Ndcc Consulting Casebook

Notre Dame Consulting Casebook

Special thanks to the universities who contributed to this casebook compilation

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Table of Contents LEVEL I – p.2

LEVEL II – p.27

LEVEL III – p.110

Retail Bank – p.3

VireTire – p.28

U.S. Healthcare – p.111

Coffee Shop – p.5

Le Seine – p.30

Software Product – p.113

Travel Agency – p.7

Formula Producer – p.32

Sheep Auction – p.117

Butcher Shop – p.9

HVAC Serv. provider – p.35

Maldovian Coffins – p.123

Car Tires – p.12

Super Pens – p. 37

H Hotel – p.128

Juice Producer – p.13

Multi-Purpose Tool – p.39

Pharma. Company – p.131

Chem. Manufacturer – p.15

HardHead Helmets – p.41

Scotch Manufacturer – p.137

Beer Brew – p.17

ABC Conglomerate – p.44

Children Clothes E-Retailer – p.146

Wheeler Dealer – p.19

Artificial Turf – p.47

Fast Food Chain – p.21

S Software – p.49

Automobile Producer – p.25

CanadaCo – p.151 Giant Bank – p.156 H Health – p.52 Acme Packaging – p.164 Maine Apples – p.55 PCB Manufacturer – p.171 Orrington Office Supp – p.63 FormCo – p. 76 Food Wholesaling – p.80 GOTONet – p.90 HBS as a Business – p.102 Magna Health – p. 104

Syzygy Supercomputers – p.175

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LEVEL I Retail Bank - profit Coffee Shop - profit Travel Agency – profit Butcher Shop - market sizing Car Tires – market sizing Juice Producer - conceptual Chemical Manufacturer - conceptual Beer Brew – conceptual Wheeler Dealer – conceptual Fast Food Chain – math-heavy Automobile Producer – strategy

3 Case 7: Coffee Shop Bain, 1st Round The Problem A friend asked me if I wanted to buy his coffee shop for $100,000. Do you think I should do it? Information Gathering Read this information well before you give the case. Share this information in each bullet only if the candidate asks for it in a clear and deliberate way. Location: The coffee shop is in Vail, Colorado Products/Prices: Cup of coffee, $4.00 Bottled Water, $2.00 Pastries, $3.00 Variable Cost: All products have a 50% margin Customers: The shop serves mostly locals, not tourists, so demand is consistent throughout the year Other Costs: Rent was $500 per month Wages (for 2 employees) were $8.00 per hour. The shop is open 12 hours a day, six days a week Tell the candidate that he can assume that the coffee shop will bring in consistent profits. Analysis This is a valuation question. So to get the value of the coffee shop we need first to get the profitability. Revenues Estimate market size. Assume that the coffee shop gets 10 customers per hour in slow hour and 20 customers per hour in a busy hour. The first and last 2 hours of the day are busy hours. So the coffee shop gets 20x4 + 10x8 = 160 customers/day.

4

If we assume all the hours as busy hours on Saturday, then we have 20x12=240 hours on Saturday. Number of customers / week = 160 x 5 + 240 x 1 = 1040 Number of customers / year = 1040 x 50 = 50,200 Assume 60% of customers order coffee, 30% order pastry, and 10% order a bottle of water, then the spend is: 50,000 x 60% x 4 + 50,000 x 30% x 3 + 50,000 x 10% x 2 = $175,000 Fixed Costs Rent = 500 x 12 = $6,000 Wages = $8 x 12 x 6 x 50 = $30,000 We can also make assumptions about utilities and insurance. Profits Profits = 175,000 x 50% - 36,000 = $52,500 Assume a 40% tax rate: Profits after tax = 52,500 x (1-40%) = $31,500 Valuation If we assume that the coffee shop is in operation for 5 years and we use a 10% WACC, then its value would be: Value = 31,500 + 31,500/ 1.1 + 31,500/1.1^2 + 31,500/1.1^3 + 31,500/1.1^4 = $131,000 Conclusion As long as the sales would be consistent for the rest of the 5 years, it would be profitable to buy the coffee shop. Further analysis could be done on the management experience and the competition to ensure that sales would be consistent.

5 Case 6: Retail Bank Accenture, 2nd Round

The Problem Our client is the private division of a retail bank that has 100,000 clients, $500,000,000 in revenues, and $150,000,000 in net income. Our client’s goal is to double the revenues and profits of the business in 5 years. Assess the feasibility of the goal. Prioritize the two or three most important steps they should take in their action plan. Information Gathering Read this information well before you give the case. Share this information in each bullet only if the candidate asks for it in a clear and deliberate way. Pricing: they make their revenues from interest and fees Costs: transaction costs, salaries. The nature of the sale is one-on-one pitch between the bank sales person and the customer. So the salary cost and the transaction costs tend to be high. Geography: They have a large presence in the North East and a moderate presence in the South East Products: They have 4 product lines, with the following ranks in revenue and profit generation: • •

• •

Private banking: o deposits o loans Investment management: o brokerage o advice o access Trust: o State planning and trust o Transferred death Insurance:

Revenues 1

Profits 1

2

3

3

2

4

2

Customers: 20-25% of customers purchase more than one product. 75-80%% of customers purchase only one product. They are segmented into 5 groups: Volume

Number of Customers

6 Ultra High: High Net: Affluent: Mass Affluent: Mass:

$10M+ $1M-$10M $0.5M-$1M $100,000-$500,000 $0-$100,000

5% 10% 20% 25% 40%

The Ultra High, High Net, and Affluent segments generate 60-70% of the revenues, while the Mass Affluent and Mass segments generate 30-40% of the revenues. Analysis At this point the candidate should start analyzing the numbers to make fact based recommendations. Buyer selection: Since transaction costs tend to be the same for the different customer segments, it makes sense to grow the number of the higher revenue generating customers and decrease the number of the lower revenue generating customers. We can attract the top 3 segments by marketing more selectively and doing promotions for higher income customer groups. We can discourage less affluent customers by raising the prices on them, giving them the option to add more profits, or switch to a competitor. Cross sell: Since 75% of customers purchase only one product. There’s an opportunity for cross-sell between the different product lines. Assuming that we will only serve the top 3 customer segments: Revenue generated by customers in top 3 customer segments = $500M x 70% = $350M Revenue generated by customers who only have one product = $350M x 75% = $262.5M If we assume that the 4 types of products generate comparable revenues, then if we crosssell each customer 3 other products then the new revenue will be = $262.5 x 4 = $1,050M Conclusion It is feasible to double revenues and profits if we can only cross-sell our current customers the other products in our business. The next steps Private Retail Bank should take are: •

Give incentives to the bank’s sales force to cross sell different products to its existing customers.

•

Do promotions for the top 3 affluent market segments.

•

Increase its prices in its bottom 2 mass market segments to “fire” its unprofitable market segments.

7 Practice Case 10 (Travel Agency) Question A travel agency makes a 10% commission on all of its travel bookings. Their current profit before taxes is $1MM, while the industry average ranges from $2MM to $3.5MM. Why are they making less than the industry average? Recommended Solution High Level Plan of Attack •

We need to understand the revenue stream and cost structure of the travel agency and conceptualize how each transaction contributes to the bottom line.

•

Focus on the types of customers the agency services and how each type relates to profitability.

Lay Out Your Thoughts •

Use the Profitability Framework, with a focus on the cost side of the equation.

•

Break your analysis down to the two types of customers: business and leisure.

Dig Deeper: Gather Facts/Make Calculations •

What is the total gross revenue for the agency per annum, on average? $10 million.

•

How does the revenue compare to other agencies with similar size? They are about the same.

•

What about the product line? Does the agency handle any bookings other than travel tickets? No. They just book tickets for their customers.

•

What are the different customer segments that the agency services? There's the business traveler segment, which comprises about 40% of total revenue, and the leisure traveler segment with the remaining 60%.

•

How many total transactions does the agency process and what is the break down for each customer segment? The total number of transactions is around one million per year. On average, about 300K go to the business segment, and 700K to the leisure.

•

Is there a cost associated with each transaction? Yes, each transaction, regardless of which segment, costs $9. HBS Case Interview Guide, Page 53

8 o

[Now you have all the necessary information to calculate the profitability of transactions for each segment. If you run the numbers, you will find the following information.]

Segment Business Leisure

Share 60% 40%

Volume 300,000 700,000

Total Revenue $ 6,000,000 $ 4,000,000 $ 10,000,000

Revenue / Cost / Profit / Transaction Transaction Transaction $ 20.00 $ 9.00 $ 11.00 $ 5.71 $ 9.00 $ (3.29)

Gain $ 3,300,000 $ (2,300,000) $ 1,000,000

Key Findings •

The leisure travelers are draining your profitability. Either the cost per transaction is too high or the revenue per transaction made on the leisure is too low.

Recommendations •

Benchmark the cost structure of other travel agencies.

•

Negotiate with the airlines on the possibility of charging a premium for leisure tickets or capture a larger commission through cost charged to the customer.

•

Look into the possibility of reducing cost per transaction for the leisure travelers.

•

Offer the leisure traveler other products to increase revenue per transaction such as hotel bookings and travel packages.

•

Become a niche player and focus only on the business traveler

HBS Case Interview Guide, Page 54

9 Practice Case 2 (Butcher Shop) Question A fast food chain recently bought a bovine meat-processing outlet to supply it with fresh hamburgers and other meets. The shop process is: cows enter from one end of the shop, meat gets processed in the middle, and then the meat gets packaged and delivered at the other end.

Cows Enter

Meat Processed

Meat Delivered

The manager of the butcher shop however could not decide whether to have the cows walk or run into the meat processing room. Can you help him? Recommended Solution High Level Plan of Attack • • • •

The first thing you want to do is to understand how much meat can be processed (the capacity) when the cows walk versus run. Then analyze the cost implications of the cows walking versus running. Next, calculate the size of the market and demand for the product. Finally, match demand with supply.

Lay Out Your Thoughts •

This is a market sizing, operation’s cost analysis question. Try to lay your plan of attack on paper in a logical sequence of steps to take.

HBS Case Interview Guide, Page 36

10 Dig Deeper: Gather Facts & Make Calculations Shop Capacity •

Let’s assume that only fresh hamburger meat is processed at the shop. Let’s also assume that from each cow, you can make 20 hamburgers.

•

How many hours per day is the shop open for? 10 hours, 5 days a week.

•

Now, if the cows walk in, 10 cows can be processed in one hour, given current labor.

•

This gives us an estimated 2000 hamburgers that can be processed in one day if the cows were to walk (20 hamburgers/cow x 10 cows/hour x 10 hours/day).

•

If the cows were to run in, let's assume that 25 cows can be processed in one hour. This gives us 5000 hamburgers per day.

Costs •

Next, we must calculate the costs associated with the two different capacities. Let us assume that labor cost increases proportionally to the increase in processed meats, and overhead increases, but not proportionally due to some sunk costs, for more equipment and other expenses. Here is the breakdown: Walk Overhead Labor Total Cost Burgers/Week Cost per Burger

$5000 1,000 6,000 10,000 $0.60

Run $10,000 2,500 12,500 25,000 $0.50

•

This shows that by running, costs drop by 10 cents on each burger.

•

To estimate revenue, we need to calculate the demand from estimating what the market size would be.

•

Let's assume that the fast food chain has 10 outlets, and the meat-processing factory serves all 10. Each outlet serves a vicinity of about 30,000 people. Now, let's also assume that there are about 3 other competitors in each vicinity, leaving it with a market share of about 25% of the customers in each area, for a total of 75,000 potential customers.

•

Of those 75,000, about 40% of them fall within the demographic target, leaving 30,000 desired customer.

•

Given the trends in healthy foods, out of the 30,000 desired customers, about a third will be allowed by their parents to frequent any one of the establishment on a regular basis - leaving 10,000.

•

Of the 10,000 customers, each will frequent the establishment about twice a week on average - 20,000 visits. Out of these visits, about half order a burger over another item on the menu - for a total of 10,000 burgers a week. HBS Case Interview Guide, Page 37

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Key Findings/Recommendations •

Even though it’s cheaper to produce more burgers, there’s no demand to support it.

•

Have the cows walk. This meets demand and ensures fresh hamburgers.

HBS Case Interview Guide, Page 38

12 © 2005 Michigan Consulting Club

Quick Quick Brainteaser Brainteaser Case Case

Case 1: Car Tires (I of I) McKinsey & Company, Round II

Problem Statement Narrative Please estimate the number of passenger car tires sold each year in the United States.

Additional Information to Provide Upon Request • About 10M new cars are sold each year • Cars last about 7 years before needing replacement • Tires last 45K miles • People drive 15K miles/ yr • Assume people purchase new tires when needed • Assume no growth in ‘installed cars’ • BONUS: New cars get 5 tires (includes spare), old cars get 4 new tires

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

Sample Solution Methodology • There are 70M cars on the road • 60M old cars • 10M new cars • Tires last three years • 60M installed cars / 3yrs • 20M cars need new tires each year • 20M x 4 tires: 80M tires • 10M new cars • @4 tires / car: 40M tires • @5 tires / car: 50M tires • Total tires sold each year • 120M tires (no spare) • 130M tires (w/ spare)

- 11 -

13 Practice Case 3 (Juice Producer) Question A major producer of juice is in the business of processing and packaging fruit juice for retail outlets. Traditionally, the producer has packaged the juice in 18-ounce carton containers. Recently, in response to demand from the market, the producer purchased a machine that packages the juice in plastic gallons (36 ounces). Over the next couple of years, sales continued to grow on average of 20% per year. Yet, as sales continued to increase, profits steadily decreased. The owner cannot understand why. He hires you to help out. Recommended Solution High Level Plan of Attack •

We know that sales have been increasing, so revenue is not an issue. The problem must be costs.

•

Because of the change in packaging, the producer has incurred additional costs that are not accounted for, causing profits to decline.

Lay Out Your Thoughts •

Use the profitability framework. Gather information on the revenue side, but focus mostly on the cost side.

Dig Deeper: Gather Facts/Make Calculations •

Looking at the revenue side, how much did the producer charge for the 18 oz. carton? $2.00 per container.

•

For the 36 oz. plastic gallons? For twice the size, the producer figured he would provide an incentive to buy by selling them at $3.50 per gallon.

•

How was the cost of the new equipment accounted for in the price? The producer ended up raising prices across the board by $.50 on all packages, both cartons and gallons, selling at $2.50 and $4.00, respectively.

•

What about cost of packaging? Does it cost the same to package the juice in cartons as it does in gallons? Well, I guess not. Plastic is more expensive than the paper carton we have traditionally used. Also, we had to hire more experienced labor to operate the machine because it is a little more complicated than the carton machine. We figured that because the demand was higher for the gallons – we would cover our costs through increased volume.

•

What about overhead costs? All costs for the factory are added together and divided by the number of units produced. o

This should raise alarm bells. This is now clearly an issue of cost allocation. The price on the plastic gallons should be higher due to higher costs. Now you need to see to what extent this is affecting the bottom line. HBS Case Interview Guide, Page 39

14 •

Let's try to understand the trend in sales. What percentage of gallons versus cartons is sold? The more our customers notice the gallons, the more they like them. As the overall volume is increasing, plastic gallons have comprised 60% of the sales. The owner has been very pleased about that.

•

It seems to me that it costs more to package in the gallons, yet the price is not higher on a per ounce basis. In fact, it's lower. Have you done any proper cost allocation to determine which type of product should carry which costs? No, we haven’t.

Key Findings •

The major finding in this case is the additional costs associated with the plastic gallons were averaged out over all units, including cartons. This resulted in a misallocation of costs and inappropriate pricing.

•

The plastic gallon products have been priced at a lower rate than they should have been. Result: the more gallons the juice producer sold, the more profit the company lost out on.

Recommendations •

This firm should conduct a thorough analysis of activity based costing to determine the overhead costs and direct costs associated with each item in the product line. They should then use this data to price accordingly.

HBS Case Interview Guide, Page 40

15 Practice Case 4 (Chemical Manufacturer) Question A major chemical manufacturer produces a chemical product used to preserve foods in containers. Despite an increase in market share, the manufacturer has experienced a decline in profits. The CEO of the company is worried about this trend and hires you to investigate. Recommended Solution High Level Plan of Attack •

The first thing we need to figure out is what does "an increase in market share" mean? Remember, the term "market share" is a percentage, and not an absolute number. It could imply that the company has increased its share of the market by beating out the competition, or the competition exiting the market. It could also mean that the market is actually shrinking, but the sales of the company are decreasing by less than those of its competitors.

Lay Out Your Thoughts •

Use the Profitability Framework. Lay out factors that you feel would help from the Value Chain analysis, 4Cs, and 4Ps.

Dig Deeper: Gather Facts •

Has the company experienced any significant increase in cost in the last couple of years related to any additional fixed or variable cost? No, costs have been steady.

•

On the revenue side, has there been an increase in the volume of output? Slightly, a little bit higher than the industry average.

•

What about the competition. Have there been any new entrants on the scene? Actually, competition has decreased. A number of players have exited the industry.

•

Why has that been the case? They were losing money. They felt that the industry had gotten saturated, so they left.

•

Has sales decreased for the industry overall? Yes, there has been a general negative trend in the last few years. There certainly has been less demand for the product.

•

Are substitute products being used? Not really. Preservatives in general are being used less in foods. Fresh food is now the preferred choice for many consumers. HBS Case Interview Guide, Page 41

16 •

What about the makers of food? Are they experiencing decreased volume? Yes, the entire industry has been slowing.

•

Are they forced to lower their prices to survive? They certainly are. Additionally, to lower costs, they are using their leverage to renegotiate price structures of raw materials.

•

So is the company in question forced to lower its prices? Yes. They are gaining market share, but it's because of a number of competitor fallouts.

•

But costs have stayed the same? Yes.

Key Findings •

The industry overall is shrinking. To survive, the company in question has been competing on price. It has gained market share at the expense of it competition, forcing some to exit the industry.

•

Its sales have only increased slightly.

•

The decrease in price has caused the company to lower its profits, despite the increase in market share.

•

Profit margin has been lower on a per volume basis.

Recommendations •

Focus on cost reduction. If price is the only way to compete, then costs must decrease.

•

Collaborate with the competition to increase leverage in negotiation.

•

Diversify into other chemicals that are in demand. Reduce the risk of market trends via a portfolio of products.

HBS Case Interview Guide, Page 42

17 Practice Case 8 (Beer Brew) Question A major US beer company, Beer Brew, recently entered the UK market. Two years after entry, the company is still losing money. Despite a high per capita consumption of beer in the UK market, sales have been very disappointing. What explains this phenomenon? Recommended Solution High Level Plan of Attack •

Evaluate the product mix of the company and compare it to what is selling well in the UK.

•

Analyze what type of marketing Beer Brew is using.

•

Understand the consumer behavior and tastes, and determine the effect on sales.

Lay Out Your Thoughts •

Use the profitability framework. Understand which factor under revenue or costs is driving the decline in profitability.

Dig Deeper: Gather Facts/Make Calculations •

Let's begin with the product mix. What kind of beer has Beer Brew been trying to sell? Currently, Beer Brew is selling two kinds of beer, a strong tasting and a light beer.

•

How have the sales of both been doing? The strong tasting beer is selling slightly below average and the light beer is not selling at all.

•

What about marketing? The company has spent more on marketing than the industry average for that region.

•

Is it a highly competitive industry? It's about average. The industry is fairly fragmented. There are no dominant players.

•

Any problems with distribution channels? No.

•

What about pricing and placement of the product? To be competitive, Beer Brew undercut its price significantly to try to capture customers. Their beer is sold just about everywhere other brands are sold.

•

What are the current best sellers of beers in the UK? Guinness, Toby, and a few others.

•

What kind common characteristics do they have? They are all moderate in alcohol level, dark, and strong tasting. HBS Case Interview Guide, Page 49

18 •

How does that compare to Beer Brew's products? Beer Brew's strong tasting brand is higher in alcohol, and market tests show that it tastes better. The light beer is low in alcohol and calories, and again tastes great.

•

Are there any light beers on the market? Very few. Mostly locally produced. Beer Brew saw this as an opportunity to cash in on the light beer industry that has taken the US market by storm.

•

What about color? Are Beer Brew's two products dark beer? No, they are fairly light in color.

•

Since most of the beer consumed in the UK is dark, and dark signifies strong beer, does the light color of the beer signal to the consumer that somehow the beer is weak? Perhaps, but the company figured that once the consumer tried it, the color wouldn't make any difference.

Key Findings •

It seems that the consumer in the UK has unique drinking habits. After further inquiry, we find that the average British drinker values dark beer over any other factor. It seems that the dark color has a psychological impact on the consumer, relating it to strength, masculinity, getting their money's worth, etc.

•

The light beer industry is undeveloped in the UK because the health movement in the US has not mobilized in Europe yet.

•

Also, because the price of Beer Brew's products is much cheaper than other brands on the market, it is portrayed as a low quality "American beer." There has been a dilution of the brand equity.

Recommendations •

Change the color of the stronger tasting beer. Make it darker and advertise it as the better tasting darker beer, with more alcohol.

•

Match the price to other premium beers that focus on the same market segment.

•

Drop the light beer product line. The UK is not ready for it yet.

HBS Case Interview Guide, Page 50

19 Practice Case 9 (Wheeler Dealer) Question

A major auto service chain, Wheeler Dealer, has enjoyed healthy returns on its 30-store operation for the past 10 years. However, management feels that the chain needs to expand, as the current geographical areas in which they are based have become saturated. For the past couple of years, they have aggressively pursued a growth strategy, opening an additional 15 stores. However, it seems that this approach has had negative returns. For the first time in over a decade, the chain's profits dropped into the negative zone. You were hired to figure out why. Recommended Solution High Level Plan of Attack •

You need to understand the nature of the business. What does the auto service entail?

•

Focus on the customer segmentation. Are they serving more than one customer? Any differences?

•

What is the profit structure of the different offerings?

•

Where did they move? Are the newly formed stores operating differently or serving different markets than before?

Lay Out Your Thoughts •

Use the Profitability Framework. Focus on how revenue has changed given the environment.

