CASE STUDY Questionnaires
This are sample situation based questionnaires.
General Information1. 4 P’s- Product, price, promotion, and place form the four Ps associated with the marketing
mix.
2. Porters five forces- s a method of analysing the operating environment of a competition of a
business. It draws from industrial organization economics to derive five forces that determine
the competitive intensity and, therefore, the attractiveness of an industry in terms of its
profitability.
3. 3 C’s- Company, Customers and Competitors
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General set of Questionnaires
Autoparts
Your client is CarCo, a mechanics and auto parts company in the Midwest. CarCo provides
automotive services to customers – these include tires, oil changes, engine repair, etc. The
business is family-owned and operated, and has historically generated $25 million in profits
annually. Recently, the business has experienced far lower profits than usual, namely $10
million. While the business is still a profitable enterprise, a similar drop in profits would lead to
collapse, and the mechanic does not really know what went wrong. You have been hired to
assess the root cause of decreased profits and suggest strategies for restoring profits to
previous levels.
What are the factors you would investigate to determine why profits have declined?
Answer1. Revenue Decline:
a. Prices have fallen
● Price war with competitors
● Willingness to pay has fallen
● Economic hardship
b. Quantity sold has dropped
● People fix cars themselves more
● Cars are better made and require less maintenance.
● A competitor has stolen market share.
● Fewer cars in the Midwest .
2. Cost Increase:
a. Fixed costs have increased
● Garage rental, utilities, equipment
● Inventory costs
b. Variable costs have increased
● Particular car parts cost more due to software modifications.
● Labor costs have risen due to more complicated services being performed.
● Timing costs due to lengthier repairs.
3. Market :
a. Overall market for mechanic services is declining due to shifted focus to renewable energy
and fewer vehicles in the market
b. Number of cars left unchanged, but cars need fewer repairs than they used to, thereby
shrinking the market.
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Wireless launch
It’s 2:30 a.m. and you are finalizing some last details to launch a new wireless
telecommunication service in the smallest market of seven in Austria. For the client, Austria Star
Mobile (ASM), it will be their first launch of seven potential launches in Austria and they want it
to be a flawless and successful in order to raise capital. Your team has just finalized the pricing
strategy and ordered 100,000 pieces of promotional material when you get a call from the CEO
of Austria Star. The CEO says he was just at conference in Singapore with the president of the
incumbent wireless provider, AT& M, who says that they will beat the price of any new entrant in
Austria by 10%.
The CEO of Austria Star wants to know how they should respond to this news. What do you do?
AnswerGeneral information given along with questionCompetitive Information:
● AT&M is known to have thorough coverage of Austria, but is known for busy lines,
dropped calls, and haphazard service.
● Your team has spent the last three months developing a highly flexible pricing model.
The model suggests that the optimum rates ex ante would be 15% less then AT&M and
use the same three-level prices.
ApproachThe thing to recognize is that AT&M (the incumbent) is signaling that the will defend the market
at most any cost (they are dropping rates in the entire country not just this market). This makes
price-based competition is less appealing and product differentiation more important.
Another insight is the high market share of AT&M. This may actually prevent them from lowering
prices as they have pledged because of antitrust law, which prevents predatory pricing to fend
of new entrants in mostcountries.
Finally, as the industry is characterized by high fixed costs and zero variable costs, the client
can reexamine their pricing strategy.
Armed with these insights, you tell the CEO that you will have a proposed response strategy
ready for him and his communications team to review once he arrives in Austria. You tell him
that despite the worrying nature of the news, there are three elements which can limit the
negative effects:
●
Firstly, as AT&M is announcing a price-based competition, you can focus on product
differentiation instead. For example, you can emphasize that Austria Star offers twice the
network speed, and promise superior service, which has been poor with the incumbent.
●
Secondly, the zero variable cost nature of the industry provides you with flexibility to
adjust your pricing strategy based on the news. You will reexamine the previous
optimum in the coming hours and provide a new recommendation.
●
Thirdly, the AT&M announcement can be deemed anti-competitive and even a breach of
antitrust law. Incumbents which dominate market shares are generally not allowed to
undercut prices when a new entrant launches in their market. This can be used both in a
public response, and also as a response strategy by flagging this behavior with
competitive authorities.
After concluding the call with the CEO, you also email the managing partner, outlining what has
happened and the planned next steps.
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Direct mail
You are consulting for a direct mail retailer that sells women's clothing. Your client’s catalog
printing and postage costs have just increased to thirty-two cents per catalog. How can your
client decide if the new price is acceptable?
AnswerGeneral Assumption:
● The average response rate for catalogs mailed can be said about 2%.
● In addition, 25% of customers who order products can be expected to reorder within six
months. In other words, each 100 catalogs mailed results in 2.5 orders placed.
● The average order size is $80 The fully allocated profit margin (excluding mailing costs)
on catalog orders is 15%.
In order to answer the question, you need to estimate the revenues per catalog to know whether
they exceed the cost. The key is to ask for the right information, and not for more than you
need.
●
●
●
●
For each 100 catalogs mailed, printing and postage costs are $32. (100 x 32 cents).
Each 100 catalogs will result in 2 orders, plus 2 x 25%, or .5 additional reorders, for a
total of 2.5 orders placed per 100 catalogs mailed.
5 orders will result in 2.5 x 80, or $200 in sales. At a profit margin of fifteen percent,
these sales will return a total profit of $30.
The $30 profit is not sufficient to cover the printing and mailing costs of $32.
Therefore, the client should reject the printing arrangement at 32 cents per copy.
Tip This is an estimation case. Here, the main skills tested are: 1) asking for the right information, 2)
calculating the numbers easily while communicating clearly. If you had a hard time calculating
numbers in your head, practice your mental math. This skill is tested to some degree in most
cases, and there are plenty of free tools online to achieve this.
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Q. 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.
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?
Answer-
General information to understand situation:
• 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.
Make Calculations based on different condition:
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:
• 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.
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Fashion magazine
Your client is a major fashion magazine that has been offered by its printer a proprietary new
process called selective binding which enables publishers to customize the pages included in
readers' magazines based on demographic data known about the reader. For example, an ad in
Better Homes & Gardens for lawn chemical services could be placed only in those issues going
to subscribers who live in houses and not to those living in condominiums or apartments. In this
way, advertisers can focus their communications on the demographic segment they are
targeting. Would you advise your client to take advantage of this new process and offer
selective binding to its advertisers?
AnswerGeneral information given along with questionReaders:
● The magazine's database can make demographic breakdowns between subscribers
who make under $50,000 and those who make over $50,000.
● There are 1 million readers, 80% of who are subscribers.
● Twenty-five percent of subscribers make under $50×000, 75% make over $50,000. The
same mix applies to the newsstand buyers according to readership audits.
Advertisers:
● Most advertisers are selling high-end fashion products, so 75% of them are targeting the
high-income group.
Costs:
● The service is being offered to your client free for 3 years since the printer wants to
promote the service's use by getting a major magazine to start using it.
● The client charges $50 per thousand per full-page ad (selective binding can only be
offered on full-page ads). Therefore, revenue associated with a single inserted page
(front and back) in an issue is $100 per thousand.
Competition:
The client's closest direct competitor has 500,000 readers, 100% of whom are subscribers.
Effectively, all of their readers make over $50,000. They charge $70 per thousand for their full
one-page ads.
ApproachThe magazine would want to consider offering the service to its advertisers if it would be able to
enhance its earnings by being able to charge its advertisers a premium for being able to more
exactly and efficiently target the demographic segment they want to reach. Of course, the
increased revenue from the any premium must be able to offset any revenue lost as advertisers
stopped targeting.
Cost/Benefit Analysis
Since the printing cost to the client of selective binding is zero, the client needs to evaluate cost
on the basis of revenue per thousand gained or lost as their advertiser base uses the service to
better target their ads to their desired segment. Presumably, instead of 100% of advertisers
paying the full $50/thousand per page, the 25% of advertisers targeting the lower income
segment will choose to advertise only to the 25% of subscribers targeting the high-income
segment will choose to advertise only to the 25% of subscribers falling into that segment and
the 75% of the advertisers targeting the high-income segment will advertise only to the high
income subscribers (75% of subscribers). Assume that all advertisers continue to advertise in
100% of the newsstand copies. The revenue effect of this change can be calculated by
looking at the impact the change would have on average ad rate per thousand
on subscription readership:
New ad revenue per page = Old ad revenue per page X [(% low income subscribers X % low
income target advertisers) + (% high income subscribers X % high income advertisers)]
Thus, new ad revenue per page = $50 X [(25% X 25%) + (75% X 75%)] at old rate $31.25 < $50
Now the question is, can ad rates per thousand on the selective binding portion of ads sold be
increased sufficiently to increase average revenue per thousand over what it is today? To
answer this question, your client's ad rates must be looked at from the perspective of their
advertisers. If you consider the advertisers targeting the high-income group, their alternative to
advertising in your client's magazine is to put their ad dollars toward the 100% high-income
readership competitor. The cost per thousand high- income readers with the competitor
magazine is:
(Page rate X total readership)/ (portion of readers who are high income) =
($70 X 500,000)/500,000 = $70
Thus $70 is the maximum price per thousand the client can charge its advertisers for selectively
bound ads before the advertisers would switch to their competitor. Note that currently, the client
is a cheaper buy for these high-income advertisers even though they are paying to reach
readers they do not want:
($50 X 1 million)/750,000 = $66.67
If the client charged $70/thousand for selectively bound ads, average revenue
per thousand to the client would be:
$70 X [(25% X 25%) + (75% X 75%)) = $43.75
ConclusionSince $43.75 is less than the $50 that advertisers are currently paying, the magazine should not
offer advertisers the selective binding service. Of course, there are other issues which
interviewees might want to mention such as the possibility of price discriminating between high
and low-income advertisers, the potential for and cost of expanding the advertising base using
selective binding as a selling tool, etc.
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CHILLED BEVERAGES
Q. You are consulting for the manager of a division of a large consumer products company. Her
division produces fruit juices in three forms, all marketed under the same name: chilled (found in
the milk section of the supermarket, usually), juice boxes, and frozen concentrate. This division
has sales of $600 million per year. The entire company has sales of over $20 billion. The chilled
segment represents $120 million in sales per year. While juice boxes and frozen concentrate
are profitable, chilled juices are only breaking even in good quarters and losing money in bad
quarters. She has received a proposal from upper management to sell the chilled juices
business. What would you advise that she do?
AnswerTo be divulged gradually:
Chilled beverages is a $5 billion dollar industry nationwide. There are two large players that
have 40% and 25% of the market, respectively. Your client’s market share, 12%, makes her third
in the industry. The best available information indicates that the two market leaders are
profitable. The two market leaders are able to fund more advertising and more promotion, trade
and couponing that your client. The market leaders produce pure orange juice and blends that
are based on citrus juices. Your product uses more elaborate blends of juices, usually with a
base of pear or peach juice (95% of the inputs) and flavored with cranberries, bananas,
mangoes, etc. (the other 5% of the inputs). Pear and peach juice are about the same price as
orange juice, but the other flavorings cost about twice as much. The market for chilled juices is
essentially mothers with school age children. This is a highly price sensitive market that loves
coupons, promotions, etc.
