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Management Consulting and Case Solving for Dummies 11. Guestimates Issac Jojy PGP 2014-16 1 I expect you to have read the previous document before going through this one. I’ve already given a flavor of why candidates are tested on guestimates during the case interviews. What are Guestimates? Guestimates are simple back-of-the-envelope type calculations that you can do on a normal A4 sheet paper in 10-15 minutes. As part of case interviews, guestimates are asked to test candidates on their ability to handle abstract questions, which in reality are extremely simple. For example, a guestimate question can be “how many cigarettes do Indians smoke?” or “How many burgers get sold in a McD joint?” These sound abstract at the beginning, but in reality, these questions are really simple. I’ll give you some simple tools in this document that will help you deal with guestimate questions with ease. Why are Guestimates important? Like I mentioned in the previous document, guestimates are a scaled down version of market sizing calculations that are done as part of analyzing the market potential, which is important for New Market Entry cases. Either while solving a new market entry case, the interviewer might ask you to solve a market sizing problem as a sub-case OR the main case itself can be a guestimate question. When it comes to guestimates, what do you mean by “Assumptions”? In an actual consulting assignment, market sizing is done by making a lot of assumptions. These assumptions are the foundations for the market sizing. A wrong assumption can lead to a wrong guestimate leading to a wrong market potential assessment leading to a wrong decision when it comes to new market entry and that wrong decision can cause a huge negative impact. So the assumptions that you make while solving guestimates are extremely important. For example, suppose while solving a guestimate like “How many smokers are there in India?”, an assumption that an average Indian who smokes cigarettes smokes 3 per day Vs 4 per day (These are the assumptions while solving the guestimates) will completely change the answer because that number will be multiplied by the huge population of smokers in India (whatever that number is) and multiplied by the number of days in a year – The impact of a wrong assumption is huge and I know of companies which have turned to losses just because an assumption that the company made during the market sizing phase was wrong. So, point being that the assumptions need to be valid and in actual consulting assignments, these assumptions are all based on data from analyst reports and extensive surveys. While solving a guestimate, you will not be given that data. So what you need to do is: • Make the assumption yourself, state it out to the interviewer, ask the interviewer whether it is fine to make that assumption. If not, ask him for feedback on your assumption and modify your assumption accordingly. But ensure that you buy the interviewer in at every stage you make assumptions for solving your guestimates How to deal with Guestimates ? Guestimates are extremely open ended and I couldn’t really find any frameworks or guiding tools to give me direction on how to handle guestimates. So I created a framework for myself and am sharing it here. Unlike the earlier framework, this will seem a little open ended. It is because guestimates are 2 so open ended and you cannot expect a single framework to handle all guestimate questions. Anyway, I’ll show you how I handled guestimates. The following points given are not all sequential in terms of what you’ll have to use to solve guestimates. It’s because the nature of guestimates will differ largely. So use these are broad guidelines and try to use these pointers.(With practice, you’ll figure out when to use what). With practice, I did not have to remember all these below points. Some of this might seem like force-fitting for you. Don’t think of it that way. Think of it as general points, which you should keep at the back of your mind so that you don’t miss out on any important parameters. 1. T – V – R (Time – Volume – Revenue) When a question is asked, first thing you need to check for is whether the answer should be in volume or revenue and what is the time frame for the analysis. For example, if the question is “What is the cigarette market size in India?” Check with the interviewer whether he wants you to calculate the volume of cigarettes sold ( in terms of number of cigarettes) or revenue potential of the cigarette industry ( Volume * Average Price). Also, check with the interviewer what the time frame for the calculation is (daily, weekly, monthly or annualy). Mostly, it will be an annual calculation – like number of cigarettes had by Indians in a year. But still, do a check with the interviewer so that there is clarity on these 3 parameters before going forward, in case it is not made clear by the interviewer while giving the question. 