Dig Deeper: Gather Facts/Make Calculations •

What type of services has Wheeler Dealer traditionally provided for its customers? There are two main businesses under each roof: off-the-shelf car parts and the garage mechanical services.

•

Are these services provided as well in the newly developed chains? Yes.

•

Have competitors entered the market stealing market share? A few competitors have entered the market, but not too many. The expansion was planned to explore new markets and prevent the competition from growing. HBS Case Interview Guide, Page 51

20 •

What about price? Have prices gone up to help defray some of the costs associated with growth? No, they have stayed the same.

•

Given the two types of businesses for each chain, do they have the same profit margin? No. In fact, because the garage services cost the business a great deal more and the mechanics are very well trained, we charge a premium. Profit margin on servicing cars has twice the profit margin of offthe-shelf products.

•

Are the customers the same for both businesses? No. The customer that uses the garage service tends to come from a mid-to-high income bracket. Those that use the off the-shelf auto parts tend to be of the lower-income bracket. They fix their cars on their own.

•

Where has Wheeler Dealer traditionally been located? Mostly in, or very close to the suburbs.

•

Has the geographical location changed as they expanded? Yes, They saw certain urban areas as very inexpensive. They located more in inner cities where there are a lot of used car sales.

•

So, would it be fair to assume that the more profitable business, the garage service, has deteriorated and the sale of off-the-shelf parts has increased, causing overall profitability to go down? Yes.

Key Findings •

The garage service is the major revenue generator for the business. As they expanded into the inner cities, they began to attract the wrong customer. Profit margin on the off- the-shelf products is not enough to cover costs and make a healthy return for Wheeler Dealer. A price increase is unlikely given price sensitivity.

Recommendations •

Scale back from the urban areas. Focus on geographical areas where you can attract the suburban customers who will use the service aspect of the business. Maintain a healthy return on the car product market from the inner city dwellers.

•

Where possible, drop the garage service in under-performing areas to reduce costs and focus on the retail end.

HBS Case Interview Guide, Page 52

Practice Cases – Case 12: Fast Food Chain

21

Bain & Co.

(Source: Sample case from Bain website) Context A large fast food chain has hired Bain to improve the company’s profitability. You’re about to have an initial brainstorming session with your team around your client’s options, and you want to collect your thoughts first. Your interviewer wants to know that you have a structure in mind. An appropriate structure for this case would be the profit equation. Be sure to state that to your interviewer. A good answer may include the following: For example: Profit = total revenue – total cost. Where Revenue = Price * Quantity and Costs = Fixed Costs + Quantity * (Variable Costs). In order for the company to improve its profitability, management needs to increase revenues and/or decrease costs. So to begin tackling my client’s profit problem I am going to look at these two sides of the equation: -

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?"

Information given upon request: The customer is price sensitive, and the market is fairly saturated The fixed costs are pretty stable. Interviewee should realize right away that the client should focus on lowering variable costs. Ask interviewee to identify major variable cost buckets. -

Raw material Packaging

Variable costs are a function of price and volume. Therefore, the client needs to reduce volumes purchased or negotiate lower prices. Raw material: 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. Some good creative answers here include (but are in no way limited to):

72

Practice Cases – Case 12: Fast Food Chain -

22

Bain & Co.

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?

Interviewer: Bain focuses on components that make up large portions of a company’s costs: reductions in these areas will have the largest impact on a client’s overall costs. Bain’s 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. How much money could we save per year in the US from using the new type of napkin dispenser in all restaurants? Interviewee should identify key information: 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 Price per napkin Information given upon request: -

A case of 6,000 napkins cost his client $28. Thus, a reasonable price per napkin is about $0.005. The client is similar to McDonald's in terms of the number of outlets.

Interviewee needs to estimate how many McDonald’s in 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 (Actual answer: ~12,000 McDonald's in the US.) Estimate number of restaurants 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.

73

Practice Cases – Case 12: Fast Food Chain

23

Bain & Co.

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.

Estimate 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 * 1,500 customers * 365 days per year * 12,000 restaurants = $98.6M dollars saved in napkin purchases. Interviewer: 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? Recommended answer: To check the magnitude of the overall number some options include: Looking at a comparable company’s 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 Interviewer: 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?

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Practice Cases – Case 12: Fast Food Chain

Bain & Co.

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. Interviewer: 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? Some potential ideas include: Advantages: Fewer napkins used per day leads to less restocking which may mean better customer service or lower labor cost. Better relationship with paper manufacturer (potential for better pricing). 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.

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25 Practice Case 24 (Automobile Producer) Question and Background Information: The director of marketing at an automobile manufacturer suggests changing the current design, where two separate keys operate the ignition and the doors to a design where one key operates all lock mechanisms. How do you think about whether this a good idea or not? Suggested Sample Response: The goal of any business including automobiles is profit throughput that can be measured by the Net Present Value impact of the proposed change. For the proposed change to have a positive impact on profit throughput, the change must be a net positive of change in cost structure or product demand weighed against the investment needed to implement the change. An expanding of demand in this case must come from the product meeting customer needs better than the direct competition or substitutes. Customer needs that this product may address are simplicity, security, and cost of ownership (related to security). One should also consider if the improvement is defensible or would be easily copied. For cost structure, the relative expense of using what is assumed to be the more complex locking mechanism of the ignition on the door and trunk (assumed 5 locks that would be more complex) would have to be weighed against the reduced cost of developing or purchasing separate key and lock mechanisms. As most automobile manufacturers are very large, it is assumed that the simpler locking mechanism needed for the doors could be reused across many product lines or purchased from large parts suppliers who supply the industry as whole and the development cost of a separate locking mechanism would be low. Therefore, the change in cost structure will be driven by the relative cost difference of buying 6 complex locking mechanisms vs. 5 simple locking mechanisms and l complex mechanism. It is assumed that a more complex locking mechanism is needed for the ignition. Therefore, the hypothesis is that the net change of cost position is negative. It is also assumed that the market power of buying more complex locking mechanism would not significantly impact the price charged by suppliers or cost basis if developed internally. This hypothesis would be easy to check by looking at the relative cost position of the different locking mechanisms and the discount structure available for mass purchasing the various locking mechanisms. On the demand generation side, the product would have to create a net positive in demand across the customer needs of simplicity, security, and cost of ownership. The fact that the marketing director suggested this change hints at the fact that customers may demand the increased simplicity of only carrying one key. This does not seem intuitively true as the two keys are almost always carried on the same key ring so the relative improvement to simplicity is probably minimal. For security, there are two factors to consider, the theft of valuables in the car and the car itself. If more complex locking systems were to improve the security to valuables, then the value of going with the more complex locking system on the doors of the car may be a positive. The assumption, HBS Case Interview Guide, Page 109

26 however, is this is not the case as door locks are typically compromised not by picking the lock but by compromising the areas around the lock (i.e. Slim Jim). Also, security systems, which are becoming more common on cars, mute the affect of a more complex locking mechanism, as the key lock mechanism becomes the non-primary mode of defense. I do not see how moving to one key would impact the chance of theft of the entire car, as in either case the same locking mechanism would have to be beaten. This also means the cost of ownership, which could have increased if the change of car theft increased due to insurance premiums, would exhibit no affect. The customer reaction to a single key mechanism could be tested through surveying or product pilots where a sample set of customers are given actual cars with one key and asked to gauge their reaction. Or larger regional pilots could be run and the change in demand affect measured. The investment required to implement the change of eliminating a separate key and lock for the doors and ignition is assumed to be minimal as key locking mechanisms are fairly standardized and the ignition key lock, which is probably more complex, could be transferred to the doors and trunk with minimal amount of rework of the parts assembly infrastructure for building the auto. The primary investment cost would then be the cost of piloting or surveying for the increase in customer demand by implementing the change. Surveying and piloting costs can be significant, but it is assumed a cheaper survey would suffice in this case to gauge demand so investment costs would be minimal. Three final possible points to consider on demand generation. One, an increase in demand is necessary but not sufficient to improve profit throughput, as the company also needs to be able to meet the new demand generated. As auto manufactures almost always have an excess of capacity, this is not an issue. Two, even if this change was beneficial it could be easily copied by competitors and it is assumed that the change would not provide any lasting brand advantage in the customers mind or raise the demand of the sector as a whole. Therefore, in the long run, the cost reduction benefits would override the decision to go forward and we have already argued the affect would be negative. A final factor that should be considered is the assumption that the majority of cars sold in the US in the past have included two keys and the two keys have most likely generated a lot of unanticipated use that may be hard to anticipate that might cause customers to reject the change. So, from a customer perspective, I would want to see the demand for this from customers to be strong and the benefits large before implementing a change. Because it does not appear the proposed change would positively impact cost position or increase demand significantly, the recommendation is against the proposed change. I recommend even against investing to gauge customer demand as the long run benefit would be in cost position and the assumption here is that the affect is negative. Summary Comments This candidate starts with a framework and works through to a hypothesis and how the answer might be tested. All the customer factors or cost impact that could be considered are obviously not included, the interviewer should look for a structured presentation that arrives at a hypothesis with ideas how to test and a proposed answer.

HBS Case Interview Guide, Page 110

27

LEVEL II VieTire - Profit Le Seine – Conceptual Formula Producer – Unconventional HVAC Service provider - Profit Super Pens – Unconventional Multi-Purpose Tool – Profit HardHead Helmets – Hypothesis and Testing ABC Conglomerate – Unconventional Artificial Turf – Market Sizing S Software – Strategy H Health – Conceptual Maine Apples – Math Heavy Orrington Office Supplies - Graph/Chart/Table Heavy FormCo – Math Heavy Food Wholesaling - Graph/Chart/Table Heavy GOTONet – Math Heavy HBS as a Business – Unconventional Magna Health – Hypothesis and Testing

28 Practice Case 5 (VieTire) Question A tire manufacturer in Vietnam, VieTire, has been the only player in that market due to high tariffs on imports. They dominate the tire industry. As it stands, the tariff is 50% of the total cost to produce and ship a tire to Vietnam. Because of the forces of globalization and lower consumer prices, the Vietnamese government decided to lower the tariff by 5% a year for the next ten years. VieTire is very concerned about this change, as it will radically alter the landscape of the industry in Vietnam. They hire you to assess the situation and advise them on what steps to take.

Recommended Solution High Level Plan of Attack •

The first thing we need to understand is the current cost structure of VieTire's product.

•

Next, we must determine the impending competitive situation.

•

Then, Calculate the impact the reduction of tariff will have.

•

Finally, recommend specific steps that VieTire can take to protect themselves from increased competition.

Lay Out Your Thoughts •

Specify what steps we must take to understand the cost differences now, and in the future, of VieTire and its competitors

Dig Deeper: Gather Facts/Make Calculations •

What would you say are the major costs associated with making a tire? Raw material comprise about 20% of the cost, labor 40%, and all other costs such as overhead 40%. The average tire cost about $40 to make.

•

It seems that labor is a major cost, $16 per tire. Why? Things are done more manually. Most of technological advances in the industry have not yet been implemented in Vietnam. What about the cost structure of the competition? An average tire manufacturer in the US produces tires at a cost of $30 each.

HBS Case Interview Guide, Page 43

29 o

Assuming shipping cost to Vietnam of $4 each tire, and a tariff of 50%, the average cost of an imported tire in Vietnam amounts to $51. So currently, even though the cost to produce a tire in the U.S. is much cheaper due to technological advances, foreign competitors are out of luck because of the tariff. Year Now 1 2 3 4 5 6 7

Tariff 50% 45% 40% 35% 30% 25% 20% 15%

Cost $50.00 $47.90 $46.00 $44.50 $43.00 $41.30 $39.60 $38.00

Result of Competition Will not enter Will not enter Will not enter Will not enter Consideration of entrance if willing to take a cut on price Preparing to enter Entered the market Competing on the market

Key Findings •

Depending on what price they are willing to set, the competition will start to think about entering the market in year four. In year six, the competition will surely enter as their prices become lower than domestically produced tires.

•

This analysis assumes that the cost structure for the competition will remain constant. It is important to note that because of the rapid advances in technology, chances are that the costs of producing tires will decrease resulting in competitors entering the market even sooner.

Recommendations •

VieTire needs to benchmark against word class tire manufacturers and reengineer production methods and cost structures.

•

They must invest in the latest advances in order to reduce their labor/operations costs.

•

The company should focus on increasing the skills of labor while at the same time contain their hourly wage.

•

Need to develop loyalty from their customers/consumers in order to lock in a certain percentage of the market share.

HBS Case Interview Guide, Page 44

30 Practice Case 7 (Le Seine) Question A French soft drink company, Le Seine, is looking to diversify its holdings by investing in a new fast food chain in the US. You are hired to determine whether they should pursue this path and, if so, how they should go about execution. Recommended Solution High Level Plan of Attack •

Understand the company's logic for entering into the fast food industry.

•

Examine the overall trends in the fast food industry, and determine which segment is the most promising.

•

Assess the overall demographic changes and major trends in eating habits.

•

Determine what competencies the company can provide that will help it enter this business and be successful.

•

What are some of the high level strategies that the company should consider when entering?

Lay Out Your Thoughts •

Use some elements of the 4Cs, 4Ps, and Porter's Five Forces. Identify which factors you need to address and list them in a logical sequence.

Dig Deeper: Gather Facts/Make Calculations •

Why is the company thinking of investing in the fast food industry and not another? The fast food industry has been experiencing sustainable growth for the last few years, and we believe that it will continue to grow.

•

Why in the US market and not the French? The US is more attractive economically and Le Seine has been present in the country for a few years.

•

Does the company know much about the fast food industry and its consumers? Not very much. They're not sure where to enter.

•

The industry as a whole might be growing, but let's think about which segment is growing the most and where it would make sense for the company to enter. If we look at the traditional burger outfits, that segment is pretty much dominated by three players: McDonalds, Burger King, and Wendy's. I would think that the barriers to entry are pretty high for this segment. You also have pizza, Mexican, chicken, cold cut sandwiches, prepared meals (Boston Market).

HBS Case Interview Guide, Page 47

31 •

Has the company thought about which to enter? No. But what do you think, at a high level, which segment should they enter? o

[Quickly run through the pros and cons of the various segments]

•

Well, if we take a look at the company itself, it is more inclined to be in the prepared meals segment, given that it is French and has a European appeal. If we look at the trends, the population is getting older and more families have two working parents. Also, there seems to be a move towards eating more healthy foods. If we consider the competition, the segment seems to be at the growing stages, with only one or two known players. The barriers to entry are certainly not as high as some of the other segments.

•

To distinguish itself from the competition, it can make food with a French theme, priced competitively. The company can also set up shop in major grocery stores, as more people are purchasing prepared foods as part of the their grocery shopping.

•

It would be a fair assumption to say that Le Seine can capitalize on its distribution and marketing experience in the US.

Key Findings •

There seems to be potential in the prepared food segment (players like Boston Market).

•

Le Seine seems to be a good candidate to enter and take advantage of the present opportunity.

Recommendations •

Based on this assessment, Le Seine should enter on a large scale. To offer competitive pricing, they must have economies of scale.

•

Quickly develop strong brand equity. Look at the franchising option. Examine in detail how the most successful fast food outlets operate.

•

Consider acquiring an existing chain versus starting a brand new one.

•

Location is extremely important. Know your customers in every region, and focus on convenience.

HBS Case Interview Guide, Page 48

32 Practice Case 13 (Formula Producer) Question The client is a manufacturer and distributor of infant formula. They sell their product nationwide, and are in the middle of the pack in terms of market share. They are currently trying to boost their market share while maintaining profitability. There is a government welfare program called WIC (Women, Infants, Children) that allows individuals living below the poverty level to receive vouchers for infant formula for their children. Unlike most welfare programs, this one is subsidized by the actual producers of infant formula. On a state-by-state basis, infant formula producers bid for the right to be the sole supplier of infant formula to welfare recipients in that state. In addition to paying the government for the WIC contract, the client also provides rebates to retailers for WIC sales. As a result, income received from WIC sales is substantially less than that received from normal formula sales. In fact, sales to mothers that remain in the WIC program for more than 12 months result in a net loss. In trying to determine how much to bid on a WIC contract for a given state, what factors should you consider? Background This case is fairly wide open, and presents an issue that is most likely unfamiliar and ambiguous. One challenge will be for the interviewee to find one or more issues that they can explore more in-depth. The basic focus of their analysis should deal with the relative profitability of a WIC contract. Response Candidate:

I think for this case I would first look at who the typical WIC customer is, and the dynamic of the relationship, meaning how long are they a customer, and what kind of loyalty is there. Since I don’t have any children, could you tell me more about a typical WIC customer, in regards to buying formula?

HBS Case Interview Guide, Page 61

33 Interviewer:

Sure. Obviously the typical WIC customer is poor, since this is a form of welfare. But some things you might not know are that 1) the average WIC recipient stays in the program for less than 12 months, 2) mothers typically remain loyal to a brand through infancy for their first child, but for subsequent children recipients often switch back and forth between brands, and 3) infants typically require formula the first 22 months of their life.

Candidate:

Thanks. With that knowledge, I can start to think about the issues facing this company. In trying to decide the terms for the contract, profitability is the primary driver. There's obviously some issue of social-enterprise here, but even so, I think profitability will drive much of the decision. Since the WIC recipient gets rebates in addition to the subsidized cost of the product, we need to quantify that rebate in order to understand what the profitability per recipient is. Can you tell me that?

Interviewer:

For the purposes of this interview, let's assume that the rebates average an additional 10% (off of the retail price).

Candidate:

OK. So the profit per customer might be determined by (WIC revenue - rebates - COGS). So if the revenue is $100/customer/year, and the rebates are $10, and COGS are $75, we make $15 per customer per year. As long as we're paying less per customer for these rights to be the sole-supplier, we're in the black.

Interviewer:

For the most part, your logic is correct. But is there anything else that might be a factor in determining profit?

Candidate:

Well, related to the actual profitability of the WIC product I'm not sure. But maybe there are some hidden costs or revenues that I'm not thinking about. In fact, maybe there are some synergistic revenues that the company can achieve. If they get the contract, that gets them additional shelf-space in the stores. And not just WIC recipients shop in the stores. So maybe they will be able to increase market-share, just by being on the shelf. Of course, they are getting full retail price for those sales. So I might add in an additional sales minus COGS to the equation. But to try and get an idea of that figure might be tough. How long to these contracts last?

Interviewer: Typically, several years.

HBS Case Interview Guide, Page 62

34 Candidate:

Ok, so knowing that a contract is several years, say 5, we can begin to get a total dollar value for the contract. If we know how many WIC recipients there are in this state that we're bidding, we can calculate expected revenues. Also, if we can get an idea of how much shelf space we would have, we can quantify the synergistic sales.

Interviewer:

Good. I'm not going to make you go through the math on it, because we're about out of time, but you're right. There are 1.2 million WIC recipients in the state, and shelf-space is awarded based on volume sales. So for this company to get the contract, it can help them have more sales volume, and thus more shelf-space, and hopefully then more market share.

General Summary Comments Ultimately, they should come up with some sort of explanation for how numbers would be run to estimate an appropriate contract bid. One example might be: (WIC revenue - rebates - COGS) + (synergistic non-WIC revenue - COGS) >= Contract Bid COGS takes into account economies of scale. Real world situation is that synergies are strong, and WIC recipients bounce in and out of program but stay loyal to product for first-borns. Not only are the synergies positive, but also on average WIC recipients are profitable because they pay retail for nearly half of the formula that they purchase over the first 22 months of their child's life.

HBS Case Interview Guide, Page 63

35 © 2005 Michigan Consulting Club

Establishing Establishing the the Case Case

Case 3: HVAC Service Provider (I of II) The Boston Consulting Group, Round I

Problem statement narrative Your client is an energy firm that has a lot of extra cash and wants to know if they should consolidate HVAC (heating, ventilation and cooling) service firms in the Atlanta area. The client would like to know if this is a viable investment they should consider.

Guidance for interviewer and information provided upon request • Only provide additional information after being specifically asked by candidate. • Atlanta market consists of 500 firms • Average annual revenue: $10M • Revenue growth: 3% • Acquisition cost: Perpetuity cost of profits • Cost of capital: 13% • Cost structure (% of revenues) • Labor: 50%, Technicians are 100% utilized • Equipment: 25% • Administrative: 20% • Profit: remaining 5% • Savings areas: • Labor dispatching efficiency: 5% decrease in labor • Equipment5% decrease through bargaining power • Admin: 1% net decrease after IT and advertising investments • Client’s finance department requires a 3-yr break-even • Assume all cost savings occur immediately • Assume revenues will remain stable for each target

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Sample Sample Solution Solution Elements Elements

Case 3: HVAC Service Provider (II of II) The Boston Consulting Group, Round I Candidate should calculate implications of changing cost structure… Then want to conduct a breakeven analysis.

A solid interview will address other potential risks…

And suggest improvements for break-even.

Cost Center

Cost (% rev)

Cost ($)

Savings (% cost)

Savings $

New Cost ($)

Labor Equipment Administrative Profits

50% 25% 20% 5%

$5M $2.5M $2M $500K

5% 5% 1%

$250K $125K $20K

$4.75M $2.375M $1.98M $895K PROFIT

Current profit

Interest rate

Cost of firm

Expected profit

$500M

10% (CoC – growth)

$5M

$895K

Undiscounted Break-even 5.58 years (stating: over 5 yrs is fine) TOO LONG = NO GO

• No industry experience • Cultural issues (small operations purchased by large company) • National entrants overpowering effort Reducing purchase price Seek further cost improvements (IT systems, warranty costs, etc) Improve revenues through advertising efficiency, brand name, referrals, etc.

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37 © 2005 Michigan Consulting Club

Establishing Establishing the the Case Case

Case 2: Super Pens (I of II) A.T. Kearney, Round I

Problem statement narrative Your client is a bank vault manufacturer, mostly focusing on the large walk-in type. It’s a very mature business and they are the largest supplier in the industry. In order to diversify their business and provide growth, the client has bought a company that specializes in high technology security devices. One of this company’s biggest and most promising products was a pen that has the ability to distinguish if the person signing anything is in fact the owner of the pen. The client would like you to define the following: •

Who would the customers of this technology be?

