our help to determine how FoodCo can triple their profitability over the next 2 years.
Overview for interviewer
The interviewee may ask some clarifying upfront questions related to the goal of tripling profitability, and then they should develop a
framework of potential areas to explore. This will likely be divided into areas such as the external Market, Revenues, and Costs.
Additional information related to the clients goal
This information may be provided upon request:
The $19M figure is revenues
Profit is currently $3M (so the target is $3M * 3 = $9M) y $ ( g $ $ )
Case 7: FoodCo
Profitability enhancement Profitability enhancement
B i t i id f i i P fit bilit
82
Brainstorming ideas for increasing Profitability
The candidate should present a framework to tackle the problem.
Market: Assume that there are no major changes.
RRevenues
Price: we dont have any flexibility; benchmarking has determined that the ideal price is being charged to customers.
Revenue Streams: For the purposes of this case assume that we produce ethnic food sold in cups e.g. a cup of noodles. This is the sole
revenue generating stream.
Quantity
Increasing this and expanding is an option but what are the implications? Increasing this and expanding is an option, but what are the implications?
We cant build more operations centers. We know that there is a lot of unmet demand but we are extremely capital
constrained and cant look to increase production by opening a new plant.
Other ideas
Expanding nationally through retail and food service channels
Expanding into new products, customers, and channels organically or through acquisitions
Point the interviewee towards efficiency gains through cutting costs
Costs
Have the interviewee brainstorm a list. These could include food materials, storage (including refrigeration), logistics, labor, and
packing materials
O th did t ith li i li t f t th t t f d th t j it f t ld b t i d i t Once the candidate comes up with a preliminary list of costs, say that our team found that a majority of costs could be categorized into
four areas: Labor (50%), Equipment (25%), Administrative (20%) and Other (5%)
Ask them which area they would target to find savings. This should point to labor as is this more controllable and an unusually
large cost driver for this type of business. Show the following chart.
Case 7: FoodCo
Profitability enhancement Profitability enhancement
83
Prompt: What are some ideas to improve efficiency?
The key should be to reduce repair time, which is controllable. Ask for further ideas of how to do this.
Indicate that through training and reconfiguration of equipment we can reduce repair time to 5% if we invest $500,000. Should we do
this?
Answer:
Labor Cost Base is $19 - $3 = $16. $16 * 50% = $8M
Savings from reduction = 22% - 5% = 17%. 17% * $8M = $1.36M
So yes, we should invest.
Case 7: FoodCo
Follow up question Follow up question
B
84
Bonus
You may want to push the candidate here if they dont realize this -- efficiency savings translate into higher production volumes. Ask them
to calculate what this increase would be and how it translates to revenues. For simplicity assume that all savings (in percentage terms)
translate directly to the same % increase in volume (e.g.17%).
Revenue Growth = $19M * 1.17 = $22.23M
Wrap-up
Ask for the overall recommendation. Sample:
B d i i i h h i i d i fi i b h d d b 17% Af h By reducing repair time through training and equipment reconfiguration, we can both reduce costs and grow revenues by 17%. After the
$500K investment, this means a total of roughly $7M profitability. This is not enough to reach the two year target, so we would have to
look at other sources/options for growth and expansion.
Case 8: Candy Manufacturing
Introduction Introduction
P bl St t t N ti
85
Problem Statement Narrative
Your client is a candy manufacturing company that has been facing declining profit margins. The CEO has reached out to
us to figure out why and what they should do about it.
Overview for interviewer
This is a relatively straight-forward case, which includes the following: discussing profitability drivers, calculating profitability of the
client versus competitors, discussing opportunities to increase revenues and decrease costs, and a conclusion. If they ask as a follow-up
to the question to the problem statement whether declining profitability is an industry specific issue or a company-specific issue, to the question to the problem statement whether declining profitability is an industry specific issue or a company specific issue,
highlight that the company has been facing issues.
Case 8: Candy Manufacturing
Potential Issue Tree and Approach to Solving the Case Potential Issue Tree and Approach to Solving the Case
86
Industry drivers of profitability:
Market size and growth,
Customer trends
Solution
Competitors
Profitability of the company:
Revenues (price and volume),
Costs (fixed and variable),
h k f d b d Think of revenue and cost by customer segment or product type
Profitability of competitors:
Revenues (price and volume)
Costs (fixed and variable)
Think of revenue and cost by customer segment or product type Think of revenue and cost by customer segment or product type
Case 8: Candy Manufacturing
Follow up and Guidance to the Interviewer Follow-up and Guidance to the Interviewer
87
Industry drivers of profitability
Q: What do you think are the general
trends in the industry?
Answer guidelines:
Profitability of the company
Q: What do you think are the main drivers of
revenues in this industry?
Answer guidelines: Again test for general
Profitability of competitors
Q: We will look into costs in a moment.
However, we have an interim meeting
with the client and he has asked us a very
specific question. Our clients profit
swe gu de es:
General brainstorming to test business
intuition of the interviewer, i.e., candy
manufacturer probably steadily growing at
inflation, if anything probably declining due
to more health conscious players;
brainstorming skills and business intuition
Provide details about our clients revenues:
Pricing has been relatively steady
and so has been sales
Our client plays in a more niche
part of the candy segment that
margins are 10%. He believes the
competitors profit margins are higher and
wants us to calculate the difference in
profit margins. How would you go about
doing that? (Transition to the competitor
profitability section)
There are a lot of big players like Hershey
in this space so it is likely a highly
competitive market
At the end of the discussion (if they havent
asked already), clarify that the industry
itself has sustained higher profit margins
they have not been impacted by
the rise in the more health-conscious
consumer as it is particularly liked
by children
Our client actually commands a
price premium, most of our
Answer guidelines:
On the revenues side you have already
mentioned that our client commands a price
premium, as competitors prices are 10%
lower. If the interviewee asks again, give it
itself has sustained higher profit margins
than our client.
p p ,
competitors have prices that our
10% lower than our client.