2. Type of Product/Service (Household vs Individual vs Industrial) This is for you to just think. Don’t say anything to the interviewer. Household products like television or fridges or cars will have to be handled separately as compared to Individual Products like cigarettes or t-shirts or even food at restaurants (Although families go to food restaurants, all of them individually have food as against a TV where all members of the family use the same product). With regard to Services, guestimates aren’t asked so much. Industrial products are very rare when it comes to guestimates. But in all these cases, just take half a second to think of the nature of the product so that you have clarity on what you’re dealing with. Since largely, guestimates are involved only with Products which are either household or individual, the rest of the document will primarily focus only on that. 3. Replaceable vs Non-Replaceable products Again, take half a second to think about whether the product is replaceable or non-replaceable. The reason why you need to do this is to ensure that you take care of a factor called the frequency of replacement. For example, look at a product like car tyres. It is a household product because a car is a household product. Now suppose you’re assessing the tyre market size of India. The broad approach is to look at no: of households in India that will be buying new cars in the year and multiplying that no: by 5 ( 4 normal tyres + 1 spare tyre). Also, you have to include the old cars of households where they will replace some tyres. For this, you need to assume a replacement frequency factor and incorporate it into your calculation to find the total market size. This is just an example, but the point is not to miss out on the replaceable products. 3 4. Conversion factor I’ll describe this using a personal example. So I was in charge of the pro-show for Unmaad. As part of the promo work for the pro show, we wanted to put up an ad on the big LED screens of some major malls in Bangalore. Now, that would require a cost investment. The culsecy wanted me to justify this cost investment because it was not a small amount. So I went to the malls, spoke to them, got a third-party approved document from them (which they already had before) on the average no: of visitors to the mall on weekdays as well as weekends. Suppose on average 100 people come to the mall – I used the conversion factor concept that I internalized during case prep last year and told the culsecy – 100 people enter the mall everyday. Since our LED screen is right in front and everyone can see it while entering the mall, assume that 30% actually notice the LED screen and see our ad. Now out of these people, assume that 10% of them are interested in music and wouldn’t mind coming for the show. And assume within this, 20% would actually buy the tickets after going back from the mall (this is dependent on the artist we’ve selected for the concert and the crowd’s attraction to this artist). So after all the conversion factors are applied, the number of tickets that we can expect to be sold as a result of this ad = 100* .3 * .1 * .2 which is a very small number. But when you multiply that small number with the total number of days where the ad will be shown and multiply it with the large average daily footfall per mall * the number of malls where you’ll be putting the ad, you get the total number of tickets that can be sold and multiply that with the average ticket rate to find the total estimated revenue. This was huge compared to the cost investment that my culsecy was concerned about and when I showed him these calculations and assumptions, he happily agreed. The numbers I gave were what I felt were random conservative estimates and am sure were not the actual numbers. But this extremely simple conversion factor tool helped me solve that guestimate problem. In an actual case, all these numbers are the assumptions which make all the difference in the answer. So you need to check with the interviewer and buy the interviewer in before finalizing on any such assumption. 5. Packing efficiency This will be easy for people who remember their chemistry from school days. I’ll give an example. Suppose the question is something like “how many tennis balls will fit into an Airbus flight?” How is this related to consulting ? – Don’t worry about that. The question is just trying to see whether you can break down the problem in a logical manner. The approach will be something like 1. Assume a standard flight size (after checking with the interviewer, making assumptions on size – like you can ask the interviewer whether you can assume it to be a cuboid instead of the weird airplane shape, ensure you tell the interviewer stuff like the size assumption includes not only the passenger space but also crew area + cockpit + luggage + fuel (MECE) – make an assumption on the size based on these parameters. Make similar assumption on tennis ball size. Divide both these numbers. But then that will not be sufficient. Since there will be a lot of gap between these balls and it will not be packed to 100% efficiency, you’ll have to factor that in as well (say 80% or 90% packing efficiency – again buy in the interviewer). This concept of packing efficiency can be used in multiple cases – How many balloons in a car? How many cars in an airbus? How many humans can be packed into a 4 classroom? etc and you can see the applicability of this in different situations, as the case may be. 6. Peak vs Non-peak hours & Weekend vs Weekday analysis This is something a lot of people miss out. When it comes to estimation of demand which varies, you need to take into account the effect of peak hours and non-peak hours OR equivalently the effect of weekdays and weekends, where the demands will vary accordingly. For example, suppose a client is planning to set up a restaurant and wants to know the potential monthly revenue. There are lot of factors to be considered for finding this. But you should not miss out on understanding the time phases where the demand is high and low. Weekends will have a high demand and weekdays will have relatively low demand. Within a day, the peak hours will have a higher demand and the non-peak hours