Brand name is important in this market, as in juice boxes and frozen concentrate, as mothers
tend to prefer highly reliable products for their children. However, the brand premium must be in
line with other branded products. Therefore, all branded juices tend to sell in the same price
range. One plant in California produces all of the product, chilled, juice boxes and frozen. It
would be difficult to find another use for the plant without a major conversion.
Approach:
There are three choices: Sell the chilled juice business. This would, however, affect the juice
box and frozen concentrate businesses, as there are both advertising and manufacturing
synergies. Sell all of the juice business. This may be more feasible, as the buyer could capture
the synergies, but would not be too likely to turn the business around. The selling price is likely
to be low. Keep the chilled juice business and rework the ingredients and costs. This turns out to
be the most feasible option, as evidenced by the success of the competitors.
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DISTILLED SPIRITS
Q. You are consulting for a major United States producer of distilled spirits. Their primary
products are a line of mid-priced vodkas and two brands of mid-range rum. Over the past few
years, the business has become less and less profitable. What could be causing this:
AnswerGeneral assumption:
The split of product sold has consistently been 60% vodka / 40% run over the past few years.
The selling prices of the two lines are essentially the same. Overall sales are growing at about 3
to 5% per year, the same as the industry average for these product lines. An analysis of the
costs reveals the following: Production Costs have remained constant Advertising Costs have
remained constant on average Distribution Costs have increased significantly The products are
sold throughout the country. In 27 states, where alcohol is sold in privately managed
supermarkets and liquor stores, “open” states, shelf space is extremely expensive and trade
promotions are critical. Such stores are also becoming less and less willing to hold inventory,
which is increasing distribution costs by requiring more frequent deliveries. In the other 23
states, liquor is only sold through state regulated liquor stores. Distribution costs in these states
is much lower, as there are far fewer outlets to service and central warehouses for the state-run
stores. Advertising of alcohol is much more tightly regulated, and therefore, advertising
spending is lower.
Approach:
A greater and greater share of the volume is being sold in the “open” states, with sales in these
states increasing at about 10% per year. Sales in the regulated states are actually decreasing.
Because the regulated states are less expensive to serve, and therefore, more profitable, the
fact that they represent a shrinking portion of the total has caused total profits to decline.
CABLE TELEVISION COMPANY
Q: Your client is a small holding company that owns three cable television companies in the
Northeast: Rochester, NY, Philadelphia and Stamford, CT. Each of these three companies is
profitable, and each has been experiencing steadily growing sales over the past few years.
However, the management feels that th e Northeast is not the fastest growing area of the
country, and, therefore, acquired another cable television company in Tucson, Arizona a little
over a year ago. Despite every effort of management, the Tucson company’s sales have been
stagnant, and the company has been losing money. How would you analyze this situation, and
what could be the cause of the poor performance of the Tucson cable company?
AnswerTo be divulged gradually:
The Tucson area is smaller than Philadelphia, but larger than Rochester and Stamford. Tucson
is also growing at 12% per year on average. Per capita income is higher than in Philadelphia
and the same as in Rochester and in Stamford. Operating costs in Tucson are essentially the
same as in the other markets. The cost of programming is based on number of subscribers and
is equal across the nation. Operating costs are composed of variable items: sales staff,
maintenance, administration and marketing. Only maintenance is higher that in the other
markets, due to the larger land area serviced. Fixed costs relate to the cable lines, which is a
function of physical area covered.
The Tucson company has attempted marketing efforts in the past, such as free Disney
programming for one month, free HBO for one month, free hookup, etc. These programs have
been modeled after the other three markets. Cable penetration rates in the three Northeastern
markets average 45%. The penetration rate in Tucson is 20%. These rates have been steady
over the past three years in the Northeast. The penetration rate in Tucson has only risen by 2%
in the past three years in Tucson. There is only one real substitute good for cable television:
satellite dishes. However, many communities are enacting legislation that limits their usage in
Tucson. They are also prohibitively expensive for most people.
Approach:
The real error of management results from their failure to recognize another “substitute” good:
no cable television at all; television reception is far better in the desert Southwest than in
Northeastern cities. The lower penetration rate is most likely a result of different climate
conditions and lower interference in Arizona.
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Q. Michal John is a Sole proprietorship in Nicobar. He has started trade after getting M.B. A
degree. He is fully familiar with all the functions of management. He starts his business with
planning function of management. He desires that all his activities should confirm to planning.
To this effect he has adopted a system that keeps a constant watch on all activities of business.
Consequently there is zero possibility of adverse results. It can therefore be said that this
method is directly related to the results. Mr John also believes that this method applies not only
to any one level of management but to all the levels as well.
1) Describe any two features of the functions of management as identified in the case.
Answer-
1) Controlling is the management function identified from the above paragraph.
Two features of controlling are:- Accomplishment of organizational goals:
● Controlling helps in achieving the goals of the organization by ensuring regular supply of
factors of production and quality goods at reasonable price.
● Coordination of activities: Control facilitates co- ordination of activities of various
departments of the enterprise. It provides unity of direction to all the departments.
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Q. Visesh works as as an interior designer. He gets a contract to redesign a play school. He
employs three painters on the site assuming that an average painter will be able to paint 10
desks in a day. At the end of the first day of their work, Visesh finds that the painter A, B and C
has painted 12, 14, 15 desks respectively. On comparing the actual performance with the
planned performance, he realizes that the standard set by him is too low. Consequently he
decides to review and revise the standard and raise it. In the context of the above case.
1) “Planning and controlling are both backward looking as well as forward looking functions”.
Explain the statement with reference to the above paragraph.
Answer1) It is appropriate to say that Planning and Controlling both are backward looking as well as
forward looking functions as evident from the above case: - Planning is considered as forward
looking function as plans are made for the future assuming that an average painter will be able
to paint 10 desks in a day. - Planning may considered as backward looking function because the
quality of planning can be improved with the help of valuable information received from
controlling. - While comparing the actual with the standard he understood that the standard set
by him is too low. - Controlling is considered a backward looking function as it is like the
postmortem of the past activities to ascertain the deviations if any- At the end of first day of their
work Vishesh found that the painters painted 12,13,14 desks respectively. - Controlling is
considered as forward looking as it helps to improve the future performance by providing
guidance for taking corrective action. – Consequently he decides to review and revise the
standard and raise it.
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CHEWING GUM MARKET
How would you estimate the size of the annual U.S. chewing gum market? Check your answer
for reasonableness.
AnswerEstimate the number of people who chew gum: of the 300 million population, 15% are between
the ages of 10 and 20, the heaviest users, for a total of 45 million. Estimate that these people
chew two packs per week, for annual sales of 4,500 million packs.
For the other users over age 20, (70% of the 300 million population, or 210 million) estimate a
usage rate of one half pack per week, for a total of 5,250 packs per year. Total packs per year is
9,750.
To check for reasonableness, figure the dollar sales that these packs represent: at 25 cents per
pack, annual sales would be $2.4 billion, a reasonable figure.
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FRENCH PIZZA MARKET
Q. Pizza Hut has recently entered the home pizza delivery business in Paris. The market for
home delivery is currently dominated by Spizza Pizza. Pizza Hut has asked your consulting firm
to help it analyze issues that will determine its likelihood of success in the Parisian Pizza
market. First, what information would you need and second, how would you analyze the pizza
delivery market?
AnswerPossible Information Needs:
An estimate of the size of the Parisian home pizza delivery market. This could be obtained by
knowing the population of Paris (6 million) and making some educated guesses about factors
that determine pizza market size. You may also want to know the size of Spizza, the current
competitor, including sales, number of stores, and proportion of Paris that is currently served by
Spizza. Other useful information: market segments targeted and served by Spizza; market
segments that are neglected by Spizza; what type of product do they offer; what do they charge
for their product; what is the cost structure of their business and what products are most
profitable.
Method of analysis:
The best method of analysis would start by determining if any part of the market is not well
served currently by Spizza. Determine what are the needs of any neglected market, and
understand if your client could profitably serve this market.
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GOLFBALL MARKET ENTRY
Q. You are visiting a client who sells golfballs in the United States. Having had no time to do
background research, you sit on the plane wondering what is the annual market size for
golfballs in the U.S. and what factors drive demand. Your plane lands in fifteen minutes. How do
you go about answering these questions?
AnswerTypical approach:
Golfball sales are driven by end-users. The number of end users: take the population of 300
million; assume that people between 20 and 70 play golf (about 2/3 of the population, or 200
million) and estimate what proportion of these people ever learn to play golf (guess 1/4) which
reduces the pool to 50 million.
Now, estimate the frequency of purchase. If the average golfer plays twenty times per year, and
requires two balls per time, that’s forty balls per person. Multiply that times the 50 million,
resulting in a 2 billion ball market.
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Q. Mr. Nithin Singhania’s father has a good business of iron and steel. He wants to go to USA
for his MBA but his father thinks that he should join the business. On the basis of emerging
trends, do you think that Mr. Singhania should send his son to USA? Give any three reasons in
support of your answer.
In order to achieve target production of 50,000 units per month, the Production Manager of
Action Shoes Ltd had to operate on double shifts. The workers are paid overtime charges.To
earn higher wages workers try to go slow during normal working hours and complete their
targets during overtime hours. Though the manager could achieve his target and produced 5000
units but at a higher production cost.
a. In your point of view, what is lacking in management?
b. Identify the values missing in the production manager and the employees of the organization.
Answer-
Yes, according to me, Mr. Singhania should send his son to USA for his MBA because
management is being recognized as a profession to a great extent because of the following
reasons:
a) Well defined body of knowledge: Management is considered to be a well-defined body of
knowledge that can be acquired through instructions. As a separate discipline, it contains a set
of theories and principles formulated by various management experts. Moreover, it is taught in
various schools and colleges all over the world.
b) Ethical code of conduct: Management in practice, like other professions, is bound by a code
of conduct which guides the behavior of its members. Therefore, acquiring a degree in
management will equip him with the good managerial skills and approach.
c) Service motive: A good management course will provide him an insight into the multiple goals
that an organization should pursue. This knowledge will help him to serve both the objectives of
profit maximization and social welfare effectively for his company.
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OVERSEAS CONSTRUCTION
Q. An overseas construction firm wants to expand by establishing a presence in a growing U.S.
regional market. How should it go about doing this? What factors are critical for its success?
Suggested framework: What are the diversifying firm’s distinct competitive advantages? What is
its capacity for funding an acquisition? What is the competitive environment like in the proposed
region? How does this environment differ from the current markets of the diversifying firm?
AnswerPossible Approah:
Diversification could be effected through joint ventures or through acquisition. Which of these
two strategies would prove the most suitable would depend on the availability of funds and upon
the nature of the company's operation in the region.
However, the success of the venture would depend not only upon the means of entry. Other
critical factors would include: The existence of a distinct sustainable competitive advantage.
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Q. Rajvir works as a plant superintendent in a carpet making factory. In order to complete the
export orders on time, the production manager asks him to make the workers work over time
whereas the finance manager is strictly against this practice because it will increase the cost of
production. Moreover, Rajveer feels that since the company is manufacturing handmade carpets
as well as machine made carpets there is a lot of overlap of activities. Therefore, there should
be two separate divisions for both of them wherein each division should have its own in charge,
plans and execution resources. In context of the above case:
(a) Identify and explain the principle of management which is being violated.