Q: (When the interviewee moves onto the cost
side, ask:) What do you think are the main
drivers of cost?
g , g
to them.
Costs side: Competitors costs are 20%
lower
Calculate the profit margins of competitors
relative to our client
Answer guidelines: Again test for general
brainstorming skills and business intuition.
Keep in mind amount of time left and
transition to next question appropriately.
Case 8: Candy Manufacturing
Basic calculation Basic calculation
O ll h d h t t & l ti
88
Overall approach, good shortcuts & solution
Question 1: Compare profit margins of client versus competition
Profitability of our client:
Assume our clients price is $1.00.
Hence, our clients profitability is: $1.00 times 0.10 (10%)= $0.10.
This means that our clients cost is: $0.90
Profitability of our competitor:
Competitors price is 10% lower than our client: $1.00 * 0.90 = $0.90.
Competitors cost is 20% lower than our client $0 90 * 0 80= $0 72 Competitors cost is 20% lower than our client: $0.90 * 0.80= $0.72
Competitors profit is: $0.90 $0.72= $0.18
Competitors profit margin: $0.18/ $0.90= 20%
Instructions for interviewer:
If your interviewee is struggling, propose the trick to assume the price is $1.00. This will make the math simpler.
The answer should be: the competitors profit margin is 20%, 2X higher than our client
Case 8: Candy Manufacturing
Identifying issue Identifying issue
O ll h d h t t & l ti
89
Overall approach, good shortcuts & solution
Question 2: What do you think the main reason is that competitors are more profitable?
It is a difference in costs as their revenues are lower.
Follow up question: interviewer should move towards understanding the major cost drivers that could be driving the difference.
I f Instructions for interviewer:
First ask the interviewee, what they think the main reason is?
It is a difference in costs as their revenues are lower.
However, guide them to this if they do not initially say this.
Follow-up question to interviewee: What would you want to know to understand the difference between competition and our clients costs?
Guide the conversation to say they would want to understand the major cost drivers that could be driving the difference.
Once the conversation comes to the point show them the Exhibit on the next page and ask them: What do you see based on
this graph:
Case 8: Candy Manufacturing
Exhibit Exhibit
90
Breakdown of costs for the client: Instructions for interviewer:
Key things the interviewer should notice from the graph:
Raw materials are the highest percent of costs; this could be
l h d h d ff b h l d
R t i l 70%
70%
80%
90%
100%
primarily what is driving the difference between the client and its
competitors; also, this would be where there is most leverage for
our client to reduce costs.
Equipment is the next highest; unless there are significant
differences between the client and its competitors equipment this
Rawmateri al s,70%
30%
40%
50%
60%
differences between the client and its competitors equipment this
wont drive down our clients costs.
Labor costs are the smallest part of our clients cost; even if the
client could reduce it impact would be limited
Laborcosts,10%
Equi pment,20%
0%
10%
20%
30%
Cl i entcosts
Hence, raw materials would be where the client has the biggest
opportunity to reduce costs and increase profit margins vis--vis
competition (Make sure the interview reaches to this point either
by themselves or by guiding them)
Case 8: Candy Manufacturing
Analyzing cause Analyzing cause
O ll h d h t t & l ti
91
Overall approach, good shortcuts & solution
Question: What could be the reasons why raw material costs could be higher for our client than its competition?
Instructions for interviewer:
Pose this as a general brainstorming question. Continue the
Provide information if asked
Competitors are slightly larger than our client Pose this as a general brainstorming question. Continue the
discussion until these key points are addressed:
Supplier bargaining power: Function of supplier concentration
relevant to number of customers
Competitors are slightly larger than our client
There are a lot of supplier options for a given raw material
Given our client is the result of a lot of mergers, they have a lot
of local suppliers for the same raw materials
Volume purchased per given supplier: Function of total costs and
the number of aggregate suppliers client uses for a particular
product
Interviewee should dive further into these points to extract the
information on the right hand side Interviewer ask for information on the right hand side. Interviewer ask for
interviewees perspective based on the additional information
Case 8: Candy Manufacturing
Bonus question: Financial analysis Bonus question: Financial analysis
O ll h d h t t & l ti
92
Overall approach, good shortcuts & solution
Question: By approximately what percentage would raw materials cost have to be decreased to match our clients
competitors profit margins?
Our competitors profit margins are 20%. For our clients sales price of $1.00, that means that the new profits needs to be
$0.20 and hence, costs $0.80. Current costs are $0.90. So we need to reduce costs by $0.10.
Raw materials cost is 70% of total current costs. $0.90 * 0.70= $0.63. So, we need to reduce this by $0.10 so that would be
a $0.10/0.63= ~16% decrease.
A stand out candidate should say They would need to reduce raw materials costs by 16% which seems a reasonable target A stand-out candidate should say: They would need to reduce raw materials costs by 16%, which seems a reasonable target.