will have lower demand. May be, this is all basic stuff. But you need to factor that in your guestimate calculation. And how do factor it? Suppose a restaurant has 10 tables – And we assume that on average a customer spends 30 minutes in a restaurant. And each table has on average 3 customers. So, if there is a huge demand for people to get in the restaurant, each table will have (60/30)*3 = 6 customers. And then we make an assumption that during the peak hours the restaurant is full and during the non-peak hours, the restaurant has an average occupancy rate of 50%. So for peak hours the no: of orders per hour will be 100% * 10 tables * 6 customers/table per hour = 60 customers. The same figure for non-peak hours will be just multiplied by .5 = 30 customers per hour. Based on this and other assumptions like average order value per customer based on the nature of products being served (eg. CCD coffee vs Dominos Pizza), the potential revenue is computed. The same approach is used for weekday and weekend demand fluctuations and is taken care in the guestimate computation. The important thing you need to note is not to jump into the solution. Tell the interviewer that so and so is the approach you’ll be following. Buy him into your approach, make it seem like normal conversation and proceed forward. 7. Occupancy Rate This has already been mentioned in the previous point. I wanted to separately give it as a tool because it is an important one and can be used in several areas. So do not forget this one. 8. Segmentation: This is another important one. While breaking down from a large abstract level to the level you’ll be making the computation, you’ll probably need to segment the target market in terms of various parameters like age income bracket, urban / rural, gender. The best thing is to immediately think of this while you start the problem and include it as part of your approach. Again coming back to the example of cigarettes, women in India smoke way less as compared to men. So, you’ll need to check whether this needs to be taken care of and if the interviewer say yes, then you’ll have to separately compute and add the numbers to get the final figure. Another example – Certain products might be used only by certain income brackets. In such cases, that also needs to be taken care as part of the analysis where in you don’t include any other people apart from the target segment. For instance LCD HD TV will be used primarily by households above a certain income bracket. This needs to be factored. Likewise, the same approach for other segmentation options. 5 9. Representative Sampling In some guestimate questions, even after using all these tools that I’ve mentioned above, you might have no clue how to go about solving the guestimate. In such extreme situations, use this tool called representative sampling, which basically means look at a small sample size and get a representative figure and then scale that figure to include the full sample size. For example, suppose a thug asks you to answer in 10 seconds what the number of smokers in India is and if you don’t answer in 10 seconds, you don’t pass and you’ll be thrown into a pool of crocodiles – I’d look at it as “Within my friend circle of 10 people, 5 people smoke. Assuming my friend circle to be a representative sample set of the Indian population, total number of smokers = .5* 1.2 billion = 60 Crore smokers” The actual answer might vary drastically from this number, but atleast you have some sort of reasoning for this answer within the 10 second constraint. Actually you just need 3-4 seconds to come to this answer. The point of giving this example is to give you an idea about what guestimates mean after all – it’s just a representative number indicating the target market size and they test your ability to break down an open ended question using logic and assumptions and they test your comfort level with handling numbers. Use this tool only in extreme cases where in you have absolutely no idea even after going through all the before mentioned tools. Such answers will not be appreciated because within 10-15 mins, you have sufficient time to break down the open ended question using the before mentioned tools and come to a way better answer, but do keep it at the back of your mind, in case you the question is extremely open ended and your brain freezes :P The above list is not comprehensive, but for most of the guestimate questions I practiced, the above was more than sufficient. You don’t have to mug it up. That’s an inefficient way of learning. Use this as a guiding tool and create your framework tailored to your thought process depending on your practice. Please note that not all guestimate questions will require you to use all of these tools. In fact, most of the guestimates will only require you to use 2-3 tools. These tools are just for assistance. The main focus should be the logical approach in terms of breaking down the problem. I’m not giving any long examples of guestimates as of now. There are plenty of resources you’ll be getting from ICON. Even Document 16 that I’ve attached has plenty of examples. When you go through them, try using whatever I’ve mentioned above as your starting point and create tools customized to yourself to handle guestimates Important Note: Like with the normal cases that I’ve discussed before, ensure you tell the interviewer the approach you’ll be following and buy the interviewer in before actually starting to solve the guestimate. The next section is on Mergers and Acquisition. Although rare, such cases can also get asked. So I’ve covered it briefly 6