•

How do we market to them?

•

What is our value proposition?

Guidance for interviewer and information provided upon request(1) Information to provide upon request • Pens cost $20 to manufacture at capacity • The technology is very compact, very thin, very reliable, and incredibly secure; essentially fraudulentproof.

Things to think about during case • How did the candidate arrive at a list of potential clients and industries • Did the candidate use a specific framework for vetting target customers, etc.? • How did the candidate construct a value proposition? • Asking questions around current customer costs/revenues and how the pen would improve this • Who is the actual customer vs who may be buying? • i.e.: credit card companies, or individuals

(1) If detailed exhibits exist, they will be referenced in this box, and included in full on the following slide(s) 2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

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38 © 2005 Michigan Consulting Club

Sample Sample Solution Solution Elements Elements

Case 2: Super Pens (II of II) A.T. Kearney, Round I This This is is aa potential potential customer customer solution, solution, the the case case could could (and (and should) should) be be adapted adapted for for Banks, Banks, Government, Government, Corporations, Corporations, High High Net Net Worth Worth Individuals, Individuals, Exclusivity/Loyalty Exclusivity/Loyalty programs, programs, etc. etc. Interviewer Interviewer should should feel feel free free to to allow allow full full market market estimation estimation scenario scenario in in all all cases cases to to allow allow for for more more robust robust mathematical mathematical analysis analysis A credit card substitute

…With viable economics…

…Creates potential value.

$10,000 in annual charges for each card in circulation

$20: Production cost per pen

$100/year in fraud per customer currently

1%: Industry accepted fraud rate

0.001%: Anticipated fraud rate

$0.01/year in fraud with pen

100M cards exist across USA

However, added costs… $500 per card reading site in modifications and training to accept new technology 100K card readers estimated across United States

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

If pen costs <$100, then beneficial for card companies

…and incomplete reach… Pens would only work at retail establishments, and would be insecure over internet, phone, and other ‘unsigned’ transactions These transactions are estimated at almost 50% of all credit card transactions

…could negate proposition. • Drawbacks: • Needing to keep track of a pen • Incomplete reach • Expensive replacement • Expensive infrastructure • Adoption in the credit card industry may not be viable… perhaps another industry? • Swiss banks perhaps? - 13 -

39 © 2005 Michigan Consulting Club

Establishing Establishing the the Case Case

Case 4: Multi-Purpose Tool (I of II) The Boston Consulting Group, Round I

Problem statement narrative

Guidance for interviewer and information provided upon request

Your client is a diversified hardware manufacturer that produces a multi-purpose hand tool. For several decades, your client was the only company to make such a tool. Over the past 2 years, the company has seen a decline in revenue.

• Only provide additional information after being specifically asked by candidate.

What is driving the decline, and what can you recommend as a solution?

• Channel: Hardware retailer- can not break contract

• Price: $50, constant over time • Current volume: 100M units/yr

• Price elasticity of demand: 0.5 (20% reduction in price will raise demand 10% & visa versa) • Several new competitors in past 2 years • Selling similar product for $30 • Channel: Discount retailers (Wal-Mart, Target)

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40 © 2005 Michigan Consulting Club

Sample Sample Solution Solution Elements Elements

Case 4: Multi-Purpose Tool (II of II) The Boston Consulting Group, Round I Initial revenue driver questions…

…Drill to increased competition.

Given contract, client must investigate price…

Increased competition? Yes!

Competitors competing on price ($30 vs. $50)

Price elasticity of demand is 0.5

Substitute products? Yes!

Competitors in different channel

Customers not very price sensitive

Decline in market demand? No, demand is higher than ever with doit-yourself work (our market) increasing

Client can not change channel

Increasing price by 20% to $60 will reduce demand to 90M units, etc

Marketing budget reduction? No, been very stable. Decline in distribution channels? No- one stable contract.

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

Follow-up question: Why not increase price by 40%? To further increase revenues? A: Demand may be nonlinear, and unpredictable at large price changes

…And take action to improve revenues. In the short run while contracts are tied with current channel, increasing price to increase revenues to $5.4B from $5B is recommended Longer term, the client should investigate entering a broader array of distribution channels to ensure maximum product reach Further, the client should explore a premium-value proposition to compete in price reduction market and retain margins

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41 Case 2: HardHead Helmets Bain, 2nd Round The Problem Our client is private equity firm considering taking private a leading manufacturer of bicycle helmets. Should they? Information Gathering Read this information well before you give the case. Share this information in each bullet only if the candidate asks for it in a clear and deliberate way. For bullets with “Explore with candidate” sub-points, make the candidate answer the associated question completely. Market Share – The company is the clear market leader with 60% share. Competition – Existing competitors have small share. However, there are some new entrants that are still small but growing quickly, including Nike and Reebok. Channels – Historically, HardHead has sold primarily through the Mom-and-Pop specialty bike retailer channel. Channel mix has recently moved to 50% discounters (e.g. Wal*Mart) and it looks like discounters will dominate in future. Explore with candidate: How are these changes in distribution channel going to effect the company’s future prospects? Good Answer: Margins will come under pressure from discounters. But more importantly, competitors such as Nike will have a tremendous advantage in the discounter channel due to greater scale and leverage in distributor relationship. Also, a recognizable consumer brand (especially with the sports image of Nike) creates competitive advantage in discounter channel where an expert bike-shop salesperson is not there to push the HardHead product. Cost Position – HardHead and all competitors are manufacturing in Asia, so costs are very low. No competitor is likely to be able to realize any greater cost advantage. Don’t let the candidate get distracted in finding cost savings – this is not that kind of case. Regulatory Issues – In the last 5 years, most states passed helmet laws. Explore with candidate: What impact does this fact have? Draw a graph of revenue over the past five years and projecting into the next five years.

42 Good Answer: This drove a significant increase in sales as helmets were purchased for the first time. This event will not be repeated, so sales will level off. Customer Segments – The customer segments that HardHead sells to primarily are the Adult Cycling Enthusiast segment, the Casual Biker segment, and the Under 18 segment. Explore with candidate: How would you expect the purchase behavior to differ between these segments? What does each segment want in a helmet? Good Answer: Adults purchase a new helmet infrequently (only after a crash or significant wear) while children must have new helmets every few years as their head size grows. Adult Cycling Enthusiasts are more concerned about having the coolest gear and tend toward more fashion-forward designs. The Casual Biker is more conservative in their fashion but still wants something that looks cool. Childrens’ helmets are purchased by their parents who care about safety but influenced by the kids who care about cool. For strong candidate, explore: What would you expect the size of each of these segments to be? What are the implications for HardHead’s future earnings? Good Answer: Let the candidate come up with all of the assumptions and then work the math. Actual numbers don’t matter much as long as the assumptions are reasonable and the math is done correctly. Note that 100M households is the standard assumption in consulting. Assume 100M households, 50% have children with 2 children per household, 75% of children ride bicycles, therefore: 75M Under 18 customers. Assume 2% of adults are Cycling Enthusiasts, or 2M. Assume 20% of adults are Casual Bikers, or 20M. Since the helmet laws created a large number of one-time purchases, we need to rely on the Under 18 market and new entrants to the adult segments for ongoing sales. Product – From a safety standpoint, there is no new innovation in design. From a fashion standpoint, there is much innovation, especially by the new entrants. If the candidate is having trouble exploring all of the above topics, provide some direction to help them along (e.g. ask “Do you think that there might be any government regulation that would impact past or future sales?”)

43

Conclusion A star candidate will see that his/her time is nearly up and will present a recommendation for the PE firm without prompting. If the interview is within 3 minutes of the end, ask: “The partner from the PE firm just walked into the room and wants to know if he should do the deal.” Good Answer: The short answer is ‘No.’ •

HardHead has been experiencing exceptional growth due to the one-time market expansion caused by new helmet laws and its historically strong market share. This unsustainable growth would result in an overvalued acquisition price.

•

New market entrants by Nike, Reebok and others will quickly steal share as consumers gravitate toward the general sports-affiliation of these well-known brands.

•

Bike helmets have been largely utilitarian, but the sports brands are likely to quickly move helmets into the fashion arena, putting HardHead at a significant disadvantage.

•

Furthermore, with the channel shifting strongly away from the specialty bike retailers and toward the mass discounters, the national sports fashion brands will have more leverage with the retailers, possibly commanding better margins, placement, assortment, and advertising support.

•

The only scenario in which the firm might consider the acquisition is if they have interest in another fashion brand that might be combined with HardHead to allow it to compete against the new fashion helmet brands such as Nike.

44 Case 4: ABC Conglomerate Bain, 1st Round About This Case This was a first-round Bain case. It is fairly straightforward in the analysis, but the difficulty lies in keeping the information straight between the three divisions. Give out the information freely, but make the candidate ask for each piece of information for each company. In order to crack this case, they will need to have neat and orderly notes and be able to quickly form a mental picture of each of these different divisions. Note that this case is also difficult because there is no information about the products or industries. This is not important to the case, so don’t make anything up – just tell the candidate that they should focus on the information they have. The Problem The CEO of a major conglomerate is dealing with poor profitability in each of his three divisions: A, B, and C. What should he do to maximize value for his shareholders? Information Gathering Read this information well before you give the case. The same information is available for each of the divisions, but make the candidate ask for each division’s information separately rather than summarizing the data for them. Do not offer any information without being asked specifically and concisely for it. Division A Competition – The firm is the clear market leader with 60% share. Cost Structure – Manufacturing is done in Asia by all firms and is largely considered to be as low-cost as possible. Revenues – This division generates over 60% of the firm’s revenues but gross margins have been declining in recent years. The high fixed costs maintained by this division have moved net income into the red as gross margins have declined. Pricing – Prices have been becoming increasingly competitive. Division A has had to price aggressively to maintain sales volume, even with its strong market leadership position. Market Trends – The overall market for division A’s product has been shrinking in the last few years and looks like it may continue to do so.

45 Customer Preferences – Customers are moving to an entirely new product category as a substitute, and prefer the product category of Division A less and less. Threat of Substitutes – A new product category is filling the customer need previously served by Division A’s product. Division A is not well positioned to enter this new category. Division B Competition – The firm has only 5% and is one of many players in the market. Cost Structure – This market is relatively new and it is believed that costs can be reduced significantly from their current position. Revenues – Revenues have been low but growing. The division is running a negative net cash flow as it is currently investing in marketing, R&D, and plant capacity. Pricing – A wide range of prices exist in the market currently with margins generally high. Market Trends – The overall market is growing at 10% a year and is expected to experience significant growth in the near future. Customer Preferences – This is a relatively new product category and consumers are not yet sure what they want or like. Division C Competition – The firm has 50% share with only one other major competitor and a few minor ones. Cost Structure – The firm has significant economies of scale and has the lowest variable cost in the market. Significant expenditures are being made in marketing, R&D, and plant capacity in an attempt to grow revenues. Revenues – Revenues have been strong with good operating margins, but have been flat for the past few years. Pricing – Division C has a price leadership position in the market. Market Trends – The overall market is not growing and expected to remain flat for the foreseeable future. Conclusion

46 A star candidate will see that his/her time is nearly up and will present a recommendation for the client without prompting. If the interview is within 3 minutes of the end, ask: “The CEO just called and wants to know what he should do.” Good Answer: Clearly the conglomerate needs to rationalize its company portfolio to maximize shareholder return. Each of the three divisions is in a different stage of the market lifecycle and needs to be treated accordingly. Division A finds itself in a declining industry with no apparent way to move into a new product category. As the incumbent firms struggle to maintain volume in a shrinking market, prices have fallen along with volume. Operating income is no longer enough to cover a high fixed cost base and the company is bleeding with little chance to recover. Division A should be divested immediately. Division B is in an emerging growth market. While it is not making money today, it is in a favorable industry and represents a strong investment opportunity. The division should invest aggressively in R&D, marketing, and production capacity in an attempt to become the market leader by developing differentiated, branded products. Division C is the leader in a mature industry and has the ability to generate a steady stream of cash for use in other investments – namely Division B. Division C should streamline operations by eliminating all expenditures not directly needed to maintain profitability and should be managed as a cash cow.

47 Case 5: Artificial Turf 1st Round The Problem Our client would like us to estimate the market for artificial turf. How would you approach this question? Information Gathering Read this information well before you give the case. Share this information in each bullet only if the candidate asks for it in a clear and deliberate way. This is a market sizing problem, so rarely is any more information provided. It tests the candidates comfort with ambiguity. The candidate should lead the discussion and start brainstorming on the uses of artificial turf: •

• • • •

Sports fields o Football o Soccer o Rugby o Golf Commercial businesses Residential Airports Schools o High schools o colleges

After the candidate has identified some uses for artificial turf, prompt him to estimate the number of schools in the US. (or any of the places where artificial turf is used) Analysis To estimate the market size of turf in high schools in the US we have to estimate the following: • Number of schools • Number of sq feet of turf that is bought each year / high school • Price of turf / sq foot We start by estimating the number of schools: Number of schools in the US = Number of high schools + number of colleges + number of community colleges Number of High schools:

48

Population of US = 300 M (M=million) Percent of population age 18 = 1% (assuming population is equally distributed) Number of people age 18 = 300M x 1% = 3M Assume 80% go to high school, then the number of people age 18 who go to high school = 3M x 80% = 2.4M Assume that on average there are 250 18-year-olds in a high school. Then the number of high schools = 2.4M / 250 = 9,600 high schools Number of Colleges – bachelors colleges: Population of US = 300M Percent of population age 19 = 1% Number of people age 19 = 300M x 1% = 3M Assume 25% of people go to college, then the number of 19-year-olds who go to college = 3M x 25% = 750,000 Assume that the average size of graduating class is 400 students, then the number of colleges is = 750,000 / 400 = 1875 colleges Number of Colleges – community colleges: Assume 10% of people go to community college, then the number of 19-year-olds who go to community college = 3M x 10% = 300,000 Assume average graduating class is 200 students, then the number of community colleges is = 300,000 / 200 = 1500 community colleges Total amount of artificial turf: Make the following assumptions: • price of turf = $10 / sq feet • lifetime of turf = 10 years • athletic field = 60 yards x 120 yards = 60 x 3 feet x 120 x 3 feet = 64,800 sq ft • adoption of turf = 50% Now we can calculate the market size for turf: • Number of schools = 9,600 + 1,875 + 1,500 = 13,000 • Number of sq feet of turf that is bought each year / high school = 1/10 x 50% x 64,800 = 3,240 sq feet • Price of turf / sq foot = $10 Market size = 13,000 x 3,240 x $10 = $420 Million Conclusion The market size for artificial turf in schools in the US is about $420 Million.

49 Case 8: S SOFTWARE BCG, 2nd Round The Problem An US software company wants to offshore its engineering/designing unit to India, as well as to penetrate into the India software engineering market. Should they do it? Information Gathering Read this information well before you give the case. The candidate is supposed to figure our following information by asking appropriate questions. The interview style is pleasant but reserved. Since it’s a two-fold question, a strong candidate will begin with laying out a clear scope and then gather relevant information to analyze the situation.

Other benefits of off-shoring

Significant

Minor

Off-shoring is critical to access local market Yes No Definitely offshore Offshore but also find out other critical factors to enter the India market Evaluate the India market Stay in current market independently with and strengthen market, customer, competitiveness competition, etc.

Market Share – the company is the industry leader in US with close followers chasing behind. Profitability – declining (unknown reason, but increasing labor costs can be a reasonable assumption). Capability – strong engineering department in the US. Cost – R&D is the major cost and Indian engineers are estimated to be 1/4 of the cost of the US engineers with the same technical capability. Customer – • Has a strong existing customer base in the US. • Customers care about the quality of service, but are also considering lowering cost in the long run. A strong candidate should follow up with questions about customer segmentation.

50 • • •

Most of S Software’s clients are medium to large companies in US. The most profitable clients are large companies in developed countries where S Software already has a strong base. S Software doesn’t have any international presence yet.

Competition – US • Key US competitors are all off-shoring in order to lower the cost. Competition – International • The growth of the international market is impressive compared to the more mature and stable US market. • Key competitors are expanding their international business aggressively. • India is one of the fastest growing international markets as well as the one with the largest market size. A strong candidate will get the hint that entering the international market, especially the India market, is critical for the company to both fulfill current customer’s emerging needs of cost saving and grow its future business. He/she should then start to compare the competitive advantages between large US companies off-shoring and local Indian players.

Ability to fulfill customized needs High quality services Access to most profitable clients Cost advantage Local market knowledge Local client / government / supply chain relationships Low legal risks

US companies O O O

Indian players

O O O O

O

Conclusion The short answer is “Yes”. The situation falls into the upper left corner of the matrix because – •

In the long-run, even current customers with established relationship will need to look for cheaper alternatives. S Software can offshore its R&D to lower the cost but still keeps its customer service team in the US to maintain the high service quality.

•

Although clients in the developed country are more profitable, the actual growth of the market is limited. Developing markets like India might not be as profitable as the US, but with the huge and growing market size, even capturing a small percentage of the market can provide substantial profits.

51 •

S Software might lack knowledge of the Indian market, but its strong customer relationship management skills, large existing customer bass, and the understating of unique customer needs can be further leveraged in India. In addition, hiring local talent or partnering with local companies can help solve the concern of the lack of local knowledge.

•

The legal risk as well as the political risk in India can be considered low.

52 Case 9: H HEALTH McKinsey, 1st Round The Problem A US health care provider suffered a profit decline last year. You are hired to solve this problem. Information Gathering Read this information well before you give the case. Basic information should be given as the candidate asks for it, but the rest of the interview is very directive. The candidate is supposed to follow the direction and do the math confidently. The interview style is pleasant and helpful. Background Information • The key revenues come from commissions. • H Health signs contracts with patients and provides medical services. • H Health has 300 contracted physicians. • A “referral” is necessary if certain medical treatment/service can’t be provided by H Health’s contracted physicians. Question 1: How would you approach this problem? Answer: Profit = Revenue – Cost = No. of patients * (unit price – variable cost) – fixed cost The candidate can be creative to come up with possible reasons for revenue decrease and cost increase. Some examples – Revenue declined: - number of patients dropped - unit price dropped - competition grew their market share Cost increased: - VC: number of visits increased (e.g. major flu), per person cost increased (e.g. cost of the medicine), referral cost increased - FC: physician’s salary increased Question 2: Competitor analysis – why is our referral cost higher than the competitor? Sunshine H Health Number of patients 300,000 500,000 Referral cost $20 (per member, per month) $15 (same)

53 Answer: (again, the candidate is encouraged to be creative) - Economies of scale - Lower administration costs - More contracted physicians Question 3: Assuming none of the contracted physicians have the specialty of cardiology, estimate the number of referrals per year for cardiology based on the following information: Number of patients: 300,000 20% of the total population is > 65 years old, and 30% of them need treatment For the rest of the population, there’s a 10% chance for them to require the treatment The treatment usually requires 5 visits to the doctor per year. Answer: >65 years = 300,000*0.2*0.3 = 18,000 <65 years = 300,000*0.8*0.1 = 24,000 42,000*5 times/year = 210,000 (times/year) Question 4: The actual number of referrals is 300,000. Why is it higher than the estimate? Answer: - H Health’s clients do not have the same weight between different ages as the total population - They underestimated the number of visits per year - More demanding patients ask to be referred even if they don’t have such issues - Physicians refer non-cardiology patients because they don’t want to take the risk and are not motivated to provide services even if they are capable Question 5: How much does the number of referrals have to decrease in order to justify following incentive plan to encourage contracted physicians to be more responsible? Incentive plan: Bonus: $100,000 / year to top 10 physicians with the lowest referral rate Training: $1,000,000 Referral cost: $200 per referral Current no. of referral: 300,000 Answer: Total cost = 2,000,000 2,000,000/200 = 10,000

54 Question 6: If the incentive plan can reduce the number of referrals by 5% for year one and 2% for year two, what is the total saving? Answer: Y1 = 300,000*5% = 15,000 Y2 = (300,000 – 15,000)*2% = 5,700 Total saving = (15,000 + 5,700)*$200 - $2,000,000*2 = $140,000 Question 7: Apart from Cardiology, how can H Health improve the number of referrals in general? Answer: - Increase training to improve physician’s capability - Extend the incentive program to other departments - Improve the quality of relationship with the patients and build up the trust - Improve/remove physicians who are outliers with extremely high referral rate - Increase the no. of contracted physicians - Partner with other health care provider to lower referral cost Conclusion According to the example of cardiology, H Health should improve its profitability by lowering the referral cost. H Health can • reduce the number of referrals, and/or • reduce the cost per referral

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60 Maine Apples Case - Solutions and De-Brief Origins This case initially appeared as a text case, without slides, in the 1999-2000 Case Book at Tuck School of Business at Dartmouth College. It has been adapted, turned into slides, and further modified by the team that wrote this case book. We$>",A?*"(-"()34?"()*";80?"/0)--,"34>" their 2003-2004 Consulting Club co-chairs, Adam Borchert and Joep Knijn (both from the Tuck Class of 2004), for allowing us to modify and to use this case. General Comments This case also has a lot of number crunching!! As such, it is a little bit more quantitative and less qualitative than the average case. However, like the GOTONet case, it is entirely possible that you will see a case such as this one at some point during your interviews. Also, it is not entirely quantitative, as there are some non-numerical insights that the candidate needs to come up with as well. Solutions/How to Give the Case The person giving this case needs to give the interviewee the first slide (page 73) as background before asking him or her to state the central question of the case. Based on the first slide, the candidate should be able to come up with the question in slide #2 (page 74). Ideally, the candidate should come up with both facets of the question: 1) the minimum necessary size of the market, and 2) the need for profitability. Slide #3 (page 75) presents the prospect with enough information to answer the two questions at the bottom of the slide. The answer to question #1 is $30,000/acre x 200 orchards x 100 acres/orchard = $600 million. The answer to question #2 is yes ! that is indeed large enough to continue.