Case 9: [Link]
Introduction Introduction
93
P bl St t t ti
The last period financial figures just came out, and [Link] gross profit margin has decreased for two years in a row. The CEO has
hired you to recommend a solution.
Problem Statement narrative
Information to be provided upon request
[Link] is a online website similar to Netflix. Whats
unique about Chickflix is that it targets only women and carries
a majority of titles that could be described as chick flicks
Overview for interviewer
The unique feature about Chickflix is that its variable cost are not
a function of sales volume, but of other drivers (such as average
number of movies returned per month) j y
Clients sign up online, order online, receive the movie and mail
it back
More specifically, [Link] offers 3 subscription models (1,
p )
Interviewee should show understanding of the revenue and cost
structure, identify the increase in cost and recommend a course of
action
2 or 3 movies at a time) Case type: profitability
Case 9: [Link]
Potential Issue Tree & Approach Potential Issue Tree & Approach
94
Wh h fit i d d? H thi b d? Why has gross profit margin decreased? How can this be reversed?
Chi kfli R Chi kfli C
Is it a revenue issue, cost issue or both?
M k C i i
What caused it? Systemic / Chickflix specific?
Changes in key revenue
drivers:
Price
Subscription mix
Chickflix Revenues
Key cost drivers:
Fixed costs
Administrative
Variable costs:
Chickflix Cost
Changes in demand?
Market size
Demographics
Technology / new
Market
Changes in supply?
New competition
More rivalry
Less movies sold
Competition
Number of
customers
Distribution
DVD amortization
substitutes by studios
Follow-up and guidance Follow-up and guidance Follow-up and guidance Follow-up and guidance
1 movie at a time
subscription model
introduced 1.5 yrs ago
Growing # of customers
and revenues
Insignificant fixed costs
DVD amortization
considered variable
Distribution cost flat on a
per unit basis
No changes in overall
demand or in demand from
target audience (women)
No changes in customer
preferences
No other competitor in
Chickflix niche
Margins for competitors
like Netflix are not
decreasing
Unchanged prices Studios keep selling
Case 9: [Link]
Exhibit A Revenue growth and mix Exhibit A Revenue growth and mix
95
Subscription 1:
Revenues (M$) Subscription models
1 movie at a time
$9.99 / month
Subscription 2:
2 movies at a time
$14.99 / month
Subscription 3:
3 movies at a time
$19.99 / month
Case 9: [Link]
Exhibit B Variable cost per unit Exhibit B Variable cost per unit
96
Distribution:
Primarily Mailing cost
Variable cost per unit ($) Components of variable cost
Primarily Mailing cost
Content amortization
Straight line amortization of movies (30 rentals =
useful life)
Considered variable because DVD library is a
function of rental volume function of rental volume
Allowances
Allowance for movies lost in mail
Other
DVD cases repair, etc..
Case 9: [Link]
Interviewer guide Interviewer guide
97
Interviewee should identify takeaways from Exhibits A
& B
Interviewer should then request analysis
Evaluate gross profit margin for each Subscription type
Calculate price required for subscription 1 and 2 to
Revenues are growing for all subscriptions
Variable costs are not a function of subscription volume,
Calculate price required for subscription 1 and 2 to
provide a gross profit margin equal to Subscription 3s
Data for interviewee:
Provide Exhibit C
but of number of movies returned per month
Therefore, the 2 key gross profit drivers are:
Subscription mix
Average rentals per month
Case 9: [Link]
Exhibit C Revenue and rentals data Exhibit C Revenue and rentals data
98
Revenues # Customers
S1 S2 S3 Total
2008 - $12M $8M $20M
S1 S2 S3 Total
2008 - 67K 33K 100K
2009 $5M $16M $10M $31M
2010 $13M $18M $11M $42M
2009 42K 89K 42K 172K
2010 108K 100K 46K 254K
Average rentals per customer per month
S1 S2 S3
2008 - 7.5 8.2
2009 5.6 7.3 8.1
2010 6 0 7 5 8 0 2010 6.0 7.5 8.0
Case 9: [Link]
Interviewer guide Calculating price Interviewer guide - Calculating price
99
Q2: Calculate gross profit margin for Subscription 3
(using 2010)
Q3: Calculate required profit margin for S1 & S2 /
Identify S1 is at a loss
Subscription 1:
Average rentals per month
Revenue per month per customer
= $20 Average rentals per month
= 6 movies
Required subscription price:
(P-1.85*6)/P = 30% P=$15
or: P = $2.5*6 = $15
Subscription 2:
$20
Average rentals per month
= 8 movies
Revenue per rental
= $20/8=$2.5
Required subscription price:
P = $2.5*7.5 = $18.75
Bonus: identify that Chickflix is selling S1 at a loss:
Gross profit margin:
= ($10-$1.85*6)/$10 = -5%
Cost per rental
= $1.85
Gross Profit margin
= ($2.5 - $1.85) / $2.5 = 30%
Case 9: [Link]
Interviewer guide Interviewer guide
100
Interviewee should identify takeaways from price
calculation
Interviewer should then request analysis
Challenge interviewee to critically evaluate the clients
financial performance
Subscription 3 is more profitable than the other models
Subscription 2 is still profitable but Subscription 1 is not
Revenues have grown but:
Subscription 2 is less profitable than 3, and
Subscription 1 is selling at a loss
Chickflix is subsidizing its own growth (selling at a
loss)
Subscription 2 is still profitable, but Subscription 1 is not
But, increasing prices may lead to a drop in customers
loss)
What recommendation would you give the client to
improve?