(b) Also identify the principle of management that Rajveer feels should be implemented in
the factory.
(c) Give any two differences between the principle of management as identified in part (a)
and part (b) respectively.
AnswerThe principle of management which is being violated is stated below:
a) Unity of command- all the forces fall under one responsible authority.
b) Unity of direction- this impies for one unit one plan.
c) The difference between the principle of Unity of Command and Unity of Direction is given
below:
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PACKAGING MATERIAL MANUFACTURER
Q. Your client is the largest North American producer of a certain kind of bubble-pack packaging
material. Currently, the company has 80% of the market, and has asked your firm to assess the
strategic outlook for this company. How would you begin to assess the future for this client, and
what type of recommendations could you make?
Answer-
Information to be divulged gradually:
Costs for the product are broken down as follows: 20% for polyethylene, a plastic chemical.
35% conversion costs, including allocated fixed costs, labor and energy costs 10% distribution
and storage, 15% marketing and overhead. Profit margins are 20%. Polyethylene is a
commodity chemical. The factory is thirty years old, and the technology used is the same as
when the factory opened. The client had 100% of the market until two years ago. Since that
time, a localized upstart company has appeared in the Philadelphia / New Jersey market and
has captured nearly all of that market. This factory has purchased technology from a German
company. Your client does not have much information about this competitor, but it appears that
their factory is extremely efficient. They have also been undercutting your client on price.
Approach:
The competitor has used their new technology to produce a lower price product. As evidenced
in the Philadelphia / New Jersey market, nearly all customers prefer this product to your client’s.
Therefore, the future is extremely bleak for your client, and they should be advised to respond to
the competitive threat, perhaps by updating their own technology.
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AIRLINE EXPANSION
Q. A major airline is considering acquiring an existing route from Tokyo to New York. How can it
determine if the route is a good idea?
AnswerSuggested frameworks:
Profitability analysis looks like the best approach. Simply determine if revenue less costs equals
a positive profit. Then, analyze the factors that go into revenue and the factors that comprise
cost to come to a conclusion.
Interviewer Notes: Revenues will be determined by occupancy rates and expected prices. Both
of these will be determined by expected demand, the competitive environment and the extent to
which our client could win over passengers from competitor routes.
Operating costs will depend on expected fuel costs, incremental costs for landing rights, etc. It is
also very important to estimate the cost of cannibalization on existing Tokyo-LA, LA, New York
routes. And, last but not least, it is important to note that losing passengers to cannibalization is
better than losing them to competitors.
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Q. A company X limited manufacturing cosmetics, which has enjoyed a pre-eminent position in
business, has grown in size. Its business was very good till 1991. But after that, a new
liberalized environment has seen the entry of many MNC’S in the sector. With the result the
market share of X limited has declined. The company had followed a much centralized business
model with Directors and divisional heads making even minor decisions. Before 1991 this
business model had served the company very well as consumers had no choice. But now the
company is under pressure to reform.
a) What organization structure changes should the company bring about in order to retain its
market share?
b) How will the changes suggested by you help the firm? Keep in mind the sector in which the
company is FMCG.
Answera) Company should introduce a certain degree of decentralization in the organization. Top
management should delegate authority and responsibility to middle and supervisory levels so
that they can concentrate on taking strategic decisions to improve the company's market share.
b) A company working in the FMCG sector requires quick decisions and that too at the point of
action. Therefore, if decentralization is introduced the company will be greatly benefitted. The
various benefits companies may enjoy are:
i. It will develop initiative among subordinates to take decisions and find more effective ways of
fulfilling responsibilities.
ii. It will build confidence and give experience to existing employees thus developing managerial
talent for the future.
iii. It will facilitate quick decision making leading to faster actions with lesser confusions.
iv. It will give relief to the top management from day to day decision making and thus allow them
to focus on more crucial issues.
v. Effective management will help business to use opportunities for expansion and growth.
vi. It will be easier to fix accountability leading to better control and meaningful performance
evaluations.
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HEALTH CARE COSTS
Q. Bill Clinton has just fired Hillary Clinton as Chief of Health Reforms and has appointed you to
fill the position. while in his office, you discover that kidney dialysis is a major portion of public
health care expenditures. What analytical techniques do you use to determine if this cost can be
reduced?
AnswerSuggested frameworks:
You can start this case by looking at the cost half of profitability analysis (Costs - Fixed +
Variable). Since this is a procedure, rather than a shole industry, it is mostly a variable costs, the
sum of which is measured by cost per unit x # of units.
Thus, one could look at this problem by analyzing(1) how much it costs per kidney dialysis.
(2) how many kidney dialyses occur in the U.S. also, Don’t forget the external factors, such as
corruption or government regulation, that may play role.
Interviewer Notes: Analyze the proportion of public versus private health expenditures that are
applied to kidney treatment to determine if this expensive treatment is being pushed onto the
public health budget by unscrupulous practitioners.
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LOCAL BANKING DEMAND
Q. How would you determine whether a location in New York City holds enough banking
demand to warrant opening a branch?
AnswerSuggested framework: Because this is a demand-oriented question, one should consider a
marketing framework, such as the 4 P’s.
Notes: The demographics of the area surrounding the prospective branch should be examined.
Population, business concentration, income levels, etc. should be compared with those of
historically successful branches. Competitor reactions could easily make this venture
unprofitable, so it is essential to anticipate them. These will depend on the importance of the
area to competitors. (in terms of profit, share, etc.)
The client will have to match competitors’ incentives to customers and should estimate the cost
of doing so. The client must examine if the new branch would complement their existing
competence and strategy (retail or commercial, high growth or high profitability, etc.) and what
purpose it would serve. If the need focuses on deposits and withdrawls only, maybe a cash
machine would suffice.
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FROZEN DESSERTS
Q. You are consulting for a small, regional maker of high quality premium priced frozen
desserts. (Ice cream and similar products). Though sales have been increasing, the business is
barely making a profit and the management is unsure that they will able to pay their usual
dividend this year. They have asked you to help them identify the problem.
Answer
Additional Assumption:
The client sells a complete line of products (ice cream and frozen yogurt) in major supermarket
chains in the Northeast. In recent years, as Americans jump on the fitness bandwagon, frozen
yogurt has begun to outsell ice cream, and currently represents 55% of product sold. The selling
price per pint is the same for frozen yogurt and ice cream. The ingredients are different,
however. Ice cream uses locally available milk and cream, and flavorings such as chocolate,
pecans, vanilla and coffee. The premium frozen yogurts use more exotic flavorings such as
mangoes, kiwis, pineapple and raspberries. All other costs are equal for the two lines.
Approach: Margins on frozen yogurt products must be lower than for ice cream, or possibly
even negative, due to the higher ingredient costs. Therefore, the shift of sales from ice cream
into frozen yogurt is causing the company as a whole to be less profitable.
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Q. An electronic company is facing a problem of declining market share due to increased
competition from other new and existing players in the market. Its competitors are introducing
lower price models for mass consumers who are price sensitive. For quality conscious
consumers, the company is introducing a new model with added features and new technological
advancements.
1} Prepare a model business plan for this company. Specify which type of plan you are
preparing.
2} Identify the limitations of such plans.
Answer1}The type of plan needed to be prepared under this situation is strategy and the steps involved
in preparing this plan are:
i) Setting up of objective: The company may set up a long term objective of capturing more and
more quality conscious consumers or becoming a leader in quality or trend setter in market by
one year time.
ii) Adopting a particular course of action: The company must import latest technology to make
their goods superior than competitor’s goods.
iii) Allocating resources for achieving the objectives: Company must take permission for
importing technology and must allocate extra funds to their R and D section and appoint people
with latest knowledge to innovate new technology.
2} The common limitations of these plans are:
i) It may involve huge cost.
ii) It is a time – consuming process.
iii) There is no guarantee of success.
iv) It may not fit in dynamic environment.
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DIRECT MAIL RETAILER
Q. You are consulting for a direct mail retailer that sells ladies clothing. Your client’s catalog
printing and postage costs have just increased to thirty-two cents per catalog. How can your
client decide if the new price is acceptable?
AnswerInformation to be divulged gradually: The average response rate for catalogs mailed is 2%. In
other words, each 100 catalogs mailed results in 2.5 orders place. The average order size is
$80. In addition, 25% of customers who order product can be expected to reorder within six
months. The fully allocated profit margin (excluding mailing costs) on catalog orders is 15%.
Approach:
For each 100 catalogs mailed, printing and postage costs are $32. (100 x 32 cents). Each 100
catalogs will result in 2 orders, plus 2 x 25%, or .5 additional reorders, for a total of 2.5 orders
placed per 100 catalogs mailed. 2.5 orders will result in 2.5 x 80, or $200 in sales. At a profit
margin of fifteen percent, these sales will return a total profit of $30. The $30 profit is not
sufficient to cover the printing and mailing costs of $32. Therefore, the client should reject the
printing arrangement at 32 cents per copy.
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CHEMICAL SWEETENER MANUFACTURER
Q. Your client manufactures a chemical sweetener used in beverages and other food products.
The chemical will come off patent in one year. You have been asked to predict what might
happen to the profitability of this product when the product comes off patent.
AnswerInformation to be divulged gradually:
This is the only product of its kind, in terms of taste and safety (lack of harmful health effects) as
proven in lab tests. The brand name of the product has slowly become a common household
word. The largest two customers (75% of your sales) are two worldwide beverage companies.
The companies feature the brand name of your client’s chemical on their product, and consider
it a sign of quality. In addition, the cost of the chemical sweetener represents 1.5% of their total
costs. The costs to manufacture the product are extremely low (about 20% of the price of the
product). Currently, the margins on this chemical are almost 40%.
Approach:
This is a classic customer analysis problem. While most products that come off patent quickly
drop in price (e.g. pharmaceuticals), this product will be able to retain some of its premium due
to the strong brand name. Because the major two customers feature the chemical name on their
product, and because the chemical represents such a small portion of their total costs, they can
be expected to be willing to continue to pay the premium into the future. Therefore, the outlook
for the product is good even after the patent expires.
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TELECOMMUNICATIONS DIVERSIFICATION
Q. A Baby Bell company is interested in diversifying into other areas besides
telecommunications. They are considering entering the market for electronic home security
systems. Would you recommend that they do so?
AnswerSuggested frameworks: Use an industry attractiveness framework, such as Porter’s Five
Forces, to determine whether this is a business you want to be in, or at least to determine what
kind of returns you can expect to achieve. then, use the value chain to look at where value is
added in the home security business. Finally, once you feel you understand the market,
determine if the core competencies of the Baby Bell are likely to match the demands of the
home security markets.
Interviewer Notes: The company is a holding company. They have previously made
unsuccessful forays into software and into real estate. The home security business is highly
fragmented. The top five players in the industry generate less than 4% of the total industry
revenues. This implies that the industry largely consists of small, regional companies.
What strengths / competencies of the Baby Bell company are useful in this market?