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61 The interviewer should then ask how the candidate should go about solving the problem. The best answer is to focus on pricing, and the prospect will be doing well to identify the two questions on slide #4 (page 76) before the slide is given to him or her. If (s)he is having trouble getting to those questions, ask him or her about the components of profitability. (The answers are revenues and costs.) Among those, which should be harder to estimate? Since the client should have a decent idea of how much this stuff costs to produce, the answer is revenues. Then, within revenues, there are pricing and volume components. Since we now know the market size, we can at least estimate volume, leaving pricing as the unsolved question. Pricing will be a function of how much money we make for the client, and how much of that we can capture. Slides #5-7 (pages 77-79) break out this question into three separate calculations. The interviewee should be given one slide at a time, asked to calculate incremental profits on a per-acre, per-year basis, and then to write the answer in the blank space at the bottom of the slide. The answers are as follows: 1. Slide #5 (page 77) - $1,500/day x 10 days / 100 acres = $150/acre/year 2. Slide #6 (page 78) - $30,000/acre x 25% x 10% = $750/acre/year 3. Slide #7 (page 79) - $30,000/acre x 75% x 5% = $1,125/acre/year On slide #8 (page 80), the candidate should sum these numbers to a total benefit of $2,025/acre/year. The second question on slide #8 is more subjective. Ask the candidate what a reasonable percentage would be. This is a perennial question for many products. Working in our client$6" 13G-7"A6"()*"5-4-@-,'"43(87*"-1"()*"@7->80(9"&8("H-7?A4."3.3A46("A("A6"()*"4*H4*66"34>" resulting lack of social proof. The best answers will be between 25% and 50%. Anyone who thinks that the client can capture all 100% of the orchard owner$6"@7-1A("A6"65-?A4."0730?B""V1(*7"

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62 the interviewee gives you his or her percentage, say that we will use $1,000/acre/year as our pricing for the sake of simplicity (this is just under 50%). Using that pricing, and the information given at the top of slide #9 (page 81), the candidate then calculates that our costs are $500/acre/year ($100,000 / 200). That gives us a gross margin of $1,000/acre/year - $500/acre/year = $500/acre/year, or 50%. This is high, and indicates that our client should proceed ahead with commercialization.

Finally, ask the

interviewee what other, non-financial factors should be considered. (S)he should be able to come up with at least some of the issues on slide #10 (page 82). In conclusion, this case tests a candidate$6" 3&A,A('" (-" >-" 3" ,-(" -1" 485&*7" 07840)A4." 34>" come up with the right answers. It is best to do all calculations in terms of per acre per year, but the candidate should figure that out on his or her own. If (s)he calculates the numbers in a different way, (s)he can then normalize the units when it comes time to add. The key qualitative insights relate to the nature of value-based pricing: the need to quantify how much money our client$6"@7->80("HA,,"53?*"1-7"its clients, and a realistic estimate of how much of that money our client can capture. Finally, common sense and a basic familiarity with new product introduction should guide the successful candidate to some or all of the qualitative issues on the last slide.

2004 Kellogg Consulting Club Case Book

85

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2004 Kellogg Consulting Club Case Book

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2004 Kellogg Consulting Club Case Book

8_

96

73 Orrington Office Supplies Case - Solutions and De-Brief Origins The Orrington Office Supplies case was adopted from a case in the Bain & Company Chicago Office Practice Case Book in the fall of 2002. We$>",A?*"(-"()34?"()*"N)A03.-"O11A0*"-1" Bain & Company, particularly Andy Grieve (Kellogg Class of 2001), for allowing us to modify and to use this case. General Comments This case combines public math with the need to come up with some key qualitative insights. More information than usual is presented up front, leaving the candidate to create the structure and decide which are the most important issues to pursue. The candidate also will need to ask for the information that they need, and interpret it once they have it. And the calculations toward the end of the case will definitely provide a public math workout! Solutions/How to Give the Case The interviewer needs to give the interviewee the first two slides (pages 87-88) as background before asking him or her how to structure the analysis. Hopefully the candidate will realize that a recent profitability decline is the most urgent and important issue and ask for some revenue and/or profitability trends. At that point, the interviewer can show slide #3 (page 89). Ideally, the candidate should not only be able to interpret the data on this slide, but also to come up with two insights about this slide: 1) the fact that profits have been declining more steeply than sales reflects the fixed-cost nature of this business, and 2) the reason that sales did not grow at a faster clip than profitability during the 1980s likely reflects a strategy to grow through acquisitions, which prevented OOS from seeing the gains through economies of scale that one would normally expect in a business such as this.

2004 Kellogg Consulting Club Case Book

97

74 Slides #4-6 (pages 90-92) all contain additional background information about the situation. The interviewer should then ask what should be done about the situation. While the channel migration to superstores is interesting, it and other macroeconomic trends are beyond the scope of the client to control. That piece of analysis, coupled with the fact that our client$6" manufacturing capacity utilization is only 50%, should point the candidate in the direction of plant consolidation. The interviewer can provide hints if necessary, but should not give slide #7 (page 93) until the candidate has been able to produce this insight. Slide #7 reveals that only the Chihuahua plant is close to having the capacity to produce the required number of different stock-keeping units (SKUs). Either OOS can close that plant and move all production to the U.S. or it can close the two U.S. plants, discontinue 500 SKUs, and consolidate all production in Chihuahua. Insightful candidates will ask to see fixed and variable cost data from the different plants; the interviewer will then produce slide #8 (page 94). The interviewee should realize without doing too many calculations that the latter option (consolidating in Chihuahua) is preferable. To reality-test this hypothesis, slide #9 (page 95) asks the candidate to make all of the relevant calculations, which are: Revenues: Each SKU earns annual revenues of $22,000 ($275 million divided by 12,500 SKUs). Therefore, eliminating 500 SKUs will shave $11 million, or 4%, off of annual revenues. Costs: Each plant currently has the following annual costs, totaling to $136 million: Chihuahua: $20,000,000 + ($4,000 * 4,500 SKUs) = $20M + $18M = $38 million Michigan: $15,000,000 + ($7,900 * 5,000 SKUs) = $15M + $39.5M = $54.5 M New Jersey: $18,000,000 + ($8,500 * 3,000 SKUs) = $18M + $25.5M = $43.5 M Consolidating production to Chihuahua will reduce annual costs by 50% to: Chihuahua: $20,000,000 + ($4,000 * 12,000 SKUs) = $20M + $48M = $68 M

2004 Kellogg Consulting Club Case Book

98

75 Profits: We have reduced costs by $68 million and lowered revenues by $11 million. This will increase profits by $57 million, to $82 million, which more than triples them. This slide may take up to 10 minutes, which is OK, because many of the earlier slides take much less time than average. Finally, common sense and a basic familiarity with manufacturing operations should guide the successful candidate to some or all of the qualitative issues on the last slide (page 96).

2004 Kellogg Consulting Club Case Book

99

76

Practice Cases – Case 11: FormCo

Bain & Co.

(Source: Raw data provided by Bain Chicago Office, 2006) Context FormCo is the leading manufacturer of paper-based business forms. Majority of FormCo’s products are sold through banks to small businesses and consumers. Increase in paperless and on-line transactions have decreased demand for FormCo’s main products. When FormCo’s products are sold through the banks, customers rarely choose higher-margin, premium products. FormCo wants to develop a phone-based direct to customer channel to encourage customers to order through the direct-to-customer channel, rather than through banks. FormCo wants to use this channel to increase probability of “upselling” higher margin products. Should FormCo pursue its proposed idea of developing the phone-based direct-tocustomer channel? If interviewee asks to further explain the difference between the two channels: The Bank channel: Banks offer FormCo products to their existing customers without additional sales/marketing effort. If Banks’ customers are interested, they place the order with the bank but sometimes call FormCo’s call centers for simple inquiry. The Direct to Customer channel: Customers call directly to inquire and place orders. Call center representatives have to have more specialized knowledge to handle this channel. A good framework may include the following: To decide if FormCo should pursue the new channel strategy, I’d like to look at the incremental revenue and incremental costs created by the new channel to see if it is going to be profitable. On the revenue side, I’d like to look at how much revenue will be brought in by the new channel (thru more customers and selling more premium products). I would also assess the cannibalization on the current channel. On the cost side, I’d like to identify cost buckets such as call center set up or expansion cost, incremental labor cost, and SG&A. If the channel is profitable, we need to further look into issues such as impact on our current operation, learning curve, competitive reaction, etc. If the channel is not profitable, we can discuss other opportunities to improve FormCo’s profitability. If interviewee asks about revenue data, show Exhibit 1 and ask interviewee what conclusion could be drawn from the charts. Conclusions from Exhibit 1 may include: The Direct to Customers channel brings in more revenue per order. The incremental revenue brought in by the Direct to Customers channel is $1,000M – cannibalization. Part of the loss of volume and revenue thru the Bankers channel is cannibalized by the new channel (part of it may be due to decreased demand). Once interviewer recognizes cannibalization, tell interviewee that 80% of the Banker channel revenue loss is due to the new channel. Interviewee should calculate total incremental revenue thru the new channel is $600M (=$1,000M – 80%*$500M). If interviewee asks about cost data, let interviewee identify cost buckets first, then give the cost data: Per order, COGS is $2.3 and other costs are $5.0.

68

77

Practice Cases – Case 11: FormCo

Bain & Co.

Interviewee should be able to calculate that incremental revenue per order is $7.5 ($600M/80M). Therefore, the incremental profit per order is $.2 and total annual profit is $16M. Once interviewee reaches the conclusion that the new channel strategy will bring in $16M in annual profit, quickly direct interviewee to the following question. FormCo implemented the phone-based Direct to Customer channel. However, they didn’t make the projected profit. What might have happened? Interviewee should assess both revenue and costs: It could be that we didn’t reach projected revenue because of worse than expected market demand, competition, changes in customer preference, ineffective sales/marketing, etc. It could also be that costs are higher than projected due to increase in raw material cost, process inefficiency, higher than expected labor costs, etc. Interviewer: The # of orders and revenue are as projected. The overall costs are higher than expected. Show Exhibit 2 if interviewee asks about cost data. Tell interviewee that currently all inquiries from the new channel are routed to Specialty reps. Interviewee should conclude from Exhibit 2 that: All call centers are under utilized with Phoenix call center having the lowest utilization. We may look into consolidating call centers to reduce costs. Only two call centers, Phoenix and Dallas, handle customers from the new channel. It could be a result of the routing strategy (intended or unintended) or only those two call centers can handle the new channel. Interviewer: Let’s look at the Phoenix call center cost structure to see if there is anything we can do to improve profitability. Total annual cost of the new channel: $313M % of total cost: COGS: 30% (calculate: 94M) Call center reps salary: 55% (calculate: 172M) (% is a lot higher than call centers that don’t handle the new channel) (Regular reps: 15% Specialty reps: 40%) Other: 15%

(calculate: 47M)

Interviewee needs to calculate Phoenix call center annual revenue and profit. The Phoenix call center handles 53% of calls from the new channel. Assume it’s proportional to orders and revenue. Therefore, the revenue is $320M and profit is $7M. Direct interviewee to brainstorm ways to improve cost structure based on given data. A good answer focuses on reducing reps salary cost since it’s the highest cost item, and specifically focuses on reducing specialty reps costs: -

Currently all inquiries from the new channel are routed to Specialty reps. Analyze those inquiries to see if some simple ones can be routed to Regular reps. If there are some common inquiries, FormCo can standardize answers and let Regular reps handle them or have FAQ’s on internet or thru automated phone system. Some of inquiries from bank customers might be mis-routed to Specialty reps. Needs to have a better routing system.

69

78

Practice Cases – Case 11: FormCo

Bain & Co.

Exhibit 1

2004 Projected orders and revenue # of Orders (M)

Revenue ($M)

250 1,500

200 80

150 100

1,000

1,000

210 500

120

50

1,100 600

0

0 2003 Banks

2004 projected Direct to Customers

2003 Banks

2004 projected Direct to Customers

CHI 040908-BPB-CAS-case

4

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

70

79

Practice Cases – Case 11: FormCo

Bain & Co.

Exhibit 2

Call Center Volume Daily Calls 2,000

1,500

350

1,000

575 125 440

400

320

500 700 450

0 Call Capacity

525

480

Phoenix

Dallas

Charlotte

Salt Lake Ctiy

1,400

1,800

1,250

1,100

Other Direct to Customer Bank Orders Customer Service

CHI 040908-BPB-CAS-case

6

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.

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Comp #2

100% Comp #3

6L :>1.$(0,&;K1./(+,$@1+$0&$A1=&$7;(A$.>/,$);1I>P !L :>1.$G(-'=$H(-$&MI&@.$.($>1II&+$/+$.>;&&$H&1;,P *DE$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 <((=$:>('&,1'/+)$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

Q6

51

83 J>&$@'/&+.Z,$I(,/./(+$/+$.>&$H&1;$!"""$/,$+(G$,>(G+$ ,/=&40H4,/=&$G/.>$/.,$!""C$I(,/./(+ 688]

!""" !""" !"""

!"""

Asia

5%

!""C

Asia

15%

Europe

40%

Europe

35%

N.A.

55%

N.A.

50%

0%

25% Our Client

50%

75% Comp #1

100%

Comp #2 Comp #3

0%

25% Our Client

50%

75% Comp #1

100% Comp #2 Comp #3

6L :>1.$>1,$>1II&+&=$/+$.>&$I1,.$.>;&&$H&1;,P$$:>HP !L :>1.$1;&$.>&$/AI'/@1./(+,$7(;$I;/@&4@(,.$A1;)/+,P *DE$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 <((=$:>('&,1'/+)$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

Q!

52

84 J>&$@'/&+.$/,$.;H/+)$.($7/)-;&$(-.$G>/@>$&M()&+(-,$71@.(;$/,$ =;/K/+)$.>&$);(,,$A1;)/+,$(7$/.,$/+=/K/=-1'$I;(=-@., E7$G&$>1K&$1$);1I>$G/.>$);(,,$A1;)/+$(+$.>&$H41M/,B$G>1.$G(-'=$ )($(+$.>&$M41M/,P

High

Gross Margin

Low Low

High

PPP *DE$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 <((=$:>('&,1'/+)$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

QC

53

85 J>&$@'/&+.$+(G$G1+.,$.($3+(G$>(G$=&A1+=$&'1,./@/.H$G/''$ 177&@.$.>&$);(,,$A1;)/+,$(7$/.,$/+=/K/=-1'$I;(=-@., :>1.$,>(-'=$.>&$);1I>$'((3$'/3&P

High

Gross Margin

Low Low

High

Demand Elasticity *DE$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 <((=$:>('&,1'/+)$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

Q#

54

86 E.$.-;+,$(-.$.>1.$=&A1+=$&'1,./@/.H$1+=$);(,,$A1;)/+$=($+(.$ >1K&$.>&$/+K&;,&$'/+&1;$;&'1./(+,>/I$.>1.$G&$G(-'=$&MI&@. 40

High

35 30

Gross 25 Margin20

E EE E^ EEE

15 10 5 Low

0

Low 0

1

2

3

4

5

High

6

Demand Elasticity

6L :>1.$(0,&;K1./(+,$@1+$H(-$A13&$7;(A$.>/,$);1I>P !L :>1.$,>(-'=$.>&$@'/&+.",$+&G$,.;1.&)H$0&$/+$&1@>$ (7$.>&$7(-;$);1I>$N-1=;1+.,P *DE$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 <((=$:>('&,1'/+)$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

QQ

55

87 Food Wholesaling Case - Solutions and De-Brief Origins This case was initially given to Colby Maher (Kellogg Class of 2003) in an interview that she had with consulting firm Booz Allen Hamilton. It was later adopted by Kellogg Prof. David Besanko for his use in his Microeconomics primer for the Consulting Club in both the fall of 2002 and in the fall of 2003. It was then slightly further adapted and modified by the team that wrote this case book. We$>",A?*"(-"()34?"M--S"V,,*4"[35A,(-49"N-,&'"23)*79"34>"L7-1B"M*634?-" for allowing us to modify and to use this case. General Comments The case primarily tests an understanding of microeconomic concepts. As such, it is a little bit more qualitative and less quantitative than the average case. However, it is entirely possible that you will see a case such as this one at some point during your interviews. Solutions/How to Give the Case The person giving this case needs to give the interviewee the first two slides (pages 49 and 50) as background before asking him or her any questions. At slide #3 (page 51), the prospect is presented with a chart and asked to interpret it by answering two questions. The key insights on question #1 are that the client is the leader in a two-company oligopoly in North America, its biggest market. It is in a highly competitive situation in Europe, and an even more competitive position in Asia where it has two competitors that are only slightly smaller, and a third competitor with a decent market share as well. For question #2, the prospect should ideally identify three major points: 1) given the economies of scale and distribution that are likely prevalent in this business, we expect them to use these advantages and the "*R@*7A*40*"087G*#"(-"

2004 Kellogg Consulting Club Case Book

56

88 increase their market share lead in North America; 2) conversely, we would expect them to lose market share in Asia and Europe during this time, for the same reasons; and 3) given the high growth rate in Asia relative to the other two continents, we would expect the Asian share of our client$6" -G*73,," &86A4*66" 5AR" (-" A407*36*B (Note: The candidate can infer from the information presented that the market in Asia is growing, since our client$6"537?*("6)37*"A4"V6A3"A6">*0,A4A4.9" but at the same time Asian sales are accounting for more and more of its total. This means either that the Asian market is growing or that our client$6"63,*6"37*">736(A03,,'">*0,A4A4.B"";)*"1-75*7" explanation seems to be the more logical of the two.) If the candidate produces these insights, slide #4 (page 52) should confirm their hypotheses. If not, it will be necessary to tease these insights from him or her, or just say why if (s)he is really stuck. As for question #2 on page 52, price competition should be softer in the U.S. than in Asia due to our client$6"0-5534>A4."537?*("6)37*"34>"()*"130("()3("()*7*"37*"1*H*7" competitors. For bonus points, the candidate could also mention that the U.S. market may be more fertile ground for price leadership and that it may be easier to track competitor moves. Slide #5 (page 53) presents the candidate with a graph and asks him or her to label the xaxis. The correct answer here is demand elasticity. That answer is revealed on slide #6 (page 54), which in turn asks the candidate to draw the most logical line on the graph, which is a downward-sloping straight line from the upper left-hand corner to the lower right-hand corner. Finally, at slide #7 (page 55), the actual graph appears and is different than what we expected. The observation from the graph is that there is no apparent effect at all from demand elasticity on gross margins. This leads us to the conclusion that profits will increase if we change our pricing strategies in Quadrants II and IV. We should leave pricing alone in Quadrants I and III, since points in those areas are behaving in the way that we would expect them to. In

2004 Kellogg Consulting Club Case Book

57

89 Quadrant II, demand elasticity is high, yet we are still earning a high margin, indicating that there is room to cut prices here and still increase profits. In Quadrant IV, demand elasticity is low, yet margins are also low, meaning that we can raise prices to capture additional consumer surplus. These insights regarding elasticity and profit-improving price changes will occur to the candidate easily if (s)he invests some effort in understanding price elasticity of demand and its relationship to changes in revenues as price is reduced 1%. These are the main concluding insights of this case.

2004 Kellogg Consulting Club Case Book

58

90 UFJF\&.$@-;;&+.'H$/,$1$'&1=/+)$EWV$/+$.>&$`W[ !

/0102(34$*,$567$85,3(9,(3$6(9:+;($79":+#(9<$"==(9+,-$ )(9:+;()$+,$3&($>,+3(# 63*3()4 +)$3&+,?+,-$*@"A3$(,3(9+,-$ 3&($BA9"C(*,$D*9?(3$="9$567)E$1&A)$=*94$3&(F$&*:($ )A;;())=A''F$;*C3A9(#$3&($#"D+,*,3$C")+3+",$*,#$ )A)3*+,(# C9"=+3*@+'+3F$#"D()3+;*''F$G&+'( 9(;(+:+,-$ 9(:(,A()$+,$3G"$)(C*9*3($G*F)H IE ;&*9-+,-$* )A@);9+C3+", *;;())$=((J$*,#4 KE 9(;(+:+,-$*$C(9;(,3*-($"=$*''$(L;"DD(9;($39*,)*;3+",)$3&*3$3&(+9$ )A@);9+@(9)$A,#(93*?(E

!

/0102(3$&*)$*'9(*#F$C(9="9D(#$)"D($#A($#+'+-(,;($",$ 3&($567$D*9?(3$+, BA9"C($*,#$&*)$'(*9,(#$3&*3$3&($ D*9?(3$+)$:(9F$=9*-D(,3(# *,#$D*F$@($9+C($="9$(,39F

!

M"A$*9($+,$*$D((3+,-$G+3&$3&($.B0$"=$/0102(3$*,#$&*:($ @((,$*)?(#$3" C(9="9D$)"D($NA+;?$!@*;?$"=$3&($(,:('"C($ ;*';A'*3+",)"$",$G&*3$3&( C"3(,3+*'$C9"=+3*@+'+3F$"=$ (OC*,#+,-$+,3"$BA9"C( G"A'#$@( *DE$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 UFJF\&.$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

_"

60

91 UFJF\&.O$%&H$N-&,./(+

*1+$UFJF\&.$1@>/&K&$ I;(7/.10/'/.H$/+$T-;(I&$G/.>$/.,$ @-;;&+.$I;/@/+)$A(=&'P$

*DE$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 UFJF\&.$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

_6

61

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

2004 Kellogg Consulting Club Case Book

_!

62

93 J>&$UFJF\&.$*TF$>1,$,(A&$N-&,./(+,$.>1.$,>&$ G1+.,$H(-$.($1+,G&; IE 7'(*)($#(3(9D+,($"A9$*,,A*'$,(3$ +,;"D($8@(="9($3*O()<$+,$BA9"C(4$-+:(,$ 3&($;A99(,3$9(:(,A($D"#('$*,#$)(3$"=$ *))ADC3+",)E [\W:T9O$#

KE /+:(,$3&($*@":(4$G&*3$+)$"A9$*,,A*'$ -9"))$D*9?LAC4$+,$C(9;(,3*-(U$ ! [\W:T9O$

a *DE$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 UFJF\&.$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

_C

63

94 J>&;&$/,$+(G$1$+&G$G;/+3'&$/+$.>&$UFJF\&.$ ,/.-1./(+ /0102(3$&*)$,"G$'(*9,(#$3&*3$9(;(,3'F$*$ ,(G$(,39*,3$&*)$;*C3A9(#$*$&+-&$#(-9(( "=$D*9?(3$)&*9($@F$"==(9+,-$;",)AD(9)$ 5,3(9,(3$*;;()) ="9$",'F$#IPVD",3& RE$$1&($.B0$,"G$G*,3)$3"$?,"GH$;*,$G($ '"G(9$"A9$D",3&'F$)A@);9+C3+",$=(($+,$ BA9"C($3"$#IP$*,#$)3+''$D*?($D",(FU MB6

20 *DE$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 UFJF\&.$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

_#

64

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

2004 Kellogg Consulting Club Case Book

_Q

65

96 J>&$UFJF\&.$*TF$+(G$>1,$(+&$A(;&$N-&,./(+$.>1.$ ,>&$G1+.,$H(-$.($1+,G&;$0&7(;&$H(-$'&1K&

ZE$/+:(,$3&*3$G($;*,,"3$;&*9-($D"9($3&*,$ #IPVD",3&$="9$*;;())4$"9$-(3$(*;&$)A@);9+@(9$3"$ @AF$)+-,+=+;*,3'F$D"9($C9"#A;3)$",$3&($5,3(9,(3$ (*;&$F(*94$&"G$D*,F$)A@);9+@(9)$G"A'#$G($,((#$ 3"$)+-,$AC$+,$"9#(9$3"$@9(*?$(:(,U [\W:T9O$

*DE$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 UFJF\&.$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

__

66

97 UFJF\&.O$&$7/M&=$@(,.,$(7$ /+K&,.A&+.P !L :(-'=$.>&;&$0&$1+H$;&1,(+$.($@(+./+-&$ G/.>$.>&$/+K&,.A&+.$&K&+$/7$/.$'((3,$'/3&$ /."''$'(,&$A(+&HP CL D(G$G(-'=$H(-$,-A$-I$.>&$,/.-1./(+B$ 1+=$G>1.$=($H(-$;&@(AA&+=P *DE$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ *(+,-'./+)$*'-0$*1,&$2((3$9&4:;/.&$4 UFJF\&.$*1,&$4 ?;17.$4 1,$(7$?&@&A0&;$8B$!""C

2004 Kellogg Consulting Club Case Book

_]

67

98 GOTONet Case - Solutions and De-Brief Origins This case initially appeared as a text case, without slides, in the 1999-2000 Case Book at Tuck School of Business at Dartmouth College. It has been adapted, turned into slides, and further modified by the team that wrote this case book. We$>",A?*"(-"()34?"()*";80?"/0)--,"34>" their 2003-2004 Consulting Club co-chairs, Adam Borchert and Joep Knijn (both from the Tuck Class of 2004), for allowing us to modify and to use this case. General Comments This case has a lot of number crunching!! As such, it is a little bit more quantitative and less qualitative than the average case. However, it is entirely possible that you will see a case such as this one at some point during your interviews. Also, it is not entirely quantitative, as there are some non-numerical insights that the candidate needs to come up with as well. Solutions/How to Give the Case The person giving this case needs to give the interviewee the first slide (page 60) as background before asking him or her to state the central question of the case. Based on the first slide, the candidate should be able to come up with the question in slide #2 (page 61). Slide #3 (page 62) presents the prospect with more background information that (s)he will need to do the calculations in slides #4-7 (pages 63 through 66). On slide #4 (page 63), for question #1, annual subscription revenues are (#B<"&A,,A-4"D=$" million subscribers x (#$T5-4()"R"=#"5-4()6T'*37EB""V4483,"0-55A66A-46"37*"(J<$"5A,,A-4"D=$" million subscribers x (=9e$$T'*37"R"%_EB"";-(3,"34483,"7*G*48*6"37*"()*7*1-7*"(#B<"&A,,A-4"+ (J<$" million = (#Bf<" &A,,A-4B" KAR*>" 0-6(6 are (=" &A,,A-4B" " g37A3&,*" 0-6(6" 37*" (=B=" &A,,A-4" D=$" 5A,,A-4"

2004 Kellogg Consulting Club Case Book

68

99 subscribers x (==$T5-4()EB" ;-(3," 34483," 0-6(6" 37*" ()*7*1-7*" (#B=" &A,,A-4B"

For question #2,

annual percentage profit margin is therefore 40% ((e<$"5A,,A-4T(#B="&A,,A-4EB On slide #5 (page 64), annual subscription revenues are now (=B#" &A,,A-4" D=$" 5A,,A-4" subscribers x (=$T5-4()" R" =#" 5-4()6T'*37EB" " V4483," 0-55A66A-46" 37*" 6(A,," (J<$" 5A,,A-4" D=$" million subscribers x (=9e$$T'*37" R" %_EB" " ;-(3," 34483," 7*G*48*6" 37*" ()*7*1-7*" (=Bh<" &A,,A-4B Total costs remain (#B=" &A,,A-49" 6-" H*$ll lose (.36 billion by halving the subscription charges, making the answer "4-#. At this point, the interviewer should pause and ask the interviewee what (s)he thinks is the likely elasticity of demand. The likely answer is that it is high, meaning that it will be difficult for us to win European subscribers with a (#0/month offering. This insight leads directly into slide #6 (page 65). For question #4, we want to keep our previous level of profits ((e<$" 5A,,A-4E" ()*" 635*. Total annual costs remain at (#B="&A,,A-49" 6-" revenues will have to be (#Bf<"&A,,A-4B""V4483,"68&607A@(A-4"7*G*48*6"37*"(=B#"&A,,A-4"D=$"5A,,A-4" subscribers x (=$T5-4()" R" =#" 5-4()6T'*37EB" " /-9" 34483," 0-55A66A-46" HA,," )3G*" (-" &*" (=Bh<" billion. There are 10 million subscribers, so we need to receive commissions of (=h6"D(=hAGA>*>" &'" 3%). This is more than a threefold increase from the current projection of (=9e$$T'*37. Ask the candidate if (s)he thinks that this is realistic. The answer should be no. For question #5, total annual costs remain at (#B="&A,,A-49"6-"7*G*48*6"HA,,")3G*"(-"&*"(#B=" billion also. Annual subscription revenues are (=B#"&A,,A-4"D=$"5A,,A-4"68&scribers x (=$T5-4()" x 12 months/year). So, annual commissions will have to be (f$$"5A,,A-4B"";)*7*"37*"=$"5A,,A-4" subscribers, so we need to receive commissions of (f$T'*37"@*7"68&607A&*7B"";)3("5*346"()3("()*'" will have to buy (%9$$$T'*37" A4" .-->6" D(f$Tyear divided by 3%).

2004 Kellogg Consulting Club Case Book

This is better, but still

69

100 represents more than a 50% increase from the current projection of (=9e$$Tyear.

Ask the

candidate if (s)he thinks that this is realistic. The answer should be no again. On slide #7 (page 66), the trick is to understand that each incremental customer contributes to variable costs as well as to revenues. A new customer adds (=#$"D(=$T5-4()"R"=#" months/year) in annual subscription revenues and (J<" A4" 34483," 0-55A66A-46" D(=9e$$T'*37" R" 3%). This sums to (=h603@*"34>")A.)">*534>"*,36(A0A('"5*34" that it will be difficult for us to win European subscribers with a (#0/month offering. 2. There are various ways around this, the most promising of which is to drop price to (=$T5-4()" 34>" )-@*" (-" 0-4G*7(" -G*7" 3" )A.)*7" 485&*7" -1" 086(-5*76" ()34" H*" )3>"

2004 Kellogg Consulting Club Case Book

70

101 initially budgeted. But we need to do some market research to see if this is practical before we jump in to the market. 3. Other solutions, such as reducing fixed costs and/or using this project as a loss leader, should also be considered, and may be desirable, depending on the situation.

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71

102 Practice Case 22 (HBS as a Business) Question and Background Information: You are Dean Clark. A wealthy benefactor has come to you with the news that she will give HBS $100 million. The grant is contingent, however, upon you using the money effectively. You have 1 week to propose to the benefactor where you would use the money before she will finalize the transfer. How would you, as Dean Clark, propose to use this money? Suggested Sample Response: First, as Dean Clark, I need to think through what does spending the money effectively mean? This is a not-for-profit learning institution, but that does not mean that it is not a business. For Dean Clark to be successful, he needs to understand what drives his business and where he can achieve the biggest return for his investment. There are currently 4 major "business units" that provide a revenue stream for HBS. These include: • MBA program • Executive Education program • Publishing • Grants and donations While there are many budding initiatives, including distance learning, these are the four largest sources of revenue. If you rank the relative profitability of these revenue streams, you would likely find that the least profitable of the four is-the MBA program. Publishing is a very profitable business but it seems to have high reliance on the education business. Executive Education is very profitable, as the fees charged to the executives are quite large when compared to the length of program. Grants and donations are virtually pure profit. At first glance one might conclude that HBS should focus their resources and efforts on the highest return areas of securing grants, publishing and expanding the Executive Education program. It would follow then, that the MBA program would fall as the lowest priority for resource allocation. That would be an incorrect conjecture, however. Consider what draws people to the executive education program, for example. The brand cache of HBS drives the attendance and enables the price premium. Similarly for publishing, the value of the HBS brand provides the credibility behind the content and drives sales. So what drives the HBS brand? Clearly it is the MBA program.

HBS Case Interview Guide, Page 104

103 Dean Clark must focus on maintaining the reputation of HBS as the premier MBA program to attract the best and brightest professors and students. It is then the academic and professional work of these people that contributes to the integrity and value of the brand. Obviously the professors publish, hence enabling that revenue stream. The MBA students graduate and achieve notable success, further driving the brand. Finally, the alumni are responsible, to a large extent, for the grants and donations that HBS receives. In the end, the MBA program effectively ties in every other revenue stream both directly and via the resulting brand cache. Clearly the $100 million is best spent on the MBA program. Summary Comments This is not a particularly difficult case but it does assess the candidate's ability to think through the school as a business and reason through to the underlying driver of that business. A superb candidate will need little to no prompting to think through this case in its entirety.

HBS Case Interview Guide, Page 105

Practice Cases – Case 2: Magna Health

104

McKinsey & Co.

(Source: Sample case from McKinsey website) Context

The interviewer will typically start the case by giving a brief overview of the context, ending with a question that is the problem definition. At the end of the description you will have an opportunity to ask any questions you might have to clarify the information that has been provided to you. Our client is Magna Health, a health care company in the Midwest. It both insures patients and provides health care services. Employers pay a fixed premium to Magna for each of their employees in return for which Magna covers all necessary health services of the employee (ranging from physician care, and medications to hospitalization) Magna currently has 300,000 patients enrolled in its plan. It has 300 salaried physician employees who provide a broad range of services to patients in 6 centers. These physicians represent a wide range of specialty areas, but not all areas. When a patient needs medical treatment in a specialty area not covered by a Magna physician, they are referred outside of the Magna network for care, and Magna pays all referral costs on a fee-for-service basis. Magna doesn’t own any hospitals itself, instead contracting services from several local hospitals. Over the past six months, Magna has been experiencing declining profitability. Magna’s CEO has retained McKinsey to help determine what is causing the problem and how Magna might fix it. How can Magna Health improve its financial situation? Interviewer: How should Client determine how to improve its financial situation? Some possible areas are given below. Great job if you identified several of these and perhaps some others.

! !

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 Interviewer: 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? We are looking for a few responses, similar to the ones below:

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Practice Cases – Case 2: Magna Health ! !

105

McKinsey & Co.

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 inhouse competency

Interviewer: 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:

Magna Health 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) A good answer would include some of 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).

Interviewer: What analyses would you do if the things you suggest were contributing to this problem? You might take the following approach, where we’ve 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

32

Practice Cases – Case 2: Magna Health !

106

McKinsey & Co.

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.) Interviewer: 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

Interviewer: 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 this problem?

33

Practice Cases – Case 2: Magna Health

107

McKinsey & Co.

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.).

Interviewer: 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 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.

Interviewer: 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:

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Practice Cases – Case 2: Magna Health ! !

108

McKinsey & Co.

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 simplicity’s sake assume:

! !

The cost of a cardiology referral is $200. Magna currently has 300,000 cardiology referrals per year.

If the incentive plan reduces cardiology referrals by 3.3 percent or 10,000 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

Interviewer: 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

Year 2 Savings with Program

! ! ! !

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. Interviewer: Your team presents its physician incentive proposal to Magna’s 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 you’ve 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?"

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Practice Cases – Case 2: Magna Health

109

McKinsey & Co.

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 some of the following responses:

!

!

! ! !

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

36

110

LEVEL III United States Healthcare - Conceptual Software Product - Conceptual Sheep Auction - Graph/Chart/Table Heavy Maldovian Coffins – Math Heavy H Hotel - Hypothesis and Testing Pharmaceutical company – Unconventional Scotch Manufacturer - Hypothesis and Testing Children Clothes E-Retailer - Hypothesis and Testing CanadaCo – Several Topics Giant Bank - Graph/Chart/Table Heavy Acme Packaging - Graph/Chart/Table Heavy PCB Manufacturer – Unconventional Syzygy Supercomputers - Graph/Chart/Table Heavy

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Establishing Establishing the the Case Case

Case 5: United States Healthcare (I of II) McKinsey & Company, Round II

Problem Statement Narrative I have just been talking with with Rick Wagoner, GM’s CEO, about his company’s skyrocketing health care costs. GM pays for the health care of about 1.1M families, which equates to about $8-9B or $1500 per car sold. After a while, he began discussing the United States’ healthcare problem on a national level. The US spends 15% of its GDP on health care while Japan spends 7-8% and Germany spends 10%. However, he says there is no evidence that health care is better in the US: average life expectancy is actually decreasing and about 45M people are uninsured.

Guidance for interviewer and information provided upon request • There is no additional information to provide. The purpose of this case is to test poise and pressured thought. If the candidate makes an assertion, play ‘devil’s advocate’ and try to get the candidate to reverse him or herself. Some examples may include: • Privatized vs. socialized medicine • Subsidized medicine development/sales vs. unsubsidized • Healthcare availability for all • Boutique hospitals vs. full service hospitals • Preventative vs. reactionary medicine

He wanted me to explore possible causes and solutions for the increasing cost trend with decreasing effectiveness/quality. He made a point of saying he didn't want to discuss politics, and shied away from fancy frameworks in our discussion Might you help me think about what to tell him?

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Sample Sample Solution Solution Elements Elements

Case 5: United States Healthcare (II of II) McKinsey & Company, Round II There There are are any any number number of of responses responses to to this this open-ended open-ended case, case, therefore therefore the the interviewer interviewer is is encouraged encouraged to to allow allow the the candidate candidate to to drive drive the the case. case. Some Some common common elements elements may may include: include: Supply Higher drug costs in USA

Emerging modular Care

Profit motive

The US is essentially subsidizing word drug consumption by paying higher prices. US expenditure pays for the majority of R&D and risk-premium costs for the pharma industry. Possible solutions are to persuade drug companies to charge the same prices everywhere, or threaten re-importation. Discuss longterm implications on R&D and curing diseases. There is a growing trend of wealthy citizens seeking out specialized care from private centers with providers accommodating by opening specialized clinics that only offer high-margin procedures (heart surgery), but are not burdened by low margin, but necessary, ER’s, etc. This takes needed funds out of full-service facilities. Discuss regulations or risks. Healthcare providers need to make lots of money. They have invested in careers, R&D, capital, etc, and need a return. This creates a motive of wanting to MANAGE disease rather than CURE disease to maximize return. All healthcare players make more money from a longer-term cash flow than onetime treatment. Discuss socialization vs. current model.

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

Demand No proactive presymptom care

Doctors’ ability to induce demand

Lack of health care for lower class

Nutritional planning, exercise, no-smoking, etc. are much cheaper to promote rather than having to deal with complications (heart disease, diabetes) down the line. Possible solution: government (or employer) sponsored programs promoting prevention activities. Discuss healthcare incentive to do this… where is the financial return? If a large number of doctors choose to live in a particular area (a large city, for instance), and there are not enough patients to sustain a normal practice, the doctors could order additional (and possibly unnecessary) tests to generate additional revenue. Possible solution: fees per patient rather than fees per service performed. Challenge on practicality The US treats every patient in the ER regardless of insurance. However, it is much more expensive to handle something in the ER rather than when the problem first occurs (regular doctor visits, etc) Possible solution: Provide adequate health care for lower class before problems become emergencies. Possible free-rider and socialization discussions

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Establishing Establishing the the Case Case

Case 6: Software Product (I of IV) The Boston Consulting Group, Mock Interview

Problem statement narrative Your client is a software maker that has one product. The CEO would like to know whether the company should offer multiple products instead of one.

Information provided upon request(1) • Client goal: grow revenues • Product: Document authoring software (MS Word, etc) • Possible product segmentation considered: business vs. home products • Company recently completed market study: see next page for results • Currently only offer product to business market (business curve on chart)

(1) If detailed exhibits exist, they will be referenced in this box, and included in full on the following slide(s) 2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

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Candidate Candidate Handout Handout (upon (upon request) request)

Case 6: Software Product (II of IV) The Boston Consulting Group, Mock Interview Market Study Results Product 600 Price 500

400

Home Business Combined

300

200

100

0 0

5

10

15

20

25

30

Users (M)

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

Price

Business

Home

Combined

200 400 500

11 M 10 M 9M

15 M 5M 2M

26 M 15 M 11 M - 21 -

115 © 2005 Michigan Consulting Club

Additional Additional Questions Questions

Case 6: Software Product (III of IV) The Boston Consulting Group, Mock Interview Use Use this this slide slide as as ‘interviewer’s ‘interviewer’s guide’ guide’ after after providing providing graph graph to to candidate candidate

Additional questions for candidate • If we are currently selling to businesses for $500, what is our total revenue?

• If we segment our demand and sell separate products to separate markets, what do our revenues look like?

• Is there anything else to think about?

Solution guide • 9M units x $500 = $4.5B revenues

Price 200 400 500

Home 200x15M = $3B $2B $1B

Business

Combined

200x11M=$2.2B $4B $4.5B

$5.2B $6B $5.5B

• Segmentation shows the revenue max price is $400 (w/ revenue of $6B) if price discrimination is impossible • If price discrimination is possible, charge $500 to business, and $200 to home users

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

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Sample Sample Solution Solution Elements Elements

Case 6: Software Product (IV of IV) The Boston Consulting Group, Mock Interview Incremental Costs • The candidate may discuss elements needed to create two versions of the product- these may include: • Programming • Testing/ QA • Packaging • Sales/marketing • Distribution

Product Differentiation/ Cannibalization • Little/no ability to create different products for different markets could lead to price-led cross-segment product cannibalization • Creating switching barriers would allow company to differentiate between product lines without concern for cannibalization

• The interview can go in this direction, asking the candidate to outline a viable cost structure per segment

Licensing •Related to the product/market differentiation issue, the firm could gain incremental revenue by either: • Establishing separate product sales/licensing costs for business/ home users ($200 for 1-3 licenses, and $550 for additional, etc) • Approaching other vendors for bundling deals to attach product with other products

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

Complimentary Products • Rather than separating current product into two separate products• Client could offer a series of complimentary products to their core product, adding incremental revenue and segmenting their customers based on how many additional features they wanted (i.e.: adding interrelated programs at a price)

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Establishing Establishing the the Case Case

Case 16: Sheep Auction (I of VI) Bain & Co., Round I

Problem statement narrative Your client is looking at investing a significant amount of money to create an online auction company that facilitates sheep sales from producers to large customers. They will only do this if they could make roughly $10 M annual profit in 5 years, and they have enlisted your help in determining the go/no-go decision.

Guidance for interviewer and information provided upon request(1) • Only provide each support slide after being asked for the information by the candidate • Slides: • Overall market size (in lbs of sheep) • Sheep prices (in $/lb) • Farmers (producers) who use computers • Sheep sold at auction vs. contract • All large processors (buyers) use computers • Sales via auction and contract will not migrate- there is no steal share between channels • Follow up questions for candidate upon completion of the calculation (which should total far short of $10M) • What would you do to achieve the $10M level? • If launched, how would you market this product?

(1) If detailed exhibits exist, they will be referenced in this box, and included in full on the following slide(s) 2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

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Candidate Candidate handout handout (upon (upon request) request)

Case 16: Sheep Auction (II of VI)

Annual Sheep Sales Millions

Lbs of Sheep

Bain & Co., Round I

450 400 350 300 250 200 150 100 50 0 2005

2006*

2007*

2008*

2009*

2010*

Year (*expected)

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Candidate Candidate handout handout (upon (upon request) request)

Case 16: Sheep Auction (III of VI) Bain & Co., Round I Sales Price/100lbs sheep

Auction Profitability by Channel

$30

$25

$20

Profits

$15

Cost of Sales $10

$5

$0 Online Auction Model

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

Traditional Auction Model

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Candidate Candidate handout handout (upon (upon request) request)

Case 16: Sheep Auction (IV of VI) Bain & Co., Round I

Sheep Sales by Channel 100% 90% 80% 70% 60% 50%

Contract

40%

Auction

30% 20% 10% 0% Sheep Sales

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

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Candidate Candidate handout handout (upon (upon request) request)

Case 16: Sheep Auction (V of VI) Bain & Co., Round I

Farmers ‘Online’ 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2005

2006*

2007*

2008*

2009*

2010*

Year (*expected)

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

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122 © 2005 Michigan Consulting Club

Sample Sample Solution Solution Elements Elements

Case 16: Sheep Auction (VI of VI) Bain & Co., Round I

Expected Calculation (Approximate)

**Use 2009 numbers to show 5-year ‘maturity’ and steady-state for profitability- this model assumes a 100% penetration- candidate should deduct that penetration is irrelevant given overall industry profitability** 400M lbs sheep

x

50% auctioned

x

x 30% ‘online farmers’

Time permitting follow-on questions…

$10 per 100 lbs sold

=

$6.66M Profit Less than $10M

…And sample answers.

• What would you do to reach the $10M profit level from here?

• Train farmers and sheep producers on computer use • Provide central computer locations near farm sites to facilitate farmer interactions • Expand the auction tool to other animals

• If this product were already launched, how would you choose to market it?

• • • • •

2005-2006 MICHIGAN CONSULTING CASE INTERVIEW PREPARATION GUIDE

Trade magazine advertisements Door to door sales & training representatives Commissioned farmer representatives Relationships with sheep processors ‘pull-driven’ Value proposition: cost savings in moving heard to auction site: producers could pick heard up at farm

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123 Case 1: Maldovian Coffins McKinsey, 1st Round About This Case This case was given by McKinsey in first-round interviews and is a “command and control” case. In this style of case, the interviewer allows the candidate to drive the case initially to explore possible routes to a solution. However, once the candidate has laid out a plan, the interviewer takes control and asks the candidate to solve a few specific problems before coming to the final conclusion. When giving this case, allow for some initial planning and brainstorming by the candidate, but then firmly take control of each of the “modules” described below. Try to move the candidate along through each of them, since in the actual interview only those candidates that complete all of the sections will be considered to have done well. This case tests mental horsepower and the ability to move to conclusions quickly. The Problem Our client is a coffin maker in the Eastern European country of Maldovia. He has seen substantial change in his market in recent years and is contemplating the future of his business. Up until now, he has been in the business of building high-quality, handcrafted coffins largely by hand with a skilled labor force. Recently, however, he has become aware of technology that would allow him to build machine-made coffins with much less labor. Should he invest in this new technology, and should he even remain in the coffin business in the first place? Information Gathering Read this information well before you give the case. Note that this case requires you (the interviewer) to drive key points in the discussion. Allow the candidate to formulate a plan and then prompt him/her to consider each of the topics listed below. Prompt: What strategic alternatives should the owner consider? Good Answer: If the candidate doesn’t get all of this, help them along since we need to lay this foundation for the rest of the case - We need to decide firstly whether to stay in business at all and if so, whether he uses the new technology: • • • •

Option 1: Sell the business to a third party Option 2: Sell the assets of the company and shut it down Option 3: Keep operating as is Option 4: Keep operating and invest in the new technology

Prompt: How would you figure out the current value of the business?

124

Provide the following information if the candidate asks for it clearly and directly. Market Size – If the candidate asks for the size of the market, first make him/her brainstorm about different ways to determine market size. A good candidate should come up with at least 4 different ways, such as: • • • •

Calculate from population growth, total population, and birth rate Review of death records for a period of time Take sample of number of obituaries in paper serving given population base Calculate from population, average life expectancy

Now make them calculate the market size, giving them the following data: Population of Maldovia: Population Growth: Avg Life Expectancy: Age Distribution: Burial Customs:

4M 0% 75 years assume a flat age distribution (i.e. same number of people at every age) 75% of deaths are buried in coffins.

Right Answer: 40,000 coffins purchased / year. Note that the candidate needs to quickly realize that every year, 1/75th of the population will turn 76 and therefore (on average) will die. Price – Coffins are priced at $5,000 for a hand-made coffin. Costs – Material accounts for 10% of the direct cost, while labor accounts for the other 90%. COGS is $4,800 per coffin. Fixed costs for the business are $700,000 per year. Assume all assets are fully depreciated and ignore taxes. Competition – Maldovian Coffins has a 10% market share and a relative market share of about 1 (if asked, you may explain that relative market share is the ratio of the company’s market share to that of its nearest competitor.) Market Trends, Regulation, etc. – If asked about any exogenous factors, simply tell the candidate to assume that the market is expected to continue as it currently is. The candidate needs to calculate the value of the business now. This is a mathematical exercise. Correct Answer: Contribution Margin

= $200 / coffin x 40,000 coffins x 10% market share

125 = $800,000 Profit

= CM – Fixed Costs = $800,000 - $700,000 = $100,000

Assuming a discount rate of 10% (candidate can assume anything reasonable here as long as they are consistent later) a perpetuity with cash flows of $100k / year has a PV of $100,000 / .1 = $1M. So the current business is worth $1M whether they keep it or sell it. Prompt: So now what is the value of the company if it were shut down and the assets were sold? Information to give if asked: Assets – Since the firm has been building coffins by hand, the fixed assets are essentially only the land and improvements. These are owned outright by the company. When the candidate asks for the value of the land, have them brainstorm ways that they might determine this. They should come up with at least 3 good ways, such as: • • •

Look for comparable real estate and determine recent selling price Find comparable commercial real estate and determine the rent per square foot, then discount the cash flows generated by renting the property Determine rate of appreciation for property in the area and then apply to book value of current land and improvements

Give the candidate the following information and have them calculate the value of the property: Book Value of Land: $20,000 Book Value of Improvements: $80,000 Years Owned: 48 Avg. Real Estate Appreciation: 6% / year Right Answer: Using the “rule of 72,” a 6% growth rate will double the investment every 72/6 = 12 years. Since the property was held for 48 years, the current value will be $100k * (2 ^ 4) = $1.6M. Since the assets ($1.6M) are higher than the value of the discounted cash flows ($1M), then it would make more sense to liquidate the business and sell the assets. Prompt: What would the value of the company be if he invests in the new technology?

126 Provide the following information if asked: Investment – Investing in the new technology will cost the firm $1M. Cost Savings – Material costs remain the same, but labor costs are reduced by 50%. Proprietary Nature of Technology – The new coffin-making technology is being offered for sale by a machine tool company, who holds the patent. They are not offering exclusivity to any customers (i.e. they will sell to Maldovian Coffin’s competitors if possible). Competitive Threat – It is not known whether the competitors have acquired or are planning to acquire this technology. Customer Preferences – While the machine-made coffins are not “hand made”, the quality perceived by the customer is the same or better. It is believed that the customer will be indifferent between the quality and appearance of a hand-made and a machinemade coffin. Brand Impact – The candidate may argue that a machine-made coffin might negatively impact Maldovian Coffin’s brand. If so, ask them how they would test this (e.g. consumer research), but tell them to assume that it would have negligible impact. Good Answer: Since Maldovian Coffins has no proprietary control over the technology, it is likely that competitors will also acquire it, resulting in an overall lowering of the industry cost structure. If this is the case, price will also fall as competition cuts price in an attempt to gain share. If we assume that gross margins remain the same, since the industry competitive structure has not changed we can calculate the new margin contribution as follows: Gross Margin = $200 / $5,000 = 4% Labor Cost = (4800 x 90%) x 50% = $2,160 Material Cost = $480 COGS = $2,160 + $480 = $2,640 Price = $2,640 / (1 - 4%) = $2,718 Contribution Margin = $2,718 - $2,640 = $78 Loss = $78 * 4,000 - $700,000 = -$388,000 So the introduction of the technology to the market might be expected to reduce industry profits, making this business completely unprofitable. Candidates could argue other scenarios, by assuming that the industry would be able to maintain higher margins than we have assumed here, so the answer may be different. They should recognize, however, that the introduction of this non-proprietary technology

127 will significantly reduce industry pricing in the absence of some other form of price support (such as branding, collusion between players, etc.)

Conclusion A star candidate will see that his/her time is nearly up and will present a recommendation for the client without prompting. If the interview is within 3 minutes of the end, ask: “The owner just called and said he has an offer to buy his business. He needs to know whether he should take it right now.” Good Answer: Given the credible threat of the industry becoming unprofitable due to the introduction of this new technology, the owner should look to sell the company as soon as possible. Taking into account the assets of the firm and the present value of the expected cash flows of the business itself, he should attempt to liquidate the business and to sell the assets for around $1.6M. If unable to sell the business now, he can continue to operate the business as a cash cow, but should not invest in the business above what is necessary to keep it operating at its present level. He should expect the business to become less profitable as the industry moves to mechanization, and should eventually look to sell the assets of the company and close the firm.

128 Case 10: H HOTEL Booz Allen Hamilton, 1st Round The Problem You are hired by H Hotel to advise whether they should raise their daily room rate from $160 to $180. Information Gathering Read this information well before you give the case. There’s very limited information to begin with, therefore the candidate is expected to ask questions, but in a structured way. Allow 10-15 seconds for the candidate to layout his/her assumptions for each step of the analysis before giving any clues. Certain level of stress should be created but the overall interview style is pleasant. Industry Overview • Overall market: stable. • Segmentation: the hotel industry can broadly be divided into two segments that serve different customer needs – one for business purposes and the other for vacation. Exploration: Let the candidate characterize each segment. For example: business hotels usually locate in the center of metropolitan areas, are smaller in size compare to the average vacation resorts, are better equipped with in-room business services like internet/fax/printer, and are more flexible in booking. Vacation hotels have to be in a touristy or scenery area but not necessary in the center of it, have a wider range of price and facilities, and with more fluctuations in demand. •

Competition: The client is the leader in the Business Hotel segment and an average player in the Vacation Hotel segment.

Internal Company Analysis • The client decided to focus on the Business Hotel unit. Why do you think they made such decision? Answer: 1) Location advantage: since the client is already the leader in this segment, they must have already blocked the best locations in most of the big cities. Competitors are hard to compete with this given the fact that the supply of space in hot spots is very limited. 2) Steady revenue stream: once contracts with big corporations are signed, the demand of business traveling is much easier to predict than vacation hotels which contributes to a higher occupancy rate. In addition, a fixed price can be set more easily.

129 3) Lower maintenance cost: business hotels tend to be smaller in size and need less recreational facilities. z

From an internal view of the company, why do you think they wanted to increase the price? Answer: To increase profitability.

z

Does it make sense from H Hotel’s internal view? Answer: The usual Profit = Revenue – Cost = Price*Quantity – (Fixed Cost + Variable Cost) function should appear here. Hint the candidate that there’s not much room for cost saving by saying “they already outsourced the cleaning service”, “they just went through a major layoff and cut the staff by half”, “their restaurant and bar are operating efficiently”, etc. On the revenue side, both increasing quantity (occupancy rate) and price (room rate) can increase H Hotel’s revenue.

External Consumer Analysis z How is the price increase going to impact consumers’ behavior? Answer: The candidate should look into both the “end user” (the actual business travelers) and the “customer” (the corporations that H Hotel has contracts with). The impact on end users is limited since they don’t pay for it. They won’t stop staying at H Hotel as long as the service level, flexibility, location, and other conditions remain the same. For the customer, most of them have long and stable relationship with H Hotel (that’s what makes H Hotel the leader of Business Hotel) will only leave if 1) the price is not competitive compare to H Hotel’s competitors (in this case it’s still competitive) 2) the price exceeds the cap of its traveling expense (in this case the cap is $240) 3) no extra benefits come with the price increase (in this case H Hotel provides better services, more business friendly facilities, etc.) z

Assuming H Hotel successfully increased the price, what can they do to the “end user” to increase demand? Answer: Let the candidate e creative here, but make sure they hit following points. Differentiation: On the product side, H Hotel can improve its convenience (e.g. provide transportation/get the hottest spot in the emerging area of a city), increase its business friendliness (e.g. in-room fax/printer), and upgrade its rooms, etc. For the service, H Hotel can create a more personalized experience for consumers by keeping track of each traveler’s special demand, set the room differently, etc. One step further, H Hotel can also lock consumers in by offering traveler specific promotion (different from the ones for the corporate), such as offering free gifts to the consumers (e.g. shopping coupons) or cross promotion between H Hotel’s

130 business hotels and vacation hotels (e.g. free stay at one of the vacation hotels when the traveler takes his/her family on vacation next time). Conclusion A star candidate will see that his/her time is nearly up and will present a conclusion without prompting. If the interview is within 3 minutes of the end, ask for the conclusion. Answer: The short answer is “Yes”. z

H Hotel has competitive advantage given its superior location, good service, and trust worthy relationship with long term customers. Given such strong base, there’s room for H Hotel to increase its price with further differentiated product and service. Even after the $20 increase, the price is still far below its customer’s ceiling and remains competitive among its competitors. Furthermore, H Hotel can still grow its sales quantity by locking travelers who have several business hotel choices in by adopting traveler specific promotions.

z

From an internal point of view, cost saving has reached a limit. H Hotel has to improve its profits by top line growth. As long as price doesn’t effect quantity (occupancy rate), total revenue will grow.

131

Practice Case 14 (Pharmaceutical Company) Question and Background Information Our client is the U.S. pharmaceutical division of a multi-national corporation. In about six months the division will receive FDA approval to launch an anti-depressant drug. Despite this apparent good news from the FDA, the U.S. division is not elated. It has concerns over the market potential for this drug and its ability to reach the key prescribers in this therapeutic category. We have been asked to help determine whether they should 1) launch alone, 2) co-market with a partner, or 3) sell, license or swap the drug. The concerns over market potential center on whether the drug can gain adequate competitive advantage in a market segment having two dominant, patent-protected competitors and nearly 100 generic competitors. Additionally, a higher technology antidepressant, which appears to offer therapeutic advantages, was recently introduced by a competitor. Gaining the professional endorsement of psychiatrists is crucial to success in this therapeutic category since they write approximately half of the prescriptions for antidepressants. However, the division has no experience marketing drugs to this physician group. Consequently, it would have to hire a sales force and/or enter into a co-marketing agreement to gain access to psychiatrists through someone else's force. The client would be able to leverage its existing sales force to reach the other half of the prescribers (Internal Medicine Specialist and Family and General Practitioners). How would you help them decide whether to 1) launch alone, 2) co-market with a partner, or 3) sell, license or swap the drug to a third party? Commentator: Note here what is being asked, "How would you help them decide." What is not being asked is "Which is the correct option to choose?" The Interviewer is looking more for how this problem is approached than for the "correct" answer. Also note that it is totally appropriate to take some time to organize your thoughts before launching into the case discussion. Response Candidate:

In helping the client decide which option they should choose, I will want to guide them to the option that will create the most value. To understand main value drivers (i.e., profitability drivers), I will first explore the market attractiveness and our competitive position within that market in order to determine revenue potential. After that, I will explore the major cost issues. Starting with the revenue, I'll want to understand first what the overall market revenue opportunities are for this type of drug in addition to our product specifically. Now, the client expressed concern over the market potential for this drug. How big is the market and what is its potential growth rate? HBS Case Interview Guide, Page 64

132 Commentator: Here the Candidate has done several things. First, the Candidate has stated the overall objective, value creation. Next, the candidate stated the method of walking through this problem, looking at revenue by using a market economics and competitive position framework, then looking at costs. The Candidate provided a roadmap. Now the interviewer understands the approach and expected direction of questioning. This helps the interviewer understand the student's thought process - how he or she thinks through business problems. Interviewer:

The overall antidepressant drug market is relatively attractive at $1.1 billion per year and is growing well in excess of the population growth rate.

Candidate:

You mentioned that concerns over market potential center on whether the drug can gain adequate competitive advantage in a market segment having "two dominant, patent-protected competitors and nearly 100 generic competitors." You also mentioned that a higher technology drug had entered the market. Is the antidepressant market segmented by technology?

Interviewer:

Yes.

Candidate:

And the two patent-protected competitors along with the 100 generic competitors are within our technology segment?

Interviewer:

Correct.

Candidate:

So, the overall antidepressant market is attractive at $1.1 billion, but within that market, there are segments based on different types of technology that may or may not be attractive.

Interviewer:

That's correct.

Candidate:

What is the technology associated with our client’s product?

Interviewer:

Tricyclic antidepressants.

Candidate:

How fast is this technology segment growing?

Interviewer:

As a matter of fact, substitution by the new technology may cause a decline in sales over the next 5 years. Additionally, the existing competitive environment is very intense and will only increase if the market shrinks.

Candidate:

So, the overall segment is not very attractive. HBS Case Interview Guide, Page 65

133 Interviewer:

Correct.

Candidate:

What percent of the volume do the two main competitors have?

Interviewer:

In our own technology segment, the leader has approximately 10% and the number two player has about 4%. The rest of the 100 competitors each has less than a 2% market share. By comparison, the new technology has captured a 20% market share of the total antidepressant market.

Candidate:

How much will our client's product be able to differentiate itself within our technology segment?

Interviewer:

Not much. In a market research study we commissioned, the product was seen as very similar to the number two product in our technology segment, slightly inferior to the number one product, and slightly better than the generic products. The new technology was viewed as far better due to a lower level of sedation.

Candidate:

So to summarize the market environment, although the anti-depressant market is attractive, the segment that we would be participating in is relatively unattractive and runs the risk of becoming smaller and more competitive over time. Additionally, within this unattractive segment, we have limited ability to differentiate ourselves relative to our competitors, and thus, will not be able to charge a premium price. I would think that this unattractive market and relatively undifferentiated position within that market would translate to a lower market share. I would estimate that our share might be lower than either of the branded products given our new presence in the market, say maybe a 2-4% share and this, like the rest of the segment, would probably decline over the next couple of years.

Interviewer:

That sounds about right.

Commentator: In understanding the revenue potential, the Candidate did several key things. 1) Disaggregated the antidepressant market. 2) Established the overall attractiveness of the relevant market segment. 3) Established the client's relative attractiveness to competitors within that segment. This enabled the Candidate to come to the correct conclusion that an undifferentiated position within a relatively unattractive market will limit the revenue potential. Also, note that the Candidate is doing most of the talking. Use the interviewer to clarify questions or provide information, but the Candidate must lead the discussion. Candidate:

Knowing that our revenue potential is relatively low puts more pressure on minimizing the costs if we were to market the drug. I HBS Case Interview Guide, Page 66

134 want to see what area within the cost structure impacts profitability the most. What percent of net sales is COGS? Interviewer:

About 20%

Candidate:

And what is the bulk of the remaining line items?

Interviewer:

Most of it is selling expense. There are some overhead/admin and advertising and promotional expenses, but most of it is selling expenses.

Candidate:

So, selling expense is the largest portion of the cost structure, which means that whichever option we choose, launching alone vs. with a partner will certainly impact the selling expense (in addition to the number of prescribers reached, thus revenue potential).

Commentator: You can pick up good “tips” here. Spend time on things having high impact and feel free to test and see how important they are. Tests might include how large something is as a percentage of sales, how important it is to the customer, or how much of an impact it has on manufacturing economies, etc. Candidate:

In understanding the effect of the co-market agreement on number of prescribers reached, I think it would be helpful if I could get an idea of who makes the purchasing decision.

Interviewer:

Well, there are four main parties involved. There are the manufacturers (such as our client), the doctors (who prescribe the drug), the druggists (who fill the prescription) and the patient (who initiates the transaction). Selling is concentrated on the doctors, since they are the group that determines if medication is needed and, if so, what type.

Candidate:

Is the growth in managed care going to influence the dynamics of this?

Interviewer:

Yes, but for the purposes of our work, let’s not address that.

Candidate:

So, for the purposes of our work, the doctors make the purchasing decisions, this includes two groups of physicians, the Psychiatric group and the Internal Medicine/General Practitioner group.

Interviewer:

Correct.

Candidate:

You noted that we don’t currently have connections to psychiatrists. This group prescribes half of the antidepressants. Can we launch the drug by only marketing to IMs and general practitioners and ignoring psychiatrists?

HBS Case Interview Guide, Page 67

135 Interviewer:

No, they are at the top of the pyramid of influence and thus must endorse the drug before their colleagues in the IMP/GP will endorse it.

Candidate:

So if we are to market this product, we cannot do so without the Psychiatric group. The weight of the decision then becomes a matter of what is the most efficient and effective way to reach them—either through a newly hired sales force or with a comarketing agreement.

Interviewer:

Correct.

Candidate:

What are the advantages and disadvantages of marketing the drug ourselves?

Interviewer:

In terms of having our own sales force, the main benefit would be that we would be concentrating on our product only and this may help sales. On the downside however, the cost of this focus is all attributed completely to our product, and having a dedicated sales force representing only one product would be expensive.

Candidate:

Do you have any other psychotheraputic drugs in development or plans to expand this part of your portfolio through licensing?

Interviewer:

Nothing is planned for the next three years.

Candidate:

So by entering a co-marketing agreement, the costs of the sales force is spread across several products, and, if the co-marketer did not have a competing product, then our product would get the appropriate selling attention warranted. Also, since this sales force has existing relationships with the psychiatrists and doesn’t need to take time to further establish these relationships, sales of our product might peak sooner. So, all in all, I would think that if we were to market this product, it would be a less costly and higher value option to enter into a co-marketing agreement rather than go it alone.

Commentator: Here, as with most case interviews, the Candidate has the opportunity to go “deep” into an issue. The Candidate has chosen to do this here with one type of cost, the sales force. The Interviewer is looking to see if the Candidate can identify some of the key “value” drivers of the function being explored. In the case of the sales force, the Candidate correctly identified the key value drivers as being: 1) The ability to spread the cost of a sales call across multiple products. 2) The ability to choose a co-marketer that needs this product in their existing product line. 3) The ability to leverage an existing psychiatric sales force infrastructure to reach peak sales sooner. Remember, there are many value drivers. We have touched on a few, but don’t be concerned about identifying the “right” ones, just try to identify what type of issues affect the situation the most. HBS Case Interview Guide, Page 68

136

Interviewer:

OK, and what about the third option, to sell, license or swap the drug to a third party?

Candidate:

Again, the client would want to choose the option that was more value creating. There could be several reasons for going with the third option: 1) We might sell our drug because the sum of the promotional or overhead costs may make it unprofitable for us to market whereas a company having a similar product line might be able to carry this product at a very small incremental cost. 2) We might license it for the same reasons we would sell it. 3) We might swap it if we could find a company needing this type of drug while having a drug that might fit more with our existing infrastructure. In any case, for the options being considered, I would want to forecast cash flows and discount them back to see what option is more value creating before making a final recommendation.

Interviewer:

OK, thank you for your input on how to approach this problem.

Commentator: You’ll note here, that the Candidate doesn’t actually make a final recommendation. This is fine. The Candidate has demonstrated how he would approach the problem, and in doing so, has hit on many of the key issues you would find in a real client case situation. Recapping the steps the Candidate took into evaluating the client’s options: On the revenue side: 1) Segmented the market to the appropriate technology level. 2) Determined that the segment was unattractive . 3) Determined that the client’s product was not significantly differentiated. 4) Concluded that for these reasons, the revenue potential was limited. On the cost side: 1) Determined that selling expense was a key component to profitability. 2) Determined that the Psychiatric group needed to be included in the selling efforts. 3) Determined that it would be less expensive to co-market vs. go it alone. 4) Determined that there are other considerations to evaluate when comparing co-marketing vs. selling, licensing, or swapping the product. Interviewer:

Provide summary comments and wrap-up. HBS Case Interview Guide, Page 69

137 Practice Case 15 (Scotch Manufacturer) Background We have been contacted by a large distilled spirits manufacturing and marketing company to develop a new strategy for one of their brands. Before getting into the details on this particular case, how would you define strategy? •

•

•

Participation o

Geography

o

Customer

o

High-Level Product Segment

Offering o

Product

o

Service

Pricing o

Product

o

Service

•

Operating Configuration (cost/asset)

•

Distribution

HBS Case Interview Guide, Page 70

138

What would be your process to develop a new strategy? •

Position Assessment (i.e. understand sources and drivers of profitability) o

Business Profitability

o

Strategies

o

Market Economics

o

Competitive Position

•

Alternative Identification

•

Alternative Evaluation

•

Business Plan

In the first meeting with the client to "scope out" the potential project, what might be some of the things that you would like to know? •

Ulterior motives for the work (are there politics involved)

•

What other work have they done on the subject?

•

What do they want to find out?

•

How would they like to work together?

•

Are there any time constraints?

•

Who would they like involved in the project?

•

Basic information on the brand (profit, volume, etc.)?

•

Any hypotheses on the key issues?

•

Any thoughts on the likely alternatives?

•

Any key questions that have to be answered regardless of the strategy?

HBS Case Interview Guide, Page 71

139

What might be some of the reasons that you would NOT want to accept this project? •

Politics

•

Not committed to value

•

Looking for scapegoats

•

Inability to satisfy the BU manager

•

Difficult client in general

Here is a little background information on the scotch industry The first scotch was introduced in North America in the early 1940s, and grew steadily and rapidly in popularity until the 1960s. The industry has subsequently declined in volume every year to 1996 at a rate of about 3% per year. From 1996-1998, the volume declined at only 1% per year for these two years. What kind of information would you want to understand in order to determine the reason for the steady volume decline up to 1996, explain the "kink" in the volume decline, and then forecast what market volume is likely to do over the next several years? •

Is the answer to slower growth explained by fewer people drinking scotch, or by drinking less overall, or both? (fewer people have been drinking scotch)

What kind of information would you want to understand in order to determine why fewer people have been drinking scotch? •

•

Demographics o

Male versus female

o

Age of typical scotch drinkers

Popularity o

Substitute products

o

Health reasons HBS Case Interview Guide, Page 72

140

What kind of analysis would you complete to quantify the reduction in number of scotch drinkers? •

Review census work

•

Complete literature searches

•

Interview customers

•

Interview distribution channel members

•

Interview other producers

•

Complete market research studies

•

Review the client's information gathered over time

Here is some additional information on the scotch industry Scotch consumption has been declining because fewer people have been drinking scotch. Fewer people have been drinking scotch for two reasons. First is a general decline in the popularity of scotch. Other distilled spirits, such as vodka and wine have increased in volume and become more popular. Second is a decline in the age group that traditionally drinks scotch (the 35-50 age group). As the baby boomers age, this segment of the population is growing, so even if popularity doesn't change, the scotch market should improve going forward due to the growth in this segment. In addition, scotch is becoming more popular, especially the unique single malt scotches. What information would you like to know about the industry, in general? •

How is the scotch market segmented? o

•

What are the sizes of the segments? o

•

40% of the volume in low-end, 50% in premium, and 10% in super premium.

Is the scotch market profitable? o

•

There are three segments in the market, low-end (such as private label CVS whisky), premium (typically seen on the back bar in a bar), and super-premium (including Chivas Regal and single malt scotches).

Yes, all segments are economically profitable.

How is profit concentrated? HBS Case Interview Guide, Page 73

141 o •

20% in low-end, 60% in premium, 20% in super-premium.

What are customer needs? o

Taste (do people like the taste of the scotch -- either in blind taste tests or do they "think" one brand tastes better because it has a darker color, or is a more thick liquid, etc.)

o

Fashion (is it fashionable to drink)

o

Badge (does the brand make me feel important/different/mature/sophisticated)

Would you think that the scotch industry is profitable? Explain structurally, and elaborate •

High barriers to entry, takes a long time to establish a brand name in scotch

•

People are very brand loyal and won't switch easily

•

People think it’s bad for your health and it’s difficult to get them to start drinking

•

People think it tastes bad and it’s hard to acquire a taste for scotch

•

Customers are not price sensitive

•

Regulatory pressures are high (high taxes, it’s expensive)

•

Competitor intensity is not that high (little price based competition, noticeable, but not outrageous investment in advertising)

•

As a result, overall, the industry is very profitable, but volume is declining, so profit is declining

What information would you like to know about the brand? •

What segments do we participate in? o

•

Only in the premium segment and with one brand

Where is our brand positioned? o

Tied as the #2 brand with 25% market share of volume (#1 has 35%, #2 has 25%, we have 25%, #4 has 10%, others have 5%)

o

Priced slightly above the industry average (10%)

HBS Case Interview Guide, Page 74

142 •

•

How have competitors performed? o

#1 has gained share from us, the #4 and other brands, but mostly from us

o

#2 has held share

How profitable are we relative to competitors? o

We all have same cost of goods, differences are in selling costs and advertising costs

o

#1 has highest selling costs and advertising costs, #2 has second, #3 has third, and so on

o

#1 and we have a price premium, #2 is priced at the industry average, #3 and all others are slightly below the industry average, but no one is dramatically different than the industry average

o

#1 has a lower per unit profitability but has the most share of profit given its highest market share

What are your potential hypotheses that you would want to test to understand our relative performance? •

Customers perceive our brand as having poorer rankings on the key attributes o

•

We do not have the same distribution/availability as competitors o

•

True

Customers are not aware of our products (advertising awareness) o

•

We actually have advantaged distribution

We are priced too high relative to our attributes o

•

We have a disadvantaged taste, disadvantaged badge, but competitive fashion

False, people remember our advertising

Customers are not convinced to buy our product from our advertising (advertising effectiveness) o

True, we have very poor advertising effectiveness

HBS Case Interview Guide, Page 75

143

Why has our advertising effectiveness been poor? •

We don't spend enough o

•

We don't spend in the right media o

•

True, we spend a lot on billboards because they're cheap but they don't reach the right audiences

We don't spend at the right time of the year o

•

True, we spend about 25% too little money

True, we spend a lot at Christmas to get the impulse buyers but we don't get the brand loyal buyers

Our advertising copy is bad o

True, we have had poor campaigns while the #1 brand has had very good campaigns

How would you determine how much money to spend on the advertising budget? •

Set a target number of customers to reach and a frequency target, and then back out the required investment to achieve the targets, based on the media used, time of year, quality of layout, etc.

•

Spend as much as competitors o

This would require a 100% increase in advertising investment

•

Spend the same % of revenue as competitors, or set a % of revenue target

•

Look at the competitors, index their advertising investment relative to the price premium they receive, and thus index our investment relative to the price premium we receive (in other words, #1 brand has a 10% price premium and invests $10MM/year in advertising and the industry average is $5MM/year. So they have 100% more advertising for a 10% price premium. We want a 0% price premium, so we'd invest at the industry average of $5MM. Or, we want a 10% price discount, so we'd invest at ½ of the industry average, or only $2.5MM per year)

•

Continue current spending

•

Spend a % of our cost structure

•

Do a break-even analysis and spend up to where we are economically break-even

HBS Case Interview Guide, Page 76

144

If our goal was to make money, and not necessarily to gain/maintain market share, what might be some alternatives? •

Reformulate the product to change its attributes

•

Change pricing

•

Reduce costs

•

Change distribution

•

Change advertising/promotion strategy

•

Sell the brand

•

Milk the brand

Which of these is likely to offer the greatest profit potential and why? •

Milk the brand o

•

Sell the brand o

•

Because market volume is declining so much, we will never recover the advertising investment to turn around the brand (the best strategy). Because market volume is declining so much, we will never recover the advertising investment to turn around the brand, and the value of the brand declines every year as the volume declines.

Invest to build the brand o

Convince other producers to spend on advertising so the entire industry convinces more people to drink scotch and all producers win. We could also encourage people to switch from wine/vodka/other drinks to drink scotch (e.g., link with cigars to appear more fashionable).

HBS Case Interview Guide, Page 77

145

Which of these will be easiest for the company to implement and why? •

Is this the largest brand for the company? (i.e., if this brand declines, will the entire company decline?) o

This brand is only a small part of the company's portfolio.

•

Fit with other brand strategies (i.e., are all of the other brands in the portfolio growth brands so that this is the only declining brand?)

•

Fit with management time and attention (is there so much time focused on fixing this brand that other brands suffer and offset the potential improvement in this brand)?

•

Because market volume is declining so much, we will never recover the advertising investment necessary to turn around the brand, and the value of the brand declines every year as the volume declines

•

Invest to build the brand o

Convince other producers to spend on advertising so the entire industry convinces more people to drink scotch and all producers win. We could also encourage people to switch from wine/vodka/other drinks to drink scotch (e.g., link with cigars to appear more fashionable).

HBS Case Interview Guide, Page 78

146 Practice Case 18 (Children Clothes E-Retailer) Part 1: Case Situation: It's a Friday afternoon. You've just accepted an offer to join our consulting company as a Senior Associate in the Business Strategy Competency. You've just called in to confirm your start time on your first day and find out you have an excellent opportunity to be the lead business strategist on a high profile project. We have partnered with a leading bricks-and-mortar children's apparel retailer to help them analyze, design, and build their Internet strategy. There will be a kick-off meeting for the project with the client (including the client's CEO) on Monday morning. The Principal/Engagement Leader on this project has asked you to lead a discussion about how the client should think about opportunities on the Internet. Right now, the client only has a marketing and informational presence on the web (a.k.a. "brochureware"). The Principal/ Engagement Leader wants the client to think about the range of opportunities and challenges the Internet presents and whether the client should invest aggressively in pursuing any initiatives. Company Background: The client's web site and some associated articles found on the Internet have provided the following information. •

The client is a publicly traded company with a $3B market cap. The share price has risen from $15 to $45 in the past 12 months.

•

The client has 300 stores, mostly east of the Mississippi, and all stores are within the U.S.

•

Revenues are approximately $250M, and the firm has average profitability for its industry.

•

The client has been on a rapid store expansion program adding about 25 new stores each quarter for the past two years. They claim to expect similar growth going forward.

•

The market for this client is clothing for children 12 and under. Sales are roughly split between boys and girls.

•

The company is vertically integrated: It designs all its own products, has deep relationships with contract manufacturers in Asia, and distributes all of its products through company owned stores.

•

The company sells a high quality product that is priced about 25-30% lower than its chief competitors.

•

The company has done only limited marketing. The brand remains relatively unknown. HBS Case Interview Guide, Page 91

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Your Challenge: •

Plan for the client meeting. Structure the problem at hand. What questions would you ask?

•

Then, work with your interviewer to explore and broaden those questions and brainstorm the client's hypothetical responses.

Possible Approach: To present the best solution, the candidate must have a better understanding of the customers, the competitors and the client. Some of the important questions to ask are: Market and Competitive Landscape: •

What are the main trends and dynamics going on in the client's industry?

•

What are their competitors doing?

•

Who are they? o

What are the brick-and-mortar children's apparel retailers doing?

o

How are they using the Internet: Has there been a direct causal relationship to their revenues and/or expenses from their Internet strategy and implementation?

o

What are the Internet pure play apparel retailers doing?

o

Who could some of the oblique or peripheral competitors be?

o

Would they be likely to enter the market?

HBS Case Interview Guide, Page 92

148

Customers: •

Who are the client's customers?

•

What is the value proposition to the client?

•

What are the trends in the customer base over time?

Client: •

What are the client's goals? o

To increase revenues? To reduce costs? To increase market capitalization?

o

How could different Internet initiatives accomplish each of these goals?

o

Are these the right goals for the client to have?

o

What are the client's organizational capabilities?

o

Are they capable of supporting an Internet initiative with the existing culture? Talent? IT infrastructure, legacy, processes? Operational structure, processes, procedures, policies? Accounting processes?

[The goal of the interviewer is to assess the candidate's ability to analyze and develop questions for the client to answer. The interviewer will often play the devil's advocate and challenge the hypothesis the candidate generates.]

HBS Case Interview Guide, Page 93

149

Part 2: Quantitative Analysis: After spending part of the weekend preparing for your kick-off meeting and discussion facilitation, you check your voicemail from the airport before hopping onto the shuttle on your way to the client's office for the meeting. The one new message is from your Principal/Engagement Leader asking you to provide an estimate of the size of today's online component of domestic children's apparel sales and how large it might grow in the next 5 years. As you step onto the plane, you realize that you'll have no access to the Internet or other research before the meeting starts. Instead, you will need to create a "back-of-the-envelope" analysis on the plane. Your Challenge: Spend about 5 minutes creating an answer to these two questions: 1. What would you estimate the size of today's online component of domestic children's apparel sales today? 2. How large do you think it will grow in the next 5 years? [The point of this scenario is to test the candidate's ability to do some real time analysis, to articulate a methodology, and to make reasonable and explicit assumptions in order to arrive at a ballpark estimate.]

HBS Case Interview Guide, Page 94

150

Possible Response Assume the children's apparel category is dollars spent on clothes for kids ages 12 and under, as stated in the case facts. There are approximately 275M people in the U.S., perhaps 15% are under 12. 275M x 15% = approximately 40M kids under the age of 12. Assume the average parents spend $250 on each kid age 12 or under each year. 40M kids x $250 = $10B children's apparel industry for kids 12 and under. Of the people who spend this $10B, assume 35% of them have Internet access and have the potential to shop online. Therefore, the theoretical current maximum potential size of the market is $3.5B. However, just because people use their online access to buy their kids' clothes doesn't mean they spent all $250 for each child online for their apparel. In fact, only a small fraction of those dollars are spent online today, perhaps 5% (a.k.a. share of wallet). 5% x $3.5B = $175M (which is not too far off the actual estimate of $130M in 1999-Forrester Report) In the next five years, let's assume the number of kids increases to 42M, average spending goes to $300 per kid age 12 and under, Internet access rises to 55% and share of wallet rises to 20%. The 5-year growth estimate would be: 42M kids x $300/kid x 55% x 20% = $1.4B (which is not too far off the Forrester estimate of $1.6B).

HBS Case Interview Guide, Page 95

151

Practice Cases – Case 8: CanadaCo

BCG

(Source: Sample case from BCG website) Context Your client is the largest discount retailer in Canada, with 500 stores spread throughout the country. Let's call it CanadaCo. For several years running, CanadaCo has surpassed the second-largest Canadian retailer (300 stores) in both relative market share and profitability. However, the largest discount retailer in the United States, USCo, has just bought out CanadaCo's competition and is planning to convert all 300 stores to USCo stores. The CEO of CanadaCo is quite perturbed by this turn of events, and asks you the following questions: Should I be worried? How should I react? How would you advise the CEO? Establish understanding of the case Interviewee: So, the client, CanadaCo, is facing competition in Canada from a United States competitor. Our task is to evaluate the extent of the threat and advise the client on a strategy. Before I can advise the CEO I need some more information about the situation. First of all, I'm not sure I understand what a discount retailer is! Interviewer: A discount retailer sells a large variety of consumer goods at discounted prices, generally carrying everything from housewares and appliances to clothing. Kmart, Woolworth, and Wal-Mart are prime examples in the United States. Set up the framework Interviewee: Oh, I see. Then I think it makes sense to structure the problem this way: First, let's understand the competition in the Canadian market and how CanadaCo has become the market leader. Then let's look at the United States to understand how USCo has achieved its position. At the end, we can merge the two discussions to understand whether USCo's strength in the United States is transferable to the Canadian market. Interviewer: That sounds fine. Let's start, then, with the Canadian discount retail market. What would you like to know? Evaluate the case using the framework Interviewee: Are CanadaCo's 500 stores close to the competition's 300 stores, or do they serve different geographic areas? Interviewer: The stores are located in similar geographic regions. In fact, you might even see a CanadaCo store on one corner, and the competition on the very next corner. Interviewee: Do CanadaCo and the competition sell a similar product mix? Interviewer: Yes. CanadaCo's stores tend to have a wider variety of brand names, but by and large, the product mix is similar. Interviewee: Are CanadaCo's prices significantly lower than the competition's? Interviewer: No. For certain items CanadaCo is less expensive, and for others the competition is less expensive, but the average price level is similar. Interviewee: Is CanadaCo more profitable just because it has more stores, or does it have higher profits per store?

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Practice Cases – Case 8: CanadaCo

BCG

Interviewer: It actually has higher profits than the competition on a per-store basis. Interviewee: Well, higher profits could be the result of lower costs or higher revenues. Are the higher per-store profits due to lower costs than the competition's or the result of higher per-store sales? Interviewer: CanadaCo's cost structure isn't any lower than the competition's. Its higher per-store profits are due to higher per-store sales. Interviewee: Is that because it has bigger stores? Interviewer: No. CanadaCo's average store size is approximately the same as that of the competition. Interviewee: If they're selling similar products at similar prices in similarly-sized stores in similar locations, why are CanadaCo's per-store sales higher than the competition's? Interviewer: It's your job to figure that out! Interviewee: Is CanadaCo better managed than the competition? Interviewer: I don't know that CanadaCo as a company is necessarily better managed, but I can tell you that its management model for individual stores is significantly different. Interviewee: How so? Interviewer: The competitor's stores are centrally owned by the company, while CanadaCo uses a franchise model in which each individual store is owned and managed by a franchisee who has invested in the store and retains part of the profit. Interviewee: In that case, I would guess that the CanadaCo stores are probably better managed, since the individual storeowners have a greater incentive to maximize profit. Interviewer: You are exactly right. It turns out that CanadaCo's higher sales are due primarily to a significantly higher level of customer service. The stores are cleaner, more attractive, better stocked, and so on. The company discovered this through a series of customer surveys last year. I think you've sufficiently covered the Canadian market—let's move now to a discussion of the United States market. Interviewee: How many stores does USCo own in the United States, and how many does the second-largest discount retailer own? Interviewer: USCo owns 4,000 stores and the second-largest competitor owns approximately 1,000 stores. Interviewee: Are USCo stores bigger than those of the typical discount retailer in the United States? Interviewer: Yes. USCo stores average 200,000 square feet, whereas the typical discount retail store is approximately 100,000 square feet. Interviewee: Those numbers suggest that USCo should be selling roughly eight times the volume of the nearest United States competitor!

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Practice Cases – Case 8: CanadaCo

BCG

Interviewer: Close. USCo's sales are approximately $5 billion, whereas the nearest competitor sells about $1 billion worth of merchandise. Interviewee: I would think that sales of that size give USCo significant clout with suppliers. Does it have a lower cost of goods than the competition? Interviewer: In fact, its cost of goods is approximately 15 percent less than that of the competition. Interviewee: So it probably has lower prices. Interviewer: Right again. Its prices are on average about ten percent lower than those of the competition. Interviewee: So it seems that USCo has been so successful primarily because it has lower prices than its competitors. Interviewer: That's partly right. Its success probably also has something to do with a larger selection of products, given the larger average store size. Interviewee: How did USCo get so much bigger than the competition? Interviewer: It started by building superstores in rural markets served mainly by mom-and-pop stores and small discount retailers. USCo bet that people would be willing to buy from it, and it was right. As it grew and developed more clout with suppliers, it began to buy out other discount retailers and convert their stores to the USCo format. Interviewee: So whenever USCo buys out a competing store, it also physically expands it? Interviewer: Not necessarily. Sometimes it does, but when I said it converts it to the USCo format, I meant that it carries the same brands at prices that are on average ten percent lower than the competition's. Interviewee: What criteria does USCo use in deciding whether it should physically expand a store it's just bought out? Interviewer: It depends on a lot of factors, such as the size of the existing store, local market competition, local real estate costs, and so on, but I don't think we need to go into that here. Interviewee: Well, I thought it might be relevant in terms of predicting what it will do with the 300 stores that it bought in Canada. Interviewer: Let's just assume that it doesn't plan to expand the Canadian stores beyond their current size. Interviewee: OK. I think I've learned enough about USCo. I'd like to ask a few questions about USCo's ability to succeed in the Canadian market. Does USCo have a strong brand name in Canada?

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Practice Cases – Case 8: CanadaCo

BCG

Interviewer: No. Although members of the Canadian business community are certainly familiar with the company because of its United States success, the Canadian consumer is basically unaware of USCo's existence. Interviewee: Does CanadaCo carry products similar to USCo's, or does the Canadian consumer expect different products and brands than the United States discount retail consumer? Interviewer: The two companies carry similar products, although the CanadaCo stores lean more heavily toward Canadian suppliers. Interviewee: How much volume does CanadaCo actually sell? Interviewer: About $750 million worth of goods annually. Interviewee: Is there any reason to think that the costs of doing business for USCo will be higher in the Canadian market? Interviewer: Can you be more specific? Interviewee: I mean, for example, are labor or leasing costs higher in Canada than in the United States? Interviewer: Canada does have significantly higher labor costs, and I'm not sure about the costs of leasing space. What are you driving at? Interviewee: I was thinking that if there were a higher cost of doing business in Canada, perhaps USCo would have to charge higher prices than it does in the United States to cover its costs. Interviewer: That's probably true, but remember, CanadaCo must also cope with the same high labor costs. Can you think of additional costs incurred by USCo's Canadian operations that would not be incurred by CanadaCo? Interviewee: USCo might incur higher distribution costs than CanadaCo because it will have to ship product from its United States warehouses up to Canada. Interviewer: You are partially right. CanadaCo has the advantage in distribution costs, since its network spans less geographic area and it gets more products from Canadian suppliers. However, since CanadaCo continues to get a good deal of product from the United States, the actual advantage to CanadaCo is not great—only about two percent of overall costs. Interviewee: All this suggests that USCo will be able to retain a significant price advantage over CanadaCo's stores: if not ten percent, then at least seven to eight percent. Interviewer: I would agree with that conclusion. Summarize and make recommendations Interviewee: I would tell the CEO the following: In the near term, you might be safe. Your stores have a much stronger brand name in Canada than USCo's, and they seem to be well managed. However, as consumers get used to seeing prices that are consistently seven to eight percent less at USCo, they will realize that shopping at USCo means significant savings over the course of the year.

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Practice Cases – Case 8: CanadaCo

BCG

Although some consumers will remain loyal out of habit or because of your high level of service, it is reasonable to expect the discount shopper to shop where prices are lowest. Moreover, over time your brand-name advantage will erode as USCo becomes more familiar to Canadian consumers. You certainly have to worry about losing significant share to USCo stores in the long term. You should probably do something about it now, before it's too late. Interviewer: Can you suggest possible strategies for CanadaCo? Interviewee: Maybe it can find ways to cut costs and make the organization more efficient, so it can keep prices low even if its cost of goods is higher. Interviewer: Anything else? Interviewee: It might consider instituting something like a frequent shopper program, where consumers accumulate points that entitle them to future discounts on merchandise. Interviewer: What might be a potential problem with that? Interviewee: Well, it might not be that cost-effective, since it would be rewarding a significant number of shoppers who would have continued to shop there anyway. Interviewer: Any other suggestions? Interviewee: CanadaCo might want to prepare a marketing or advertising campaign that highlights its high level of service. It might even institute a CanadaCo Service Guarantee that surpasses any guarantees offered by USCo. Interviewer: Assuming the only way to keep customers is through competitive pricing, is there anything CanadaCo can do to appear competitive to the consumer? Interviewee: It might want to consider offering fewer product lines, so that it can consolidate its buying power and negotiate prices with suppliers that are competitive with USCo's. It might lose some customers who want the variety of products that USCo has, but it may be able to retain the customer who is buying a limited array of items and is just looking for the best price. Interviewer: All of your suggestions are interesting, and you would want to analyze the advantages and disadvantages of each in more detail before making any recommendations to the CEO.

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Practice Cases – Case 13: Giant Bank

156

Bain & Co.

(Source: Sample case from Bain website) Context Our client, Giant Bank is one of the "big 4" banks in Australia. These 4 banks account for about 75% of the retail/commercial banking revenue in Australia and are roughly equal in size. Giant Bank does not have a good understanding of the profitability of its retail customer base, and more specifically individual segments. One segment that has been of particular concern to them is the "youth" customer segment. This group encompasses all customers under the age of 22. Giant Bank wants Bain to help answer two questions: Question 1: What is the average annual profit of a Youth customer? Question 2: What should Giant Bank's strategy be to maximize long term profits for this customer segment? For Q1: To calculate the average annual profit of a youth customer, we need to know the annual revenue our client makes off a youth customer and the cost that incurs to serve that customer. Given upon request !

Revenue source: interest revenue and fee revenue (see chart below)

Charts given upon request (Note: not all charts are needed to answer the questions):

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Bain & Co.

Practice Cases – Case 13: Giant Bank

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Bain & Co.

Practice Cases – Case 13: Giant Bank

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Bain & Co.

Practice Cases – Case 13: Giant Bank

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Bain & Co.

Practice Cases – Case 13: Giant Bank

Interviewer: The following are the correct answers to Q1:

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Bain & Co.

Practice Cases – Case 13: Giant Bank

162

Bain & Co.

To answer Q2, some examples: Good idea: !

!

Raise/Introduce fees o Raising/introducing fees accomplishes two objectives a) increase revenue from this customer segment and b) if done correctly, can influence behavior positively e.g. reduce branch visits by charging for transactions. o Giant Bank needs to be careful about how to do this however, to ensure that it doesn’t lose too many customers. While these customers are negative profit, they are likely positive contribution given the bulk of the costs are fixed. Thus, Giant Bank should raise/introduce fees that either are in line with the market, or is likely something the other 3 banks will follow. Redirect customers to cheaper channels o Channel costs vary significantly. Branch costs (the most expensive) can be 10x-100x more expensive than cheaper channels (e.g. internet transactions can be < $0.01 fully costed). o Many customers will migrate to cheaper channels if the appropriate mix of positive and negative reinforcement are applied. Positive reinforcement includes education and making the channel easy to use (e.g. secure and easy login for internet access). Negative reinforcement usually comes in the form of fees.

Has potential: ! Shut down unprofitable branches o At the end of the day, this is where the bulk of cost reduction is going to come from. However, it is unlikely that Giant Bank has branches which are predominately “Youth” customers. Thus, analysis across all segments need to be conducted before an identification of specific branches to shut down can be made. o This analysis will likely be an overall “footprint” analysis of branches quantifying profitability, contribution, and customer segments served. ! Aggressively cross sell other products o It is clear from the data that the number of products that this customer segment owns is significantly less than other segments (except for Community). One high potential is credit cards.

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Practice Cases – Case 13: Giant Bank

Bain & Co.

However, it is highly likely that this customer segment doesn’t need any of the other products that Giant Bank has to offer. Thus aggressively cross selling may be futile. Further analysis will be required before this action can be recommended. While cross selling has been a hot topic for financial institutions, the results to date have been disappointing. Attract more youth customers through marketing o Giant Bank should not want any more of these customers, and certainly shouldn’t spend marketing dollars to acquire more of these customers. However, there is an exception to selectively target older, educated customers in this segment (e.g. 21/22 year old college graduates) who will likely be profitable future customers for the bank. o Timing is critical here however…too soon and Giant bank stands to lose money for many years before being able to recoup its investment, and there is no guarantee that the customer will not defect once he becomes profitable. o

!

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Practice Cases – Case 14: Acme Packaging

164

Bain & Co.

(Source: Sample case from Bain website) Context Gulf Partners, a private equity fund specializing in leveraged buyouts, has asked Bain to evaluate an investment in Singapore-based Acme Packaging. A private equity firm is a company that has raised money from individuals and institutions to invest in companies that may be a riskier investment but offer the promise of higher returns. Acme Packaging manufactures and sells intermediate bulk containers (IBCs), which are metal frame crates stacked within shipping containers for the transport of goods. Acme Packaging has manufacturing operations in Singapore and sales offices throughout Asia. 100% of sales are from Asian markets with 80% of sales from rubber customers - mostly tire manufacturers from Japan and Southeast Asia. Acme Packaging has 65% market share within the rubber IBC market and has increased share in the Asia IBC market by 5% over the past 3 years. Gulf Partners prefers to sell their investments within 5 years with a minimum 40% return on their investment. In order to evaluate whether Acme Packaging can generate high returns, Gulf Partners would like Bain to assess the growth potential for Acme Packaging. They specifically want to know: Question 1: Can Acme Packaging double its operating income by year 5 (2006)? Question 2: What growth opportunities should Gulf Partners pursue to increase the value of Acme Packaging?

Charts given upon request (Note: not all charts are needed to answer the questions):

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Practice Cases – Case 14: Acme Packaging

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Bain & Co.

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Bain & Co.

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Bain & Co.

Practice Cases – Case 14: Acme Packaging

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Bain & Co.

Practice Cases – Case 14: Acme Packaging

170

Bain & Co.

Bain recommends to collect the following facts to answer the questions: ! ! ! ! !

Size and growth of IBC sales in Asia Profitability of new sales offices over time Market share of worldwide IBC market by geography Market share and growth of IBC sales in Asia by customer industry Current and historical income statement for Acme Packaging

To answer Q1, Bain recommends the following:

To answer Q2, Bain recommends the following: Bain's Ranking and Rationale for Gulf Partners' growth opportunities are below. 1. Expand presence in Asia by increasing sales in non-rubber customer industries - The chemical IBC industry in Asia is larger than the rubber IBC industry and is increasing at a faster rate. The market is fairly fragmented, and a fragmented market is easier to penetrate than a market dominated by strong competitors. Acme’s presence in the chemical industry, as well as other companies selling across industries, indicates that selling across industries is possible. 2. Aggressively increase market share within the rubber IBC market in Asia - Acme currently has a 65% share in the rubber IBC market. Although Acme could leverage its current position to gain additional market share, the opportunity is not large. The remaining market share is divided between only two companies, and the remaining customers may not be as profitable. 3. Enter new geographical markets by opening sales offices outside Asia - Europe represents a growing but heavily consolidated market. 80% of Europe’s IBC sales go to five companies. Acme Packaging would have difficulty penetrating a market dominated by strong competitors. - Although the United States is a more fragmented market, the growth rate is 3x less than the growth in Asia. Furthermore, entering the U.S. versus growing share in Asia would be less profitable for Acme Packaging based on the financials of new sales offices. - A new office does not yield profit until year 4, and since Gulf Partners wants to sell the business within five years, they are probably more interested in short-term growth opportunities.

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Practice Cases – Case 16: PCB Manufacturer

171

Booz Allen Hamilton

(Source: Interview case from Booz Allen Operations Round I, RSB 2006 casebook #8) Context Our client is a Printed Circuit Board (PCB) manufacturer that has 3 plants - 1 in Philippine, 1 in China, and 1 in the US. The client wants to invest money to expand capacity in one or more plants. Which plant(s) should the client invest in? Interviewee could ask some clarifying questions upfront or early in the process to understand: ! What is PCB is for? ! How does our client evaluate investment? Given upon request ! PCBs are used in TVs, radios, mobile phones etc. ! The client wants the first year ROI on any investment to be no less than 10%. Interviewee should lay down a structure that addresses all the key issues the client should consider when evaluating the investment. A sample framework could cover the following issues: ! ! ! ! ! !

Each plant’s current demand and capacity utilization Overall demand and supply of the market each plant is in, to understand if there is enough demand to meet the increased capacity Price elasticity of each market – how increased supply will affect price? Profit margin of each plant (all else being equal, the client should invest in plants that have the highest profit margin) Competitive reaction Government regulations

Given upon request: ! ! ! ! !

Annual Demand in each plant is the same: 6M units/year. Capacity utilization is close to 100% in all plants Assume that there is sufficient demand to meet the additional supply in all markets Assume that price won’t be affected by the increased supply in all markets Price per unit is $10 in all plants

Interviewee should now realize that investing in the plant with the highest profit margin will bring the highest return. Interviewer should explore the complete value chain to understand cost components of every part of the value chain across the three plants, and identify the plant that has the highest profit margin. Value chain Analysis !

Sourcing: How would the cost of raw material be different across plants? Raw materials are made in East Asia (in places such as Taiwan). It is cheaper to transport raw material from Taiwan to China/ Philippines than to US. The cost of raw material is $1/unit for China and Philippines, and $2/unit for US The other factors that affect raw materials purchasing: Supplier Quality and delivery; supplier maturity.

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Practice Cases – Case 16: PCB Manufacturer !

Booz Allen Hamilton

Manufacturing: What are the different costs in manufacturing? Neglect fixed costs for now (Plant, property, equipment, Long-term agreements etc.) We shall focus on variable costs. o Direct Material Cost (it’s the cost of raw material) o Labor Cost - $20/hr for US; $4/hr for China; $10/hr for Philippines o Employee Productivity / efficiency ! Productivity: 80% for China; 90% for US and Philippines ! Efficiency: 75% for China; 90% for US; 80% for Philippines o Overhead burden – Assume $10/actual labor hour for all countries o Scrap rate / rework rate – cost of quality o Tax rate It takes 6 minutes to produce one unit in all three plants.

!

Warehousing: Why would you need warehousing cost? For long-distance transportation, the client would need to carry more inventory on its shelf to compensate for the long lead-time and demand variability during the longer lead-time. It is important to realize safety stock needed to maintain certain service level and reduce stock out costs. Warehousing costs are 25% of sales in China and Philippines and 10% of sales in the US.

!

Transportation/Distribution: The transportation cost would be higher when shipping products from country to country. Annual transportation costs are: $4M in China; $1.5M in US and $3M in Philippines

!

Docking Costs: These costs include customs, tariffs, inbound taxation rates etc.

!

Marketing/Sales: Ignore in this case

!

Customer Service: Ignore in this case

Interviewer: Let interviewee calculate the unit profit margin in each plant

Variable Cost

China

US

Philippine

Raw Material

$1/unit

$2/unit

$1/unit

Direct Labor (DL)

$4/hr

$20/Hr

$8/Hr

Theoretical Time

6 min/unit

6 min/unit

6 min/unit

Productivity

0.8

0.9

0.9

Efficiency

0.75

0.9

0.8

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Booz Allen Hamilton

Scrap

NA

NA

Overhead

$10/Actual DL $10/Actual DL Hour Hour

$10/Actual DL Hour

Warehousing

20% of sales

10% of sales

20% of sales

Transportation

4,000,000

1,500,000

3,000,000

Here are the tabulated results: Variable Cost

China

US

Philippines

Raw Material

6,000,000

12,000,000

6,000,000

Theoretical Rate

10/Hr

10/Hr

10/Hr

Actual Rate (Adjust for efficiency and productivity) 6/hr

8/hr

7/hr

Total Hours

1,000,000

750,000

900,000

Direct Labor Rate

4,000,000

15,000,000

7,200,000

Overhead

5,000,000

7,500,000

9,000,000

Warehousing

12,000,000

6,000,000

12,000,000

Transportation

4,000,000

1,500,000

3,000,000

Total Cost

34,000,000

42,000,000

37,200,000

Cost / Unit Price/Unit

$5.2

$7

$6.2

10

10

10

$4.8

$3

$3.8

Margin

Conclusion: The plant in China has a higher profit margin due to lower cost structure and therefore expanding capacity in that plant will bring the highest return. Interviewer: If we decide to invest in a brand new facility in China and move all manufacturing from the US plant to China as well, what are the things we should consider? Some of the things to consider: ! US facility shutdown costs (severance, plant closures, machine sell-off etc.) ! Union issue ! Facility startup cost in China ! Additional costs to transport products back to US, such as transportation, customs, etc ! Currency risk ! Chinese government regulations ! Impact on brand image in US and US customer relations Interviewer: Suppose the client decides to move manufacturing to China, what would the client need to consider when deciding whether to invest in new equipment?

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Practice Cases – Case 16: PCB Manufacturer

174

Booz Allen Hamilton

Sample answer: ! If the equipment has high value, and a specific asset to the client, the client should consider shipping it overseas vs. selling off in the US and purchasing in China. Of course, the client needs to compare the cost of both options. Leasing in China is another option. ! The equipment needs to have a physical useful life for the ‘overhead’ allocation to be low. Interviewer: The client believes that the asset is specific. It is fully depreciated, and has useful life of 10 years. Hence, the client decides to ship the equipment to China. Uninstalling and shipping and then reinstalling will take about 2 months. How should the client do in the interim to keep the business going? Sample answer: The client should focus on building a ‘bridge’ inventory in order to satisfy the customer demand during the timeline between uninstalling and shipping the machine to China; and installing it and running the machine to production.

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181 Syzygy Supercomputers Case - Solutions and De-Brief Origins The Syzygy Supercomputers case was created from scratch by the editorial team for the Kellogg Consulting Club Case Book re-write, although the case does combine concepts from various other cases. General Comments This is a challenging case that tests several relevant concepts, and is heavy on slide interpretation. The candidate will need to use logical, inductive reasoning to discover and highlight the relevant ideas and insights. Solutions/How to Give the Case Slide #1 (page 101) gives the relevant background information. Based on that, the candidate should identify this as a profitability problem, and ask to see historical revenue and cost information. Wanting to see this information over time, rather than just for the most recent fiscal year, is important, indicating the candidate$6"84>*76(34>A4."-1"()*"4**>"(-"6**"(7*4>6"73()*7" than just a snapshot at this moment in time. Slide #2 (page 102) provides this profitability information. The correct interpretation is that both costs and revenues have risen over time, but that profits peaked in 2000 and have fallen ever since. Slides #3 and #4 (pages 103-104) should be given in tandem. After presenting the macroeconomic information about this industry (presented in the famed "537A5*??-#"1-753()7

7

Take some time to familiarize yourself with this chart, if you have never seen one before. You will probably encounter a chart like this one if you interview with Bain. Marakon uses a similar data format in some of its studies. The editorial team has also seen data laid out this way in cases used in the classroom, so it is a valuable type of chart to be able to quickly interpret.

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182 on slide #3 (page 103), the interviewer should then present slide #4 (page 104) and ask the candidate which product on slide #4 is which.

This will require the candidate to identify the

meaning of the two axes and the bubble size. The x axis is absolute market share (AMS), which is Syzygy$6"7*G*48*6">AGA>*>"&'" ()*" total revenues in the category. AMS is best estimated by the height of Syzygy$6"7*0(34.le in each of the five product areas in slide #3 (page 103). The y axis represents relative market share (RMS), which is calculated as Syzygy$6" 537?*(" 6)37*" >AGA>*>" &'" ()*" 537?*(" 6)37*" -1" ()*" 4*R(" closest competitor, if Syzygy is the market leader in that category, in which case the RMS number will be greater than one. If Syzygy is not the market leader, then the calculation is Syzygy$6"537?*("6)37*">AGA>*>"&'"()*"537?*("6)37*"-1"()*",*3>*79"A4"H)A0)"036*"()*"RMS number will be less than one. Estimating RMS from the information on slide #3 (page 103) is best done by looking at the ratio of the height of Syzygy$6"7*0(34.,*"A4"*30)"-1"()*"1AG*"@7->80("37*36"(-"()*" height of competitors$"7*0(34.,*6"A4"*30)"-1"()-6*"37*36B""KA43,,'9"()*">A35*(*7"-1"()*"&8&&,*s is driven by Syzygy$6"(-(3,"7*G*48*6"A4"()3("03(*.-7'9"*6(A53(*>"17-5"()*"537A5*??-"0)37("-4"6,ide #3 (page 103) by the height of Syzygy$6"7*0(34.,*"DA(6"537?*("6)37*E"58,(A@,A*>"&'"()*"HA>()"-1" the rectangle (the size of the market). Correctly interpreting slides #3 and #4 (pages 103-104) will lead the candidate to correctly identify the products on slide #4 (page 104): 1. Product #1 is custom applications; 2. Product #2 is supercomputers; 3. Product #3 is telecommunications equipment; 4. Product #4 is satellites; and, 5. Product #5 is operating software.

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183 So, now ! how do you interpret the graphs and what to do about them? Looking at slide #4 (page 104), the bubble in the upper-left hand corner of an AMS vs. RMS slide (product #1, in this case) indicates a position as the market leader in a very fragmented industry. The obvious question, then, is what if any advantages accrue to such a leader. In this case, it is probably true that there are little if any economies of scale in custom applications, so increasing either AMS or RMS seems unlikely to lead to a competitive advantage. By contrast, the bubbles to the righthand side of a chart like this (product #2, in this case) indicate a duopoly market in which the client company is in either first place or a close second. Finally, the bubble in the lower left-hand corner of such a chart (product #5, in this case) indicates a weak position and begs the question ! are there economies of scale, network effects, and/or an experience curve at work here? Since this product is operating software, the answer is probably going to be "yes# in all three cases. The likely conclusion is that Syzygy$6" 3,7*3>'" 653,," 537?*(" 6)37*" A4" -@*73(A4." 6-1(H37*" HA,," continue to erode. Translation: Syzygy should probably exit this business. Slides #5 and #6 (pages 105-106) conclude the case by looking at Syzygy$6"7*6*370)"34>" development (R&D) spending. The key insight in slide #5 (page 105) is that Syzygy is the only major competitor in this industry whose R&D spending is below the "4-753(AG* band#"D()*"&34>" indicated by the area in between the two parallel lines). We would expect each company$6" degree of technical leadership to go up as it invests in R&D. But Syzygy, with slightly more R&D than Cray Research, enjoys less of a perception of technical leadership from its customers, and is also dominated by Sonic Wave, which has a position to the north and west of Syzygy as well. Slide #6 (page 106) builds on this point by examining Syzygy$6" jkP" *R@*46*6" 36" compared to its product prices over time. Although R&D as a % of the product price is clearly

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184 increasing over time, the key insight here is the absolute expenses, not the % taken up by expenses. Spending $4 million/unit on R&D for features that will allow a company to charge $6 million/unit more for its product is a good strategic move, even if it raises the overall % of a product$6"63,*"@7A0*"()3("A6"6@*4("-4"jkPB""[-H*G*79"/'S'.'"A6"6@*4>A4."5-7*"5-4*'"-4"1*3(87*6" than the customer$6" 0-77*6@-4>A4." "HA,,A4.4*66" (-" @3'#" ! for instance, from 2001 to 2003, Syzygy$6"jkP"6@*4>A4."@*7"84A("A407*36*>"&'"^=B<"5A,,A-49"&8("()*"0-77*6@-4>A4."@7A0*"A407*36*" was only $300,000/unit. Likely translation ! Syzygy is spending money to develop features that consumers are not willing to pay for. That$6"3"&3d business practice. In conclusion, this is a complex case with multiple possible interpretations. In light of the information presented, the candidate should be able to produce the most important insight, which is that Syzygy should either A) cut R&D to eliminate spending on unnecessary customer features, or B) keep R&D spending the same, but switch the work to developing features that consumers will be willing to pay for at a level that is higher than the R&D expense itself. Syzygy$6"@-6A(A-4"36"()*"-verall market leader would argue for Option B, but either option could be argued for successfully. A second-order insight from the case is that Syzygy should exit the operating software business, since economies of scale, network economics, and the experience curve are all working against it. By the same token, it should increase its focus in some of the categories where it is the market leader, to get some or all of those economies to work for it and against its competition.

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