Case 9: [Link]
Brainstorming solutions Brainstorming solutions
101
Re-evaluate the subscription models
add maximum monthly returns
Restructure S1 into a profitable model
Healthy Revenue Growth
Negotiate volume discounts to decrease distribution cost
E S2 & S3 t t il th i
Cost Rationalization
Restructure S1 into a profitable model
Test customers price elasticity between S1, S2 and S3. Use
findings to price each subscription correctly
Targeted advertising to increase customer base
E d i t th i h & hild i
Encourage S2 & S3 customers to mail more than one movie
together
Promote rentals of older movies (with a lower content
amortization cost)
N i i h i di d DVD
Expand into other niches: men & children movies
Negotiate with movie studios to reduce DVD cost
Case 9: [Link]
Final recommendation Final recommendation
102
R d ti
Chickflix has grown revenues by adding customers in S1 & S2. It has subsidized S1 with proceeds
from S2 & S3 as S1 earning negative margins.
Chi kfli d S1 i fi bili
Recommendation
Chickflix needs to restructure S1 to return it to profitability.
Adjusting price is an alternative. Chickflix should also rationalize cost and start by focusing on the 2
main cost components: distribution cost and content amortization.
Moving forward, Chickflix should evaluate entering other market niches.
Risks
Adjusting prices could lead to cannibalization with customers from S3 switching to S2 and those from
S2 to the newly restructured S1.
Chickflix needs to identify the premium offering that S2 and S3 have.
Chickflix should be cautious when restructuring S1, so that customers are not lost
Next Steps
Analyze customers price elasticity for different subscription types
Renegotiate contracts with distributors and movie studios
Case 10: Skedasky Farms
Introduction Introduction
Problem Statement Narrative
103
Skedasky Farms is involved in the process of making, selling, and distributing white wines. As of late, industry growth has stagnated. The
CEO wants to increase revenue, and has enlisted you to help. To start off, come up with ideas to help the CEO with his goal.
O f Overview for interviewer
This case is fairly open-ended, and will involve a lot of brainstorming on the part of the interviewee.
Keep the interviewer focused on ways to increase revenue. Costs are irrelevant for now (although good to keep in mind). Additionally,
dont let the interviewer get hung up on one idea. For example, if they suggest expanding to include red wines, thats good, and they
may mention a concern or two, but then have them move on to other ideas for increasing revenue.
Eventually, push them towards the next part of the case.
Information to be provided upon request
The interviewer can choose to provide some of this information upfront, or can wait for the interviewee to ask. This information is not
crucial to brainstorming, but could be useful in coming up with creative recommendations.
Skedasky grows all of their raw inputs (grapes)
Their farms are in California, with some processing facilities on-site, and another large facility located nearby.
Skedasky sells to wine distributors, and also sells directly to some stores in the state S edas y se s o w e d s bu o s, a d a so se s d ec y o so e s o es e s a e
They sell a variety of grades of wine, from cheaper boxed wine to premium bottles
The industry is very fragmented (the interviewee should be able to guess this), and Skedasky has a comparable domestic market
share to the other major winemakers in its area
Case 10: Skedasky Farms
Ideas for increasing revenue Ideas for increasing revenue
104
A good interviewee will structure their ideas and briefly mention pros/cons of each idea. A sample structure with ideas is show
below
Current revenue streams
Solution
Increase price
Examine price elasticity of demand
For each grade (boxed vs premium)
For each type buyer
For each type of wine (Cabernet vs Merlot)
Increase volume
Increase share of shelf space
Seek new distributors or stores
Increase international exposure
Rebrand the wine Rebrand the wine
New revenue streams
Wine tours, private tours and tastings for wealthy buyers
Release new brands or varieties of top selling wines
Expansion into new products
Red and sparkling wines
Spirits
Beer
Case 10: Skedasky Farms
Diversifying into beer Diversifying into beer
N P d t
105
New Product
Skedasky thinks they have a good case for begin making and selling beer.
Question 2a Question 2b Question 2a
What are some possible reasons this could be a good idea for
Skedasky?
There are many potential synergies, such as:
Leverage the brand name and distribution channels
Question 2b
How may they want to enter the Beer market and what are some
associated concerns?
Organically
Pros
Leverage the brand name and distribution channels
Economies of scale in SG&A and other expenses
Perhaps some of the equipment could be used for both products
Of course, there are many concerns/reasons this could be a bad
idea.
Morecontrol,nointegrationproblems
Cons
Willtaketimetobegin
Iftheylackexpertiseinbeermaking,couldbea
lengthytrialanderrorprocess
Acquisition q
Pros
Facilities/resourceswillbereadytogo
Leverage brandname oftarget
Cons
Integrationissues(e.g.,cultureclash)
Potentially expensive Potentiallyexpensive
Jointventure/Alliance
Arethereanyconcernsrelatedtofinancing?
ThisdependsonhowmuchSkedaskyiscurrentlylevered,and
whethertheyhavefreecashtoinvestinthisnewproject.
Case 10: Skedasky Farms
How about changing the price? How about changing the price?
106
Price effect on revenue
Suppose that for some more immediate impact on revenue, our client is considering changing the price of their mid-upper level
bottles of wine. Currently, the 10,000 bottles are sold per year for $20/each. Studies have determined that a 10% increase in the
price will result in a 10% decrease in volume, and a 10% decrease in price will result in a 5% increase in volume. Which course
S l
should the company take? (Let me know if you need any additional information)
Solution
Key to answering this is that the interviewee must ask for the profit margin. Margins are currently 50% (of $20). The calculations should
result in the numbers below, suggesting that a 10% price increase would be most favorable.
Currently 10% Price Increase 10% Price Decrease
P i 20 22 18 Price 20 22 18
Cost 10 10 10
Margin 10 12 8
Volume 10000 9000 10500
Profit 100000 108000 84000
An 8% increase in profit looks very attractive.
Case 10: Skedasky Farms
Sample Recommendation Sample Recommendation
P t
107
Prompt
You run into Mr. Skedasky in the elevator, and he wants to know where you are with your work.
We looked at several ideas to increase revenue, such as your suggestion to enter the beer market.
I believe that you can take advantage of a number of synergies with this move, and an acquisition
looks like the best way to enter, so more research must be done on potential targets. However,
many risks present themselves with this move, such as will the brand name carry over? Do
management capabilities carry over to the beer industry? Therefore, further analysis must be
done.
For an immediate increase in revenues and profits, you should increase the price of the mid-upper
range wines. Research shows that you can expect a profit increase of roughly 8% in that category.
Si il t di h ld b d t d th d t li
Recommendation
Similar studies should be conducted across other product lines.
Case 11: University Apartments
Introduction Introduction
P bl St t t N ti /Q ti 1
108
Problem Statement Narrative/Question 1
Your client is a real estate development corporation. It is looking to build an apartment complex on a vacant lot near a
leading university in Philadelphia. What are some areas that should be examined to decide, whether this is a good idea?
Overview for interviewer
This is a profitability case. Discussion should quickly turn to P=R-C and the various drivers of costs and revenues.
On the REVENUE side, price and volume (number of units built, % rented) should be considered, with some discussion about different price
and purchase scenarios i.e. how long would it take to sell all units, is there seasonality of occupancy?
On the COST side, fixed and variable costs should be discussed, such as land purchase, apartment construction, utilities, labor, insurance,
etc.
Additional factors:
What is the current MARKET for land and apartments, including zoning for the vacant lot?
How do the future tenants WTP (willingness to pay) depend on the quality of apartment units built?
RISKS such as lower than expected demand for units, drop in real estate value
Case 11: University Apartments
Question 2 Question 2
Breakeven Question
109
Assuming an average apartment size, how much must our client charge in rent per apartment per month to break even within
three years? See following information sheet.
Solution
Costs
Provide information if asked
Detailed explanations on following page Costs:
Land: (200*200)*100=4M
Construction: .80*40,000=32,000*3*50=4.8M
Utilities: 5,000*12=60,000*3=180,000
Insurance: 2,500*12=30,000*3=90,000
Labor: 3*40,000=120,000*3=360,000
Detailed explanations on following page:
Land:
40,000 sq ft. (200*200)
$100 per sq ft.
Construction
B ildi k 80% f l d
abo : 3 0,000 0,000 3 360,000
Total Costs: 4M+4.8M+180,000+90,000+360,000=9.43M
Revenues:
Total apartment Sq. Ft.:
.80*(200*200)=32,000*3=96,000*.80=76,800
Building takes up 80% of land space
Construction cost is $50 per sq. ft. per month
Building is 3 stories high
Labor is $40,000 per year; 3 staff required
Operating costs:
$ Total apartment units: 128,000/512=150 units
Total units occupied: 150*.80=120 units
Breakeven:
9.43M/(120*3)=26,194/12=$1310 per unit per month
Insurance is $2,500 per month per floor
Utilities is 5,000 per month per floor
Total apartment Sq. Ft.:
80% of land space is building
5 stories
20% is common space
512 sq ft. per unit
Vacancy rate is 20%
Case 11: University Apartments
Information Sheet Information Sheet
The vacant lot is square, measuring 200 ft. on one side and costs $100 per
f
110
sq. ft.
Building regulations specify that no more than 80% of the lot can be covered
with buildings, given the need for grass, sidewalks, etc.., and construction costs
are $50 per sq ft are $50 per sq. ft.
The vacant lot is zoned for buildings up to 3 stories tall; no apartments are
allowed in the basement.
Utilities cost $5,000 per month, insurance costs $2,500 per month, and labor Utilities cost $5,000 per month, insurance costs $2,500 per month, and labor
costs $40,000 per full-time employee per year.
The highest paying customers prefer apartment buildings that have at least
20% of the apartment building dedicated to amenities, i.e. non-apartment
unit use.
Preliminary market research estimates indicate a 80% occupancy rate per
year during the first 3 years; additionally, apartments that are 512 sq. ft. in
size would provide the most profit size would provide the most profit.
Full-time employees include 1 custodian, 1 rental office staff, 1 grounds staff.
Case 11: University Apartments
Question 3 Question 3
111
Strategy Question
Considering that our client can only build on 80% of the lot and can build apartments on 80% of the building itself, what are some
other ways that they can earn revenue on the site or otherwise increase tenants willingness to pay?
Suggested Solution
Earn extra revenue:
Store
Restaurant
Dry cleaners
Other small businesses
Increase customers WTP:
Gym
Garage
Laundry
Pet zone
Guest services (concierge, etc..)
Case 12: Vidi-Games
Introduction
B k d
Introduction
112
Background
Our client is Vidi-Games, a manufacturer and retailer of video games. They are planning to enter the Brazilian market. One of the factors
that has prevented them from entering that market is that there is a tariff for importing products that can be produced in the country of
50% of production costs. However, the government is planning to lower it down to 15% in the next years, decreasing it 5% every year
(from 50% to 45%, and so on).
Questions
What variables should they consider? What is the market size? Should they enter the market? And if so, should they export the product
from China to Brazil or produce it in Brazil? from China to Brazil or produce it in Brazil?
Interviewer guide
First, structure the problem. It is a profitability problem. Some things that should be mentioned, on top of industry analysis and profitability , p p y p g , p y y p y
stuff, are repatriation costs, regulations, currency, inflation, culture issues, etc..
Case 12: Vidi-Games
Market Size Calculation
I f ti th t th did t d M k t Si C l l ti
Market Size Calculation
113
Information that the candidate needs:
The interviewee should try to estimate these numbers, but no real
prior knowledge is required. Because it is a market very different
from the US, these numbers should be provided after the person
tries to estimate them.
Market Size Calculations
Total number of video-games that can be expected to be sold
per year
= (total number of households that will purchase video games)
x (number of video games per year per average household)
Brazil population = 200M
Younger population under 35 = 50% - It can be assumed that
these are the only ones interested in video-games
Poor population = 60% (hence, affluent people who can afford
this 40%)
= [(total population x % of young people (that use
video-games) x % of affluent people) (average
people per household)] x (number of video games per
year per average household)
Total number of video games that can be expected to be sold this, 40%)
Average number of people per household = 4
Penetration of video games within the affluent and young segment
in Brazil = 75%
Games per year per average household = 3
Total number of video-games that can be expected to be sold
per year = ((200M x 50% x 40%) 4) x 3 = 22.5M of video
games
Case 12: Vidi-Games
Profitability
I f ti th t th did t d I t i C l i
Profitability
114
P d ti i Chi $14
Information that the candidate needs:
Usual retail price = $50
Volume calculated in market size = 22.5M video-games per year.
Interim Conclusion
Under the current situation it is not a
profitable business, and therefore the
company should not go.
ProductioninChina $14
ProductioninBrazil $21
Distribution $6
Labor $8
Overhead $6
Other costs $10 4 Othercosts $10.4
Information that the candidate needs:
Profit = Revenue - Costs
$ $ Total revenue = Volume x Price = 22.5M video games x $50 per video game = $1.125B
For costs, two scenarios have to be considered: producing in Brazil or in China.
Total costs of producing in Brazil = $21 + $6 + $8 + $6 + $10.4 = 51.4
Because of 50% tariff, the production cost of producing in Brazil or in China is the same.
Total cost of producing in China = ($14 x (1.5)) + $6 + $8 + $6 + $10.4 = 51.4
Per unit profit = $50 - $51.4 = $ -1.4
Because of 50% tariff, the
production cost of producing in
Brazil or in China is the same.
Case 12: Vidi-Games
Lower Tariff Lower Tariff
115
BUT the tariff is going to decrease, is it going to make sense for them to enter? (Ignore inflation and other factors).
Break-even point -> Revenues = Costs
Costs that do not depend on tariff
Tariff % at which the company breaks-even p y
$50 = $30.4 + ($14 x (1+ X )) -> X=0.35=35%
Costs that do not
depend on tariff
Tariff % at which the
company breaks-even
Since the government will lower the tariff 5% every year, in 2 years the company would break even, in the following period they can
enter the market (3 years from now).
Profit (per unit) = $50 ($18.9 + 30.4) = $0.7 per video-game.
Total profit = $0.7 per video-game * 22.5M video-games per year = $15.75M
p p y
Case 12: Vidi-Games
Additional Calculation
Y l fit th t iff h th i i (15%)
Additional Calculation
116
Yearly profit once the tariff reaches the minimum (15%)
Profit when the tariff reaches its lowest (and from then on) = $50 ($16.1 + $30.4) = $3.5 per video-game.
Total profit = $3.5 per video-game * 22.5M video-games per year = $78.75M
If the investment of going into Brazil is $100M, when will they recoup their investment?
First year (3 years from now) = $15.75M
Second year = $31.5M y
Third year = $47.25M
Total of first three years = $94.5M
Very soon, beginning the fourth year, the investment would be recovered (3+ years is a good answer).
Exact number (assuming you sell the same number of video games every day of the year, 360 days) =3 years and 31.43 days.
Calculations to get the exact number:
$100M $94 5M $5 5M $100M-$94.5M=$5.5M
If we sell the same amount of video games every day, then we sell 22.5M360 = 62,500 video-games per day. And because this is the
fourth year of our investment, the tariff is 20%, therefore, the profit per unit is $2.8.
Hence, we make 62,500 video-games per day x $2.8 per video game = $175,000 per day.
$5.5M still to break-even $175,000 per day = 31.43 days.
Case 12: Vidi-Games
Brainstorm and Conclusion
Wh t ld Vidi G d if th d d t t ? (B i t i t th j t id )
Brainstorm and Conclusion
117
What could Vidi-Games do if they needed to enter now? (Brainstorming part, these are just some ideas)
Revenue side:
Analyze how viable is an increase in price.
(Because the profit per unit is negative, increasing volume does not solve the problem)
Cost side:
N h l b Negotiating cheaper labor.
Moving manufacturing sites to lower cost areas.
Optimizing distribution network.
To produce in Brazil: See possibility of reducing production costs.
Other ideas:
Entering in partnership with a Brazilian partner Entering in partnership with a Brazilian partner.
Acquiring a competitor in Brazil.
Selling video-games to retailers there (hence saving in distribution, labor, overhead, etc.., but selling at a reduced wholesale price).
Whatdoyouthinkofthecurrentscenario?IhavetocallVidiGamesinacoupleofminutes,what
isyourrecommendation?
Case 13: Big School Bus Company
Introduction Introduction
Problem statement narrative
118
You have been approached by a private equity firm trying to decide whether or not to acquire Big School Bus Company. Big School Bus
Company manufacturers, owns, and operates school buses across the United States. The private equity firm wants you to help them
estimate the size of the market for school buses and to identify ways in which you might able to extract more value from Big School Bus
Company, if acquired.
Overview for the interviewer
Let the candidate begin by performing a market size estimate. Candidates should define the target market, determine how large the
market currently is (volume), and identify what portion of the market Big School Bus Company could be reasonably expected to capture,
based on present (and future expected) market share.
Things candidates should consider:
Segmenting school children into those who: a) walk; b) are driven to school by parents; and c) take the school bus
How many children take school buses every day
H h l b ld b d d ll h hild How many school buses would be needed to transport all these children
That school buses can make multiple trips every morning and afternoon
That only a fraction of school buses are replaced every year (candidate should make a reasonable assumption for school bus lifetime
10-15 years; thus 1/10 to 1/15 of the total school bus market is addressable)
FYI: every school day, about 500,000 school buses transport ~26 million school children to and from school. Use this information to help y y, , p p
steer the candidate back on track if they are orders of magnitude off.
NOTE: Technically there are other uses for school buses beyond simply transporting children to and from school. Depending on how time
goes, you may want to ignore this aspect and have the candidate focus on a more limited definition of the market to be sized.
Case 13: Big School Bus Company
Market sizing
I f ti t b id d (if k d)
119
Market sizing
Information to be provided (if asked)
The school bus manufacturing industry is dominated by two players. Big School Bus Company is the larger of the two with about 45%
market share (by volume).
40% of school buses are owned and operated by independent companies, such as Big School Bus Company. These independent
companies often contract their services out to school districts. The rest are owned and operated by school districts themselves.
IF the candidate identifies him or herself as not having been part of the US public school system and specifically asks for clarification,
you can tell the candidate that around 60% of US schoolchildren take school buses to school every day.
Average school bus capacity is 20 passengers for smaller school buses and 70 passengers for larger school buses.
80% of schools buses are larger school buses. 20% are smaller school buses.
Case 13: Big School Bus Company
Extracting more value
O i f th i t i
120
Extracting more value
Overview for the interviewer
How would the firm extract more value (additional profits) from Big School Bus Company?
Candidates should then setup a framework that allows them to explore both sides of the profit tree (revenue and costs).
Before the candidate gets too involved with their framework and analysis, the interviewer should ask the candidate whether their intuition
tells them that more value can be extracted from the manufacturing or the operations/services side of the industry. Candidates should
realize that the school bus industry is in a relatively mature phase, and most of the market has already been saturated. Thus, operations
and services are likely to be more attractive, in general.
There are many possibilities that candidates can address in operations/services, and this is a chance for the candidate to be creative.
Several different areas may be explored, and sample ideas follow on the next slide.
Case 13: Big School Bus Company
Question 2: Extracting more value
Sample ideas
121
Question 2: Extracting more value
Revenue explore different business models
Customers could be the school districts themselves.
Customers could be businesses looking for mass transport services (but unwilling to pay for coach buses); this could potentially
generate a lot more revenue for Big School Bus Company during hours when school buses might otherwise be sitting idle
Customers could also be wealthy parents willing to pay for private mass transportation services (perhaps where public school buses Customers could also be wealthy parents willing to pay for private mass transportation services (perhaps where public school buses
are lacking, bus stops are too far from homes, or where public school buses are of less than suitable quality to these parents).
School children tend to take school buses just before their parents head off to work and before their parents get home from work.
Thus, Big School Bus Company may be able to allocate buses to transporting employees to work (think the Google shuttle concept).
Service differentiation. For example, provide WiFi so that students can complete their homework while riding the school bus and
h b l d if di t t d b i t t b d t t i t perhaps be less rowdy if distracted by internet-based entertainment.
From a price perspective, Big School Bus Company could contract out services for a flat fee per year. Or they could charge per
passenger. Candidates would ideally discuss the issues of willingness-to-pay versus cost-plus (and other) pricing methods, as well as
which business models would better support a fee-per-person pricing model.
Costs
When it comes to school districts sourcing buses (and sometimes bus services), school districts may choose to put out contracts to
competitive bids. Oftentimes the decision point will be who has the lowest bid that still meets the quality metrics and requirements
specified by the school district.
In order to submit a low bid, Big School Bus Company should also examine its cost structure. Candidates may delve into the fixed and In order to submit a low bid, Big School Bus Company should also examine its cost structure. Candidates may delve into the fixed and
variable cost components of different proposed options for creating value. For instance, fixed costs could include the buses themselves,
the internet connectivity hardware and contracts with internet service providers, the corporate headquarters/dispatch center, etc..
Variable costs would include fuel and hourly wages for (potentially unionized) bus drivers.
Case 13: Big School Bus Company
Conclusion
C l i
122
Conclusion
Conclusion
Candidates should recognize that while the problem narrative focuses mostly on the questions of market sizing and extracting value, the
real substantive issue is whether or not to recommend an acquisition of Big School Bus Company. Top candidates will make such a
recommendation at the end, without prompting.