Consider: Installation expertise, operator services, transmission system (phone lines) It turns out
that the “expensive home” segment of this market is saturated. Growth has been slow in recent
years. Price sensitivity is unknown in “moderate-priced home” segment. The conclusion is that
this business is a reasonably good fit for the company, but that more market research needs to
be done to assess the growth and profit potential of each segment of the market.
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ALUMINUM CAN MANUFACTURER
Q. An aluminum can manufacturer has discovered a way to improve its manufacturing process.
As a result, its manufacturing cost has been reduced from $0.89 to $0.79 cents. How can the
manufacturer best exploit this cost advantage?
AnswerSuggested frameworks: Remember basic economics. The firm can either use a penetration
strategy or price skimming strategy. Consider the impact of either strategy on the company and
its competitors. Also, don’t forget to think about any substitutes for aluminum cans.
Interviewer Notes:
Clearly, the client should either drop price or reap additional profits. It turns out that the client is
the leader in its market with a 40% share and supplies directly to major beverage
manufacturers. The number two player in the market has about 30% of the market and the rest
is shared by many small competitors. Aluminum cans have a lower priced substitute, steel cans,
which have inferior printing and stamping characteristics. Steel cans are used by customers
who do not want to pay the premium for aluminum cans. If the client drops prices, other
competitors will have to follow since this is a commodity market and not following would mean a
quick demise.
The lowering of prices might increase the client’s market share marginally, but some smaller
competitors will have to start exiting the industry and larger competitors will have to start
investing to discover the client’s cost advantage. At the same time, steel can users sill start
switching to aluminum cans, thus hurting manufacturers in that market. The resulting growth in
the aluminum can market will attract steel can manufacturers to enter it. Since some steel can
manufacturers have deep pockets and a strong backing, these new entrants could pose a future
threat to our client. In conclusion, it is best to retain prices and generate extra profits for now.
The cost advantage may help another day during a price war.
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FILM PROCESSING
Q. The CEO of the largest domestic manufacturer of photo film want to enter the film developing
business. He needs your advice on how to go about evaluation this idea. What would your
approach be?
AnswerSuggested frameworks: This is and industry entry question; look at industry attractiveness with
Porter’s five forces analysis. Then, think about what part of the marketing mix (4 P’s) would be
best for film developing. Finally, analyze competitive response.
Notes: Distribution channels are the key factor in this business. Major discount stores sell the
service. This is a scale economy business in the back-office, so profits are easier with high
volume. This makes the business tough to enter. This company ended up establishing a “store
within a store” concept with Wal-Mart.
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CONCRETE MANUFACTURER
Q. Your client, a concrete manufacturer is considering acquiring a small local firm. What factors
should be considered? After considering these factors, would you recommend the acquisition?
AnswerAdditional Information to be divulged gradually: The target firm is currently profitable, with
margins of 5%. Your client’s margin is 15%. Your client attributes its higher profit margin to
economies of scale in trucking and mixing, and a stable labor force. Both companies compete in
the geographical market, the Southeastern U.S. Your client’s customers are large construction
firms and contractors generally in the office and commercial building construction business. The
smaller firm sells mainly to other small businesses and contractors. (Swimming pool installation
firms, patio builders, etc.) Additional research shows that the smaller customers for concrete are
growing, while the major office building construction market is stagnant. The smaller firm has
strong contacts with many local customers, and is often the preferred supplier due to their
customer responsiveness. Your client is not able to fund the acquisition internally, but could
obtain bank financing at a rate of 10%. Similar acquisitions generally are made for two to three
times current sales of the target firm.
Approach:
From a financial point of view, the acquisition is not attractive if there are no synergies between
the firms. With profit margins of only 5%, the income generated by the smaller firm will not cover
the capital charges (interest due to the bank) on the acquisition price. (Acquisition price = 3 x
sales. Interest on this amount will be 10% x 3 x sales, or 30% of annual sales. Profits are only
5% of sales. This analysis, of course, ignores the tax shields.) However, if your client were able
to use some of its competitive advantages to improve the financial outlook of the target firm, the
acquisition would be advisable. It is reasonable to expect that synergies would arise from
economies of scale in trucking and mixing, which could raise the profit level of the target firm,
and make the acquisition more attractive.
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SHIPPING CONTAINER MANUFACTURER
Q. Your client is a manufacturer of large steel shipping containers that are designed to hold up
to several tons of material for shipping on ocean liners. The container consists of a steel frame,
a steel shell and an insulation and waterproofing material that uses a hazardous chemical. The
containers are leased by the company to worldwide shipping companies. Shippers can lease
the containers one-way or round-trip. The client has asked you to do an assessment of their
strategy. What issues might you examine?
Answer-
Suggested Issues: Sales and cost issues: The growth of the shipping container market; your
client’s share in that market; trends in the leasing terms in the industry; customer power; steel
prices; manufacturing costs. Market issues: changes in the worldwide shipping market (e.g.
does the growth of an area like Southeast Asia imply many more one-way contracts than
round-trip?); growth of the largest customer industries; new technology in shipping containers;
customs and trade agreement trends. Environmental Issues: Production and disposal of the
insulation chemicals; costs of handling the chemicals.
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HEALTHCARE COMPANY GROWTH
Q. A large healthcare company has decided it is interested in substantially increasing the size of
its operations. Its goal is to double total sales and profits in less than two years. As a consultant
brought in to assist them, what would you do? What issues would you consider? What are some
likely alternatives for the company?
AnswerPossible issues to consider:
● What is the current scope of operations?
● In what areas of healthcare does the company deal?
● What is its current market share in these areas?
● What plans has the company already considered?
● What is the competitive nature of the industry?
● What would be the effect on sales and profits of reducing prices and margins?
● What potential is there for expansion by acquisition? Do they have the financial
capability?
● Do potential acquisition targets exist?
● Will the market for acquisitions be competitive?
Possible recommendations: Naturally, a suitable solution will depend upon the answers to the
above questions.
A business can increase profits by:
● Increasing sales
● Increasing prices
● Decreasing costs
However, if the company’s margins are found to be consistent with industry norms, it would
seem unlikely that either increasing prices or cutting costs represent feasible methods by which
to double sales & profits, particularly if the company is operating in a moderately competitive
environment. This leaves only sales increases, which could be achieved by: Selling more of the
current products to current customers Selling new products to current customers Selling current
products to new customers Selling new products to new customers The suitability of these
options will again depend on the particular environment. In the particular example of this case, it
turned out that only selling new products to new customers via some form of diversification
could hope to achieve the company goals. You should then consider the potential for increasing
sales by means of diversification through acquisition or joint venture. The relative benefits of
each will depend on financial resources as well as the existence of, and competition for suitable
targets.
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REGIONAL GROCERY STORE CHAIN
Q. A regional chain of grocery stores currently receives its stock on a decentralized basis, i.e.
each store deals directly with the various suppliers. The president of the chain is wondering
whether it would be better if they established a centralized warehouse through which all
supplies would be delivered and then disbursed by company trucks. What are the key
considerations to making this decision?
AnswerIssues to consider:
● Would the savings from bulk purchasing more than compensate for the cost of: Building
and maintaining the warehouse.
● Employing additional personnel and trucks.
● Opportunity cost of capital tied up in inventory for additional periods.
● Do the stores buy similar products? (i.e. do purchasing synergies actually exist?)
● Will delivery frequency to the stores by better or worse?
● Consider the costs of stockout and the need for fresh produce.
● Will the stores prefer delivery direct from the supplier or from the warehouse?
● Consider the time tied up in order processing, the flexibility of delivery times and
quantities.
Possible Approach: The proposed solution would depend upon your interpretation of the
trade-offs both financially and organizationally for the two methods of delivery. For you to
propose going with the new method, you need to establish not only that it will cost less, but also
that all the affected players can be persuaded to buy into it.
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Q. Eco-friendly products are gaining power as the consumers’ awareness about environmental
issues has increased over the years and they are conscious about choosing products that do
not have adverse effects on the environment. They are now more conscious about the carbon
emission and climate change effects, and want themselves to be ‘seen’ as a green advocate
among their peers. In such a scenario, it has become a challenge for the companies as they
have to not only meet the needs of the consumers but also ensure that their products are safe
and environmental friendly. As a result, there is growing need for better and advanced
technologies to works as a catalyst in this regard.
a) Identify the relevant features of business environment being discussed above.
b) Describe briefly any three points which highlight the importance of business environment
and its understanding by managers.
Answera) Inter-relatedness is the relevant feature of business environment which is being discussed
above. Different elements of business environment are interdependent over each other.
A change in one element affects the other elements. Economic environment influences
the non-economic environment which in turn affects the necessary conditions.
b) The three points which highlight the importance of business environment and its
understanding by managers are described below:
i) It enables the firm to identify opportunities and getting the first mover advantage.
ii) It helps the firm to identify threats and early warning signals.
iii) It helps in tapping useful resources.
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MAGAZINE DISTRIBUTION
Q. A magazine publisher is trying to decide how many magazines she should deliver to each
individual distribution outlet in order to maximize profits. She has massive amounts of historical
data for sales volumes through these outlets and a well constructed internal accounting system.
How should she go about computing an appropriate number?
AnswerPossible Approach:
The best way to tackle this one (without going into a huge Economic Order Quantity quantitative
analysis) is not so much to start asking questions as to set out and outline analysis and fill in as
you go. It should be observed immediately that to maximize profits, marginal revenues should
be set equal to marginal costs. The marginal revenue for a magazine would be its cover price
times the probability that it will be sold.
The probability of sale, with an appropriate confidence interval, could be established in some
manner from the historical data. The marginal costs could be obtained from the internal
accounting data. A detailed discussion of the application of these concepts from basic
microeconomics and statistics may be necessary.
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Q. A company, which manufactures a popular brand of toys, has been enjoying good market
reputation. It has a functional organizational structure with separate departments for Production,
Marketing, Finance, Human Resources and Research and Development. Lately to use its brand
name and also to cash on to new business opportunities it is thinking to diversify into
manufacture of new range of electronic toys for which a new market is emerging. a] Prepare a
report regarding organization structure giving concrete reasons with regard to benefits the
company will derive from the steps it should take.
AnswerThe company should change its organizational structure from Functional to Divisional. The main
reason for the change is that the company is diversifying and is planning to add new products to
its existing product line. This will mean that the organization will increase its scale of operations,
will have a larger number of employees leading to increase in levels of management. It will be
better for companies to create divisions for each product for effective control on quality and
production. The benefits of adopting divisional structure of organization are:
i. It will lead to product specialization.
ii. It will provide growth opportunities for employees.
iii. It will define accountability and responsibility for the performance of each division.
iv. Independent functioning will promote flexibility and employee initiative.
v. New divisions provide growth and expansion opportunities for the organization.
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Q. A company manufacturing sewing machines set up in 1945 by the British promoters follows
formal organizational culture in totality. It is facing lot of problems in delays in decision making.
As the result it is not able to adapt to changing business environment. The workforce is also not
motivated since they cannot vent their grievances except through formal channels, which
involve red tape. Employee turnover is high. Its market share is also declining due to changed
circumstances and business environment.
a] You are to advise the company with regard to change it should bring about its organization
structure to overcome the problems faced by it.
b] Give reasons in terms of benefits it will derive from the changes suggested by you.
c] In which sectors can the company diversify keeping in mind the declining market for the
product the company is manufacturing?