If a candidate does not make such a recommendation without prompting, ask them at the end of the case what they would recommend
and why (the Our clients managing director is coming; what do you say to him/her? executive summary).
Case 14: American Beauty Company
Introduction
Problem statement narrative
123
Introduction
American beauty company is, as the name suggests, a high quality beauty products company. They have done very well both in US and
globally and enjoy great brand recognition. One of their major products is hair color. ABC manufactures high quality use at home hair
color products. They sell through retail and drugstores, will all manufacturing in-house. They have an 800 number for customer support.
Recently they have been experiencing declining revenues and market shares. The retailers have complained about their products as the
competition Bell International takes over The firm has been called in to advise ABC on what to do
I d d i Th b b f h hi bl C i l h i l k h bi i d
Question 1:
How would you start thinking about this problem?
competition Bell International takes over. The firm has been called in to advise ABC on what to do.
Its an open ended question. There can be number of ways to approach this problem. Crucial here is to look at the big picture and come
up with three or four major areas that you would like to explore given this specific product, industry and the situation. Do not get caught in
the profitability trap due to mention of declining revenues.
A good answer would include following:
Product
Attributes
Customer
Target market segment(s)
B d l lt
Attributes
Ease of use
Value proposition
Price
Benchmark against competition
& your value proposition
Brand loyalty
Price sensitivity
Important attributes
Typical customer behavior. What they like / dislike about
our product
Buying habits
Market share and trends
Buying habits
Distribution channel
Distribution network
Shelf space & positioning relative to competitors
Share of distribution network compared to competitors
Case 14: American Beauty Company
Question 2 and 3
Question 2: One of their biggest market segments is 18 55 yrs old women. But their share has been declining
recently Why do you think this might be happening? How would you approach this issue?
124
Question 2 and 3
There might be a number of issues here. You could suggest doing a market research to break down the issue into brand awareness, trial %
and re-trial and acceptance %, access (distribution) to figure out which one of these may be critical for ABC. You can also suggest
benchmarking against competitor products.
recently. Why do you think this might be happening? How would you approach this issue?
Segment Size($Mn) Growthrate
W 800 5 %
Question 3: Using the data below, what sales are required for ABC to have 50% of the womens market in 2 years?
Women 800 5%
Men 200 20%
Teens 100 10%
It will be good to point out that based on this data looks like their biggest segment, women, is maturing fast.
Total Womens Mkt in 2 yrs = 800 * (1.05)^2 = 882 Total Women s Mkt in 2 yrs 800 (1.05) 2 882
50% mkt share = 441
Case 14: American Beauty Company
Question 4
Question 4: What is the dollar market share for ABC currently? What will the mkt share be in 2 yrs?
125
Question 4
You will need to ask for the current and future mkt share data. Current mkt share is as below. Assume they keep the same mkt share in 2
yrs.
Segment Size($Mn) Growthrate CurrentMktshare
W 800 5 % 50%
It will be good to notice that ABC has quite low penetration rates in mens segment.
Women 800 5% 50%
Men 200 20% 10%
Teens 100 10% 30%
g q p g
ABCs current $ mkt share = .5 * 800 + 0.1 * 200 + 0.3 *100 = 400 + 20 + 30 = 450
Total mkt in 2 yrs = 800 * (1.05^2) + 200 * (1.2^2) + 100 *(1.1^2 )= 882 + 288 + 121 = 1291
ABCs mkt share in 2 yrs = 441 + 28.8 + 36.3 = 506.1
Mkt share % = 506.1 / 1291= 39.2%
Case 14: American Beauty Company
Question 5
Question 5: The team also did a customer brand awareness and perception survey in the 18 55 yrs women segment
f ABC b h ki it d t i t th tit B ll Th lt f th i th t bl b l Wh t
126
Question 5
Survey 1: Brand awareness, 18 55 yrs, Women
for ABC benchmarking its products against the competitor Bell. The results of the survey are in the table below. What
do you notice and what do you suggest ABC can do about it?
Bellusers 80%knowaboutABC
Survey 2: Perception of quality, 18 55 yrs, Women
Nonusers 40%knowaboutABC,60%knowaboutBell
ABCusers 95%knowaboutBell
Segment ABCishigherquality Bellishigherquality
ABCusers 95% 85%
BellUsers 70% 95%
Nonusers 55% 85%
You can see from the results of both the surveys that despite its high quality and brand recognition, the competitor Bell fares better
amongst customers in both dimensions whether users or non users.
ABC should focus on improving its brand awareness and perception of quality. For brand awareness, they have to focus on advertising. To
improve its perception of quality, they should invest in promotions, joint marketing efforts with retailers to push their product and trials.
Case 14: American Beauty Company
Recommendation
A good recommendation will include the following major points
127
Recommendation
A good recommendation will include the following major points:
Based on the analysis so far, it seems like the main reason for declining revenues and market shares is that
the competitor Bell has achieved better brand awareness and perception of quality in the market
compared to ABC. Hence ABC should focus on improving these through advertising and aggressive
promotions and marketing.
Going forward, it seems like ABC has very low penetration in the mens segment. They should target these
Recommendation
g , y p g y g
segments for future growth opportunities since the womens segment seems to be maturing.
Also, the total market size of teens seems really low. There might be opportunities there to expand the total
market size through innovative products, increased usage and acceptance of hair color products.
Recommendation