Answera] The company should try and encourage the formation of informal organizational structure
within the formal structure of the organization.
b] Benefits the organization will enjoy with the formation of Informal organization are as follows:
i) Quick communication and faster feedback: The information transmitted without following
formal channels will spread faster and it will also receive quick response from the receiver.
ii) Fulfills social needs: The informal structure has groups of like-minded people. Therefore, it
allows them to satisfy their social needs, gives them sense of belongingness and motivates
them to perform better.
iii) Makes up for inadequacies of formal organization: Informal organization provides feedback
on organizational policies, procedures or decisions taken by top management. It facilitates
formal organization to incorporate the positive suggestions and adapt to the changes for the
better.
c] The company can diversify or add new products in their existing line of products. For
example, they may introduce embroidery machines, handy sewing machines, automatic or
computerized embroidery or buttoning machines, interlocking machines etc. They may also
introduce sewing machines for differently- abled people.
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KNITTING MACHINE DEMAND
Q. How would you asses the world demand for knitting machines?
Answer-
Possible Approach: The world’s demand for knitting machines basically depends on the world
demand for cloth. In order to evaluate the world demand for cloth, we need to know how much
cloth (measured in square meters, for instance) is being purchased per unit time per inhabitant
of the world. In order to refine our appraisal, we may segment the inhabitants of our planet per
level of personal wealth. Note that this may not be a linear relationship. Furthermore, you may
need to consider other factors
The current level of the ratio: amount of cloth manufactured per working year / number of
machines The expected usable life of an average machine The existence of substitutes for
knitting machines and the consequences of this on our expected demand
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CEMENT MANUFACTURER CAPACITY ADDITION
Q. You are consulting for the number-one producer of cement in Portugal. This company
currently has 45% of the market, and feel it could have more, but is running at 100% capacity of
their one plant, located near Lisbon, in Southern Portugal. The CEO has asked you to help him
decide if they should build another plant or expand the current plant.
AnswerAdditional information to be divulged gradually:
The cost structure for cement production is as follows: Raw materials 28% Labor and allocated
fixed costs 16% Distribution 26% Sales and overhead 18% Pre-tax profit 12% The company’s
selling prices are set by prevailing market prices in Portugal. Land is available to expand the
current factory; there is also a suitable site near Porto, about 200 miles to the north.
Approximately 80% of the customers are within 100 miles of the current plant. Raw materials
are purchased from a government-owned company, and prices are set by a yearly contract with
the government. The plant is unionized, and extra shifts are not possible. The trucks are owned
by the company, and transport all product directly to the customers throughout the country.
Customers pay for trucking by the mile. The fixed cost of plant additions is roughly the same as
the cost of a new plant of the same capacity.
Approach:
As distribution is the second-largest cost item, it makes sense to minimize distribution costs in
choosing the site of the next facility. From the data, it is safe to assume customers that are
further away are less inclined to buy due to the increased trucking costs. Therefore, location of
the plant in the north may increase sales in the north by reducing delivery costs to these
customers.
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SNACK FOOD COMPANY
Q. A large salted snack food company has steadily been losing market share over that past two
years, from a high of 20% to the current level of 18%. Profits as a percent of sales, however,
have been growing. What could be causing this?
AnswerAdditional Information to be divulged gradually: The size of the total salted snack food market
has grown from $15 billion to $17 billion during these two years; the interviewee’s conclusion
should be that the client’s total dollar sales have actually grown, but not kept pace with the
market. The product line of the client has not changed over this period.
The total sales force was cut to reduce costs, though the same number of outlets are still
covered by this sales force. The changes in the marketing budget come from reduced trade
promotions. The products are mostly sold through large grocery store chains and convenience
stores. The sales force generally visits each customer at least once per quarter. Promotions
usually occur at the end of each quarter. Grocery stores and convenience stores require some
type of promotion to grant valuable end of aisle displays or advertising space. The largest
competitors are two multinational consumer products companies that feature complete lines of
snack foods. Their sales forces are regarded as the best in the industry. Together, these two
companies have 55% of the market.
Approach:
The data show that the greatest change is in the sales force numbers. It turns out that the
company went on a cost-cutting spree over the past two years. The sales force was drastically
cut and the commission scheme was reworked. The marketing expenditure was also
decreased. Most of the reduction came from trade promotions. The product is sold through the
same channels as previously: large grocery chains and convenience stores. These channels
are traditionally driven by periodic trade promotions.
The reduction in trade promotions brought about a loss of shelf space, which has directly led to
the decrease in market share. Also, the product line has not changed in the past two years in a
product category where new products and line extensions are routine. In addition, the market
has been growing, indicating a missed opportunity for new products in the market. Lastly, the
increase in profitability has resulted from the lower costs, but may not be sustainable.
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BEVERAGE COMPANY COST STRUCTURE RC
Q. Cola and Coca Cola both compete in the same industry. Their cost structures are vastly
different, however. Using Coca Cola as a benchmark, estimate the likely cost structure for RC
Cola. In other words, for which costs would RC Cola be higher, for which would they be lower,
and why?
AnswerPossible Approach:
This is a twist on the standard price/cost case that also questions the interviewee’s
understanding of the cost items.
A possible analysis, line item by line item: Cost of goods sold: RC Cola would be higher due to
their lesser power in negotiating price breaks from suppliers. Distribution: would be higher for
RC Cola for two reasons. RC is not distributed in as many outlets as Coca Cola. Therefore, the
average truck driver will be driving more miles and spending more time to deliver a truckload of
RC that the Coca Cola driver, who will have several stops within an immediate area.
Also, the typical order size for RC Cola would be smaller, meaning that more stops would have
to be made. In the case of Coca Cola, it is conceivable that one truckload may be deliver to just
one customer.
●
●
Sales Costs: could be lower for RC, as there are fewer, but more loyal customers.
Marketing: is lower for RC Cola as they are not a frequent advertiser like Coca Cola.
●
Administration / Overhead: lower for RC Cola as they are more of a “one-product”
company than is Coca Cola.
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PERMANENT LIGHT BULBS
Q. A small R&D lab in the Swiss Alps has developed a super-durable filament for light bulbs;
with this filament, the light bulb will never burn out. The lab is ready to license this product to a
light bulb manufacturer. What will be the effect on the light bulb industry?
AnswerAdditional Information:
● The light bulb industry is dominated by two multinational producers.
● The two companies sell their products side by side for essentially the same price in
similar outlets internationally.
● There are a several small local players in various regions of the world who produce local
brands and some private store brand light bulbs.
● There have been no technological innovations in light bulbs for many years.
Possible Approach:
One outcome is that one of the two major players purchases the technology. If the technology is
patented and exclusively licensed, this player may enjoy an advantage for a limited time. If the
producer makes enough bulbs at a low enough cost, all customers will eventually switch over to
the permanent light bulb, thereby drying up the industry, putting the competitor out of business
and greatly reducing their own business.
Another solution is that all of the players obtain some version of this technology. If that were to
happen, the price for this product would decline to the normal industry profit level, and
customers would shift to the permanent light bulb. Over time, all bulbs would be permanent and
the industry volume would greatly decrease, making the industry more competitive and wiping
out industry profits.
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AIRPLANE MANUFACTURER
Q: You are consulting to a CEO of an airplane manufacturer. In the last couple of years you
have gone from being number one in market share to number two. In addition, another company
has announced that it will be entering the business and is presently tooling up its plant. As a
consultant, what are the concerns your client might face, what additional information might you
want to find out, and what recommendations would you have?
AnswerAs a consultant, you are concerned with three key items:
1. The condition of the airplane manufacturing industry.
2. Why the firm has lost market share.
3. How to prevent the new entrant from stealing market share.
The airplane industry's demand is a function of travel among two classes: business and leisure.
Business travel increases as a result of globalization. Leisure travel increases with growth of
middle and upper classes. Business travelers are primarily insensitive to price, leisure travelers
are very price sensitive. The current competitor: a comparison Price, service, technology,
heritage, safety. It turns out that the competitor's plane is cheaper to operate because it is more
fuel efficient. The consultant should ask as a strategic question whether the firm is interested in
the manufacture of more fuel efficient planes. The answer would depend on the future of oil
prices. Instead, it may be better to try to compete on the basis of price, safety and service.
Prevention of a new competitor gaining share:
● Creation of barriers to entry.
● Long-term contracts are pre-emptive.
● High concern, on the part of purchasers, for a proven safety track record.
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OIL REFINING INDUSTRY
Q. Your company has 25% world-wide market share of the oil industry. You generate $4M
annually in revenues through the machinery division of the company, which supplies machinery
to refineries (not owned by your company) around the world. How do you asses the current
operating status of this division?
AnswerApproach:
Define "assessing the operating status" - most likely in comparison two dissimilar pieces of
information: 25% market share and $4M (but no idea what % of the market this represents).
The guide is to request what % of the market $4M represents. Assume this is unknown. An
estimate of the market size is therefore needs to be done. The way to do this is to ask how
many oil refineries there are, how much does each cost to build, how long they last (actual life,
not dependent life) and what the machinery replacement costs are.
From this, one can estimate what the industry spends per year on machinery can. Divide the
above mentioned $4M into this and the refining division's market share can be assessed. This
% can then be compared to the 25% share of the parent.
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Q. Karodimal ltd. manufactures fashionable and designer clothes. Recently it finds that the
demand for its product has been declining. After market research it was discovered that fashion
and tastes of the consumers is changing a pace. Consumer demand is increasing. New
competitors have entered the market with new designs. It is difficult for the company to predict
future happening. Also it is difficult to know the extent of the relative impact of the social,
economic, political, technological or legal factors on decrease in demand of its product in the
market. A meeting was held in which managers from different functional level heading
production, marketing, financial etc. for example, chief operating officer, chief finance officer,
vice president (marketing) were present to discuss how to deal with the situation. After a long
discussion, it was decided that they would study and analyze the market first to identify
customers' taste and fashion and then manufacture garments accordingly. It was also decided
to increase expenditure on advertising, after sale service, etc. Identify any two features of a
business environment by quoting the lines from the above case.
(a) At which level of management the meeting of managers in Karodimal Ltd. was held.
(b) State the importance of understanding the environment by business managers in the light of
the above para.
Answer(a) Features of business environment :● Dynamic nature – Fashion and taste of the consumer is changing at a fast pace.
● Uncertainty- It is very difficult for the company to predict future happening.
● Complexity – It is difficult to know the extent of the relative impact of the social,
economic, political, technological or legal factor on decreasing in demand of its products
in the market.
(b) Business environment helps the manger in coping with rapid changes by developing
suitable courses of action to deal with changes taking place in the environment as well
as with the pace of change.
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MYSTERIOUS AUDIO CASSETTE MARKET
Q: Your client is the manufacturer of audio cassettes. They have hired you to figure out why
they've been experiencing an alarmingly poor sales year. They want you to figure out the root of
the problem, and what to do about it.
AnswerInformation to be divulged gradually: 5-6 major players in major market; client used to have a
steady 30% market share: (second largest in industry). Now, the firm has a 44% share. Your
client offers a full range of audio cassettes -- from low bias to high bias/metal. Your client is also
using the most sophisticated and quality driven cassette manufacturing techniques.
The firm has been losing sales reps, yet loyal reps claim that sales are at record high levels for
them this year. Firm historically targeted two consumer groups -- older, middle income
enthusiasts and high school stereophile. Recently your client has been losing younger target
market customers. Firm has traditionally managed its relationship with retailers well. However,
the firm has recently lost several major accounts due to its inability to move your customer's (the
firm's) products.
Approach: The combined market characteristics, recent symptoms and sales decline and
increased market share suggest that your competitors are abandoning this market -- likely due
to a new and better substitute technology (the compact laser disk, for example.) Still, your
client’s historically flat market share suggests brand loyal customers. Moreover, your older
target market is loyal -- perhaps less likely to switch to the new technology in the short run.
Assuming(1) that your client wants to be a provider of this new technology.
(2) has the capacity to manage a primary supplier position in its traditional line of business -short-term, target your older customers as well as new segments less likely to switch over to
CD's; for the long-term, consider resource requirements, opportunities and constraints of
developing or acquiring the new technology.
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WINDMILL
Q. You produce a windmill with an accompanying electric generator (generator harnesses the
power produced by the windmill). This may costs you $10,000 to manufacture. How much are
your customers willing to pay for it?
AnswerPorter's five forces dictate that industry rivalry/potential substitutes, and supplier/buyer power
need to be assessed. This could be an appropriate start. To narrow it down, let's assume
competition, and a demand/supply level far beyond your capacity.
We must examine other components: The $10,000 cost is irrelevant; you have no idea what this
product is worth to anyone. Assessing the value of the product's benefits is perhaps the next
step. The closest substitute to the windmill is probably utility produced electricity.
Therefore, inquire how the electrical utilities measure and charge for the electricity they provide,
convert the Windmill’s output along these terms and assert a cost/benefit estimation of how
much potential customers would be willing to pay for it. Other considerations upon which to
discount the value might be reliability, maintenance, etc.
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CANDY COMPANY
Q. Your company is a rather successful producer of candy. It originally started as a single
product line. The production process consists of two basic activities: manufacturing and
packaging. The firm has also expanded its sales through product line extensions. Management
is concerned that sales are growing but profits are not increasing at the same rate. What can
your company do?
AnswerThis is a revenue vs. cost exercise. Margins are shrinking. Find out about the critical
components of cost: raw material, labor and fixed cost. Raw materials are commodities with
cyclical prices which have fallen in recent years but are expected to swing up again (this, as you
have guessed, makes the problem worse.) Labor and fixed capital has increased per unit
over-proportionally compared with ten years ago. Find out that the company's controlling system
is still focusing on the manufacturing part of production and the cost explosion occurs in
packaging. (candy is candy, the product line extension is primarily an issue of different
packaging.)
Controlling schedules manufacturing which is rather efficient already but not packaging, thus
causing slack in labor and fixed capital (small batch sizes, high setup times.)
Possible solutions: reduce product line, introduce controlling/scheduling measures for
packaging.
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CONSULTING FIRM (1)
Q. Your are the managing director in a large international consulting firm. Traditional strengths of
your firm have been solving strategy and organizational issues. Recently, you have noticed an
increasing number of your firm's proposals are being rejected because of a lack of information
technology expertise in your firm. So far, your firm's growth has been strong enough that
proposals lost have not hurt annual earnings. Nonetheless, you are becoming increasingly
concerned about the need to develop the firm's capabilities in information technology.
Ql: Assuming your concern is valid, what reasons will you provide to other partners about the
need to acquire information technology skills?
Q2: Assuming your are able to convince other partners of the importance of IT expertise, what
steps would you take to rapidly build IT capacity in this area?
Q3: What are the major risks in executing an IT capacity-expansion?
Answerl) Good answers focus on the value of IT to clients: discussion topics include the increasing
importance of information in business, strategic value of information and information flows,
importance of information systems for implementing new organizational structures and
management control systems. Better answers focus on the costs of losing clients to competitors:
discussions included the encroachment costs of having clients talking with competitors about IT
problems, risk of losing credibility with clients by not being able to solve a problem.
2) Good answers will focus on various methods to build expertise: buying expertise by acquiring
another firm, by raiding IT practices of other firms for a few key consultants, building capacity
through recruitment of IT experts and training them to be consultants, building capacity by
training current consultants in IT practice skills, establishing a strategic alliance with a IT
boutique firm. Candidates should discuss the pros and cons of each method proposed; impact
on firm's current culture, cost to the firm, time needed to build expertise, etc. Better answers will
realize the importance of stimulating client demand as capacity builds through seminars, articles
and strategic studies in IT areas...
3) Good answers depend on the expansion methods discussed, but an important issue is the
loss of the firm's focus away from just strategy and organization. Better answers will focus on
the difficulty of implementation in IT; rapid technological changes in the IT industry require
significant ongoing training and development costs; new practice cultures may be significantly
different from current culture, especially if "external experts" are brought into the organization.
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COSMETIC COMPANY IN EUROPE
Q. Eurocos. Inc produces and sells various cosmetics products in several European countries.
The company's different brands are well established in the markets. The various products are
quite similar in terms of raw material and production. The company has been doing very well in
the past, however profits have been shrinking in recent years. The CEO of Eurocos, Inc thinks
of changing his strategy in the industry. He asks you is this is a good idea and what they should
do?
AnswerAdditional Assumption: Many small to medium size companies, few big companies owning
several brands many small to medium size brands comprise the market. Eurocos produces all
products in all countries; transportation costs are small.
Some basic questions which may arise:
● How can fragmentation be overcome? Feasible for Eurocos?
● Create EOS and learning curves--Yes
● Standardize market needs--No
● Separate the product's commodity aspect from fragmenting aspect--Yes
● Changing environment: reduced tariffs
Possible Approach: Consolidate production while keeping the marketing and branding nationally
decentralized.
Pros: EOS in production (better sourcing, longer runs, quality) optimize location (interest rates,
wages, labor) Learning curve of running a more complex plant and logistics (see also Cons)
Keep "fragmented" marketing required in the market Total inventory decreases (safety stock at
original plant locations can be pooled centrally)
Cons: More complex central operation Increased logistic complexity Transportation costs
increase.
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SEMICONDUCTORS
Q. The domestic semiconductor industry is beleaguered - brutal price competition from the
Japanese, accusations of "dumping" against the Japanese etc. Domestic semiconductor
manufacturers are clamoring for protection from Washington, and some of the public policy
solutions being proposed are things like research consortia sponsored by the government, trade
restraints etc. You are a consultant at a major firm. You are concerned that the public policy
debate ignores basic issues regarding industry economics and whether the solutions being
proposed will solve any problems for your clients. You know that each generation of memory
chips lasts only 4-5 years. What are some of the factors you will consider while looking at the
economics and how might they impact the idea of shared research by US manufacturers?
AnswerApproach:
These are some of the basic issues to be fleshed out: What are the cost drivers in the industry?
(e.g. the split between fixed and variable costs involved) The basic issue to be arrived at is that
it costs huge amounts of money to be a player - roughly 250m in research and 600m in plants.
There are multiple factors and assumption which ar needed to be considered likeThis increases exponentially for each succeeding generation of memory chip. High fixed costs.
Negligible variable costs. Cut-rate, volume-oriented pricing - marginal cost of an additional chip
is minimal. Need access to huge amounts of capital on a continuous basis to survive for the
long term. Raise pros/cons/issues of govt. participation in this. Is it feasible? What are the
priorities for scarce govt. resources? Will relaxation of antitrust laws help? Foreigner's access to
cheaper capital? Research costs are smaller component. What will shared research
accomplish?
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AIRLINE INDUSTRY
Q. The airline industry is characterized by low returns and stiff competition. In the early years
after deregulation. discount, carriers like People Express sprang up. Years later the discounters
have gone out of' business. In a price-competitive industry, why is it that the higher-cost carriers
were able to survive and the low-cost ones weren't?
AnswerApproach: These are some of the basic issues to be flushed out: Characteristics of discounters.
Low fares, limited service. Characteristics of major carriers. Higher fares but better coverage
and service. Hub systems channeling traffic. Competitive moves by majors. Innovative use of
information technology for yield management and differential pricing. Basically they priced every
seat individually based on continuously monitoring demand/supply.
They would leisure customers with fares lower than discounts and charged more from business
travelers (indifferent to price but sensitive to service and frequency). They stole the discounters'
market and forced them out.
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OIL TANKERS
Q. Your rich uncle has just passed away and left you with 3 small oil tankers in the Persian Gulf.
How do you determine how much they are worth?
AnswerApproach: This problem involves the interplay of supply and demand forces to determine the
value of the tankers. The nature of tanker supply will be revealed by defining the different tanker
types (in layman’s terms: small, medium, and large) in the industry and the cost-related prices
associated with employing each type. In effect, a step function supply curve results for the
industry with each step a different tanker type.
Demand for the services of tankers is assumed fairly inelastic due to refinery economics
dominating the purchase decision. It will turn out (by carefully creating the supply/demand
curves) that at the given level of demand, only large and medium tankers are put into supply.
This renders your late uncle's small tankers suitable only for scrap at the present time.
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FERTILIZER
Q. You are hired by a fertilizer manufacturer to help them out of a difficult situation. Their market
share and profits are in a decline and they can't figure out what is happening. What are you
going to do?
AnswerApproach:
These are some of the basic issues to be fleshed out:
Fertilizer is a commodity. Identify the basis of competition in the industry i.e. competition is on a
cost basis. Who are the major players? What is their cost position vis-à-vis yours? It turns out
that your client is the high-cost producer (You will have to find this out with your questions and
approach). Why is your client the high-cost producer? Examine the inputs to the process and
analyze each one vis-à-vis your competitors (a long drawn out process).
Are there economies of scale and where do you stack up on that dimension? .It turns out that
you are comparable on all dimensions except for a key raw material (phosphate). You will also
do not have any scale advantages. You first have to be clear with this set of possible tracks.
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RETAIL ADVERTISING PRICING
Q. You are the new retail advertising manager of a large daily newspaper. This morning you
received a call from the advertising director (your boss!). He sounded extremely worried about
the retail advertising division's performance. (Naturally he doesn't explain why, assuming that a
hot-shot like you would by now be totally familiar with the status quo!). He has to attend a
meeting of senior executive convened by the publisher where he will have to defend the
advertising department's performance. He also wants to make a big splash by presenting a new
"strategic pricing methodology' aimed at achieving "value-based differentiated pricing".
AnswerApproachFind out corporate profitability objectives. Assess gap between annual departmental
performance and original targets. Examine both revenue and cost issues. (You discover that
revenues have gone up steadily over the past few years. Further, costs have not risen
significantly. So why worry?) Apparently, corporate pressure to improve bottom-line results has
led to steep advertising price increases. A classic demand-curve scenario has led to greatly
decreased cumulative ad volume, with potentially serious long-term consequences.
Examine competitor pricing and customer price sensitivity. Discuss heterogeneity in advertising
customers based on business size, breadth or product line, price-point etc. Understand
advertising attributes of importance to different segments (e.g. color, size, frequency,
discounting etc.). Use the difference in needs of customers to implement prices based on
appropriate advertising service provided.
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INSURANCE COMPANY
Q. An insurance company pays its sales people a base salary of monthly wages and
commission of 25% of new policy sales (2% of renewal). Which is the right way to pay the sales
agents?
AnswerApproach: This, in case you have not already surmised, is an organizational behavior scenario.
Again, you must define what the "right way is". Assume some generic definition like "the manner
by which agents are both motivated and equipped to accomplish their tasks in the interests of
the organization..." is applicable. Having been set up by definition, the results achieved by the
above mentioned composed system are examined. The only factor determining how much the
agents paid is their sales $. In essence, they are motivated to issue a policy to anyone at as
high a price as possible.
They are not motivated to give consideration to the riskiness of the insured party. The absence
of such a consideration (for example) would be detrimental to the company in the long run. A
more efficient compensation structure might pay the agent on a sliding scale, depending on how
risky (costly) an insured party proves to be.
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Q. Shalini after acquiring a degree in Hotel Management and business Administration took over
her family food processing company of manufacturing pickles, jams and squashes. The
business had been established by her grandmother and was doing reasonably well but the fixed
operating cost was very high and the cash flow position was weak. She wants to modernize and
diversify it. She approached a financial consultant, who told her that approximately Rs 50 Lakh
would be required for modernisation and expansion programme. He also informed her that the
stock market was going through a bullish phase.
1) After considering the above discussion, Name the source of finance Shalini should not
choose for financing the modernisation and expansion of her food processing business. Give
one reason in support of your answer.
2) Explain two other factors she should keep in mind while taking this decision.
Answer1) Shalini should not choose debt capital for financing the modernisation and expansion of her
food processing business because the fixed operating cost of the company is high. It cannot
take the additional burden of fixed commitments in terms of payment of interest and capital by
issuing debt.
2) The other two factors that shalini must keep in mind which taking this decision are stated
below:i) Risk: - financial risk refers to a situation when a company is unable to meet it fixed financial
charges. Financial risk increases with the higher use of debt.
ii) Flexibility:- too much dependence on debt reduces the debt raising capacity of the firm. So to
keep flexibility the company should not use debt in its full potential.
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MEAT PACKING INDUSTRY
Q. Your client a US firm, owns a meat packing plant in Spain. Over the last few periods profits
have steadily declined, despite the fact that sales are growing. You have been hired to figure out
why.
AnswerApproach: Porter's five forces are useful. By looking at the suppliers you will know that they are
independent farmers with little power against your client. Therefore, the costs of your raw
material cannot be the issue. In analyzing the internal rivalry you will discover the market is fairly
regional, hence transportation costs and competition have not changed dramatically. Also, your
production costs have remained stable.
You will also discover that there has been no introduction of a substitute product. Since there
are stable costs, and strong sales, the only other alternative is the price of your product.
Investigate this avenue, and you will discover the buyer link. Your margins are being squeezed
due to the increasing concentration and buying power of your customers.
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PIANOTUNERS
Q. How many piano tuners are there in Chicago?
AnswerApproach: This is a brain teaser case. Its purpose is to test your logical and quick mathematical
thinking. There is no right answer, the test is to see if you can come up with an answer based on
the information you estimate. You need to start by asking questions about the key factors. One
way to solve it is to estimate the number of households in the Chicagoland area.
{The interviewer gave this piece of information at 2,000,000 households.} Next, you can break
the income of the households into four quarters (500,000 each). Make an estimate of 20% of
highest income quarter have pianos, 10% of second quarter. 5% of third, and 0% of fourth.
With 175,000 pianos to tune you can estimate how often these pianos are tuned. You can
estimate top income quarter tunes their pianos once a year, second quarter once every three
years, third quarter once every 10 years. This gives you (100,000 + 50,000/3 + 25,000/10) =
119,167 or approximately 120,000.
Estimate a piano tuner an do four a day, 250 days a year, therefore: 120000/250=480 pianos a
day to tune 480/4 = 120 pianos tuners needed.
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CONSULTING FIRM STRATEGY
Q. You are the newest member on the management committee of a well-known top-tier strategy
management consulting firm. Eager to be accepted by your more senior peers, you volunteer to
study the industry and propose a firm strategy for the 1990's, which you will present to the
committee at its next meeting. As you leave the meeting you begin to realize the enormous task
to which you've committed yourself.
l. How do you evaluate the consulting environment and determine likely future scenarios?
2. What information do you use in this process? How is this information obtained?
3. What do you believe is most likely to happen in the consulting industry given your present
knowledge? How did you arrive at this conclusion?
4. What strategy do you propose to the management committee?
AnswerThis is one of the most difficult types of cases because the answers are completely unknown
and will vary substantially depending upon the interviewee's knowledge of the industry. This is
also an interesting case since the salience is likely to be high. As an interviewer you should feel
free to add information on an as-needed basis. When information isn't available, ask the
Interviewee to develop his or her own hypotheses. What matters here is the thinking process,
not necessarily the answer.
1) A good place to begin is to evaluate the industry from a competitive analysis perspective,
such as Porter's five forces. The following is an abbreviated analysis. Rivalry (low to moderate):
management consulting is fragmented, with many players each holding relatively small
concentration of total market. Firms act as competitive monopolists, and differentiate
themselves by specialty, type of customer (Fortune 100 versus Fortune 1000 companies),
reputation (McKinsey versus accounting firms), and the resources they employ (top MBAs
versus all MBAs). Many companies are relationship-driven with their customers, which limits
competition and keeps prices high. Top tier firms in particular are able to have high price points.
Potential Entry (moderate): there are no great barriers to entry into consulting; however, few
new consulting firms truly compete in the top tier. It's possible new firms would enter if the
industry were earning positive economic profits and if they faced certain imitability (e.g. the
ability to recreate what the top tier firms do). Substitutes (moderate): companies can move the
consulting process in-house by hiring ex consultants and bright MBAs. Buyer Bargaining Power
(moderate-high): In the last decade the consulting market has boomed, with supply generally
following demand, which lowers buyer power. However, it is appropriate to question effect
recession might have on industry. It's possible that demand may decrease as companies quit
expanding, which would reduce demand, give buyers more bargaining power, and push prices
lower. Supplier Bargaining Power (low-moderate): Major suppliers are the intellectual capital
employed by firm (e.g. experienced consultants who bring in sales and new consultants who
provide analytics). Must pay market price or risk losing suppliers.
Other interesting points might explore the key success factors in the consulting industry.
Differentiating factor which sets top tier firms apart from middle ones.
Do any firms have specific sustainable competitive advantages over others?
How does the marketing mix differ among firms?
Does your firm have any specific core competencies or advantages that set it apart from other
companies?
Determining likely future scenarios is more ambiguous. There are at least several key points:
what effect will a recession have on consulting firms? Will top tier firms suffer differently from
others? How will the mix of products demanded change (e.g. cost-cutting studies rather than
market expansion studies)? Will the consulting market continue to expand or suffer a cutback?
Or, will certain geographical areas expand (Pacific Rim, Eastern Europe) faster than others?
Again, the thought process is more important here than actual answers.
2) Information gathering is a key reason companies use consultants. An interviewee should
have a decent understanding of business information sources and how information is gathered.
Information can be broken into two groups: secondary and primary. Usually one begins with
secondary material, specifically, a complete review of published literature (a "lit search")
pertaining to the study (e.g. journal and newspaper articles, investment bank research,
specialized studies, books, etc.). This often points towards other good sources (e.g. industry
experts, associations, major competitors, government sources, etc.). Hypotheses are often
created from the secondary information. Primary research is then used to focus in on the key
issues. This research includes telephone interviews, in-person interviews, mailed
questionnaires, focus groups, laboratory experiments, etc.
3) This answer will depend upon the material covered in the first two. Ask the questions: What
trends are likely? What is a positive scenario? A negative one? If you had any information at
your disposal, how could you get a better handle on this issue?
4) There is no right answer here, so the interviewee may balk. However, you can provide some
structure. What are the key success factors to succeeding in the industry? Is there any way to
achieve sustainable advantage which cannot he duplicated by your competitors? Can you use
non-traditional methods to achieve competitive advantage, such as leveraging through
technology. Given your firm's competitive strengths and core competencies, what is the best
strategic route?
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Q. ABCDE Ltd. has opened a customized shoe business in 23 cities. The organization has done
a lot of research on the nature of business environment in which it is doing business. The
market has fragmented as there are many players, brand loyalties of the customers keep on
changing, customers are more demanding and there is intense competition in the market. Every
week on Saturday the board of directors sits for a meeting and decides the future course of
action. They rely on their surveys and past performances of other companies to achieve policy
making and deciding future course of action. The company devotes its lot of time in
understanding the external environment. With all the research the company has realized that
the business environment does tend to have a lot of impact on the organization so it is
necessary to continuously monitor it.
Name the various importance of management highlighted above?
AnswerThe various importance of business environment highlighted above:
It helps in coping with rapid changes. The market has fragmented as there are many players,
brand loyalties of the customers keep on changing, customers are more demanding and there is
intense competition in the market.
It helps in planning and policy formulation. They rely on their surveys and past performances of
other companies to achieve policy making and deciding future course of action.
It helps in improving performance. With all the research the company has realized that the
business environment does tend to have a lot of impact on the organization so it is necessary to
continuously monitor it.
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Q. ‘Raise the Bar’ is a sports equipment company. It has different branches in different parts of
the world. However, the requirements of the sports equipment are different in different branches.
This is due to the change in cultures and lifestyles of people in the different countries. The
market in which it is dealing is known for awareness of health. The more the awareness the
more is the demand for such equipments. Company knows that the demand for these products
is unpredictable as new designs keep on coming and the industry keeps on changing frequently.
There is a Research and Development Department which keeps on updating the equipments in
material and design. However the outside business environment is characterized by changing
customer preferences, entry of new competitors making it change. A meeting was organized
recently to understand the external business environment. However, after the meeting it was
realized that the business environment can’t be understood in totality it can only be understood
by breaking it into its dimensions. The result of a successful meeting could be seen later in the
performance of the company which created record sales in the coming year.
Identify the features of the business environment highlighted here.
AnswerThe different features of business environment highlighted above are:
●
Relativity: This is due to the change in cultures and lifestyles of people in the different
countries.
●
Uncertainty: Company knows that the demand for these products is unpredictable as
new designs keep on coming and the industry keeps on changing frequently.
●
Dynamic nature: However, the outside business environment is characterized by
changing customer preferences, entry of new competitors making it change.
●
Complexity: However after the meeting it was realized that the business environment
can’t be understood in totality it can only be understood by breaking it into its
dimensions.
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SKYSCRAPER
Q. Your client is going to build a skyscraper, but is not sure how many stories to make it. How
should he decide?
AnswerApproach: This is an economic supply/demand mind tease. Clearly you don't want to lose
money on the deal. Rebuilding will house tenants, who will pay to reside there. The costs of
building and maintaining the structure (both fixed and incremental by story) need to be
compared to revenue generating capacity of the project. When marginal revenue equals
marginal cost you stop adding stories.
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CORN FEED COMPANY
Q. A corn feed company has eight manufacturing plants located in the Midwest. These plants
service the entire United States. Their plot in Ohio is in need of refurbishing. The company has
four possible options:
I. Refurbish the existing plant.
2. Build a larger plant at the current location.
3. Build a similar size plant at a new location.
4. Build a larger plant at a new location.
Which is the best option for this plant?
AnswerThere are two issues to this decision. The plant size and the plant location should be considered
separately.
l. Size of Plant First consideration is the demand for the product. Corn feed is a commodity
product. Pricing on the product is dependent on current corn prices as opposed to the
manufacturing process. There are four main competitors - our company is the second largest.
All four competitors have similar manufacturing processes and similar cost structure. The
purposed largest plant will not have economies of scales not currently present a the existing
plant. The capacity utilization is 65% which is industry standard. The current customers buy
from all four manufacturers in order to guarantee supply. Currently demand is being met and
there are no alternative use for corn feed.
2. Location of Plant Transportation cost and perishability are the main issues with location. The
transportation cost for the corn stock (raw material) is much higher than the cost of transporting
the actual feed. The corn is grown in the Ohio area and the feed is sold to the East Coast. The
raw material is perishable where as the corn feed can be stored for any length of time and
easier to transport. Cost analysis of the transportation cost of feed versus raw materials should
be completed. Included in this analysis would be the % of spoilage for longer transportation of
corn stock.
Conclusion: The current plant is located close to the corn fields and this is the best location for
the plant from the cost/benefit analysis.
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POTS & PANS
Q. A manufacturing company based in Charleston, SC makes high quality pots and pans which
are sold throughout the U.S. in specialty and department stores. You are called in because they
feel that the $ l million that they spent on distribution last year was way too high. How can you
show your client money that he can save money.
AnswerApproach:
Distribution is basically a trade-off between cost and service level. The higher the service level,
the higher the cost (more inventory pools, warehouses and shipments). So you need to ask
where the inventory is being held. It turns out that stores, since they sell so few of these pots
and pans, hold no inventory and thus require next-day replenishment after a sale. The next
thing you need to know is where the warehouses are located, since the closer they are to the
stores the cheaper the distribution costs. Your client has three warehouses - one in Charleston,
one in Philadelphia and one in LA - from which they cover the whole country. A quick way to
solve this case is to realize that if stores require next day service from these three warehouses,
the only way they can do this is by shipping overnight at a premium rate (UPS - no wonder
they're spending so much).
You can save them a bunch of money by closing down Philadelphia and LA and shipping
everything from the plant In Charleston by UPS (negotiate a volume rate). This can be
confirmed by asking for the annual sales which turns out to be 10,000 units. When you divide
this into the $1 million distribution cost you discover that they are pay $100 to deliver a pan to
the store. Beat this figure and you've earned your exorbitant fee.
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CASTOR MANUFACTURER
Q. Your client manufactures castors (the wheels found on the bottom of office chairs) out of a
plant in West Germany and One in East Germany. Over the past two years the company’s
profits have declined by 20% while revenues have been relatively flat. You have been asked to
find out what is happening and suggest a course of action to reverse these trends.
AnswerInformation to be divulged slowly:
The company operates in three divisions: 50% of sales are to hospital bed manufacturers, 25%
are to mop bucket manufacturers, and 25% are to chair manufacturers. The hospital bed and
mop bucket divisions are located in the West German manufacturing operation, the hospital bed
division is located in the East German manufacturing operation. Breaking out each division as a
separate profit center shows that revenues are up 10% for both mop bucket and chair divisions
but down 10% for the hospital bed division. Similarly, profits are down 10% for both the mop
bucket and chair divisions but are down 30% for the hospital bed division. Further investigation
shows that labor is the major component of cost in manufacturing castors. In the past two years,
wages in the formerly state regulated East Germany have skyrocketed.
This is what is driving most of the increased costs. Similarly, the demand for hospital beds (and
thus castors) in East Germany has declined as they have become more efficient at managing
their health care system.
This is a typical revenue/cost case. We have already been told that revenues are flat which
should be a clue to explore the cost side of the income statement. In this case it helps to work
logically through both the fixed and variable costs to see if there are any major items.
Sometimes the interviewer will provide you with an income statement that will break out the
major cost components by percentage.
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Q. Kartik joins a garment factory as a plant supervisor in Lucknow. He observes that the output
of some workers is very low as compared to the standards set for their performance. On
analyzing the reasons for the same, he finds out that a lot of time of the workers is wasted in
getting the requisite materials issued from the store. Whereas on asking, the store keeper
complaints that there is no harmony in the working of the production department as a whole.
Every day the workers approach him at the last minute to procure different kinds of threads,
laces, mirrors, buttons etc. If it is not available in the store then he has to place an order with the
purchase officer. As a result, a lot of time of the workers is wasted. So, inorder to integrate the
various production activities, henceforth, Kartik ensures that the store keeper is informed well
three days in advance about the requisite material. Consequently, the store keeper is able to
keep the materials ready for the workers every morning in accordance with their requirements.
In context of the above case:
(a) Identify and explain the quality of management that Kartik has introduced in the working
of the production department as a corrective measure to control the output of the
workers.
(b) State briefly any two points highlighting the importance of quality of management
identified in part (a).
Answera) Coordination is the quality of management that Kartik has introduced in the working of the
production department as a corrective measure to control the output of the workers.
Coordination is the process which helps to integrate the efforts of different individuals with
diverse needs to secure a unity of action in the pursuit of common goals.
b) The two points highlighting the importance of coordination are stated below:
●
Growth in the size: With the growth in the size of an organization, there is a
proportionate increase in the number of its employees. So there is a greater need to
unify the efforts of diverse individuals towards the realization of organizational goals.
●
Functional differentiation: As a result of functional differentiation in an organization, its
people and activities get divided into small departments on the basis of functions like
marketing, finance etc. Since each department tends to formulate its own objectives,
policies etc, there is a need to reconcile the goals pursued by each of such departments
with the goals of the organization as a whole.
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Q. Unique Ltd. is engaged in manufacturing electrical appliances. The company has been facing
a lot of problems for the last few months because of chaos between two departments’ i.e,
Production department and Sales department. The sales department blames production
department for delayed production. However, the production department blames sales
department for poor sales. The force that integrates the two departments is missing. Identify the
missing force in the above case and list its two characteristics.
AnswerThe quality which is lacking in the above case is “coordination”.
Features:
● It integrates group efforts into purposeful work activity. With the help of this all the
required set of target can be easily as well as efficiently be achieved by the company
over any specific deadline.
●
It is all pervasive as it is required at all levels of management. Without this key
understanding between different sub sections; we cannot expect growth from the
organization.
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Q. A cable TV company from Canada, World View, had recently entered the US market in the
northeast to expand its market share. World View saw this move as an opportunity to capture a
large part of the US market (4MM consumers) in a market with very little competition. However,
in the last couple of years, much to the surprise of management, World View has been unable to
make a profit. You have been hired to figure out why and advise them on their next move.
Answer-
General information to understand :
• We need to understand why the company is losing money despite the market being
uncompetitive.
• We must analyze both the revenue and cost side of the problem.
• We should also analyze the differences in viewing behavior and income between the customer
base of World View in Canada and in the northeast.
• We will also determine the strength of any competitors and substitutes.
Information based Calculations :
• Let's look at costs first. Did World View incur additional costs per customer on average in the
new market? No, based on the potential number of subscribers, they have instituted the same
system that was in place. Costs associated with cable wire, debt, maintenance costs, etc. are all
proportionally the same.
• What about the number of subscribers. Out of the 4MM potential customers, how many are
signed up? Only 2.1 MM.
• Are other cable companies capturing the remaining market? No, competition is not an issue.
Those that we have not acquired as customers simply do not have cable.
• What about substitutes and viewing behavior? How is the consumer in the northeast US
different from the one in Canada? Well, the Canadian consumer does not rely much on local
stations for watching TV. Cable is a major source of entertainment and news coverage. In the
northeast US, we tend to see consumers shy away from paying the $40 a month. They settle for
watching local stations.
• Does the new market lave a lower income level? Yes, they do, by about 20% on average.
• What about the local stations? How many are they? Do they meet most of the needs of the
consumer? There about 16 local stations that have coverage over the entire northeast. I guess
they are doing pretty well by providing programming that the consumer wants. You tend to see
the average consumer in the northeast watch regular TV more than Cable when compared with
the Canadian consumer.
• Do these stations have good reception and how much do they charge? They have a very good
reception and they are part of basic TV, so they are free.
• Is World View providing any type of programming that the local stations are not providing?
Some, but the consumers don't seem to be interested. They don 't feel that it's worth $40.
Key Findings :
• There is a great deal of competition in the area, not from other cable companies, but local TV
stations.
• The consumer in northeast US is quite different from the consumer in Canada with respect to
television viewing habits.
• Consumers are not willing to pay $40 for a service that they already get for free.
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Q. 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?
AnswerGeneral Information to understand:
• 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.
Information based 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.}
• 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.
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Q. 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.
AnswerGeneral Information to understand:
• 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?
Information based 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.}
• 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 off the-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.
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Q. A company X Ltd. Is setting up a new plant in India for manufacturing auto components?
India is highly competitive and cost effective production base in this sector, X Ltd. Is planning to
capture about 40% of the market share in India and also export to the tune of at least $5 million
in about 2 years of its planned operations. To achieve these targets it requires a highly trained
and motivated work force. You have been retained by the company to advise it in this matter.
i. Outline the process of staffing the company should flow.
ii. Which sources of recruitment should the company rely upon? Give reasons for your
recommendation.
Answeri) the steps involved in the staffing process which company should follow are:
a) Estimating manpower requirement.
b) Recruitment
c) Selection
d) Placement and Orientation
e) Training and Development.
ii) Companies should rely upon external source of recruitment as companies require to set up a
new plant and large manpower with the latest technology. Reasons for relying on external
sources are:
a) Fresh Talent. With external recruitment fresh and new talent come to the organization.
b) Wider Choice. Through external recruitment the organization gets wider choice.
c) Qualified Personnel. By using external recruitment the management can get qualified and
trained persons.
d) Latest Technological Knowledge. Through campus placement organisation can get
employees with latest technological knowledge.
e) Competitive Spirit. Through external recruitment when outsiders join the organisation, this
develops a competitive spirit in existing employees of organisation.
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Hot Air Balloons
Your client is TakeFlight, a company that sells hot air balloon rides out West. Purchasing a hot
air balloon ride is all-inclusive, meaning participants pay for the following:
1. Watching the hot air balloon inflate.
2. Up to 15 passengers can ride in the balloon for approximately 1 hour.
3. Car ride back from the landing zone to the starting point The entire process takes 3
hours. In recent years, the business has expanded to offer two rides, twice per day,
rather than one ride, twice per day.
However, TakeFlight has not experienced the economies of scale it expected. (If asked,
economies of scale mean profit margins rise as a company sells more products. In this case,
doubling sales has not reduced margins at all.) You have been hired to target strategies to grow
TakeFlight’s profit margins to support future growth.
Question: What are the factors you would investigate to determine opportunities for margin
expansion?
AnswerSample Framework (margins are essentially a spread between price and cost):
1. Clear an general mindset over Raising Prices.
a. Do we have a monopoly or other market power?
b. Do we have a differentiated experience warranting a price premium?
c. What is the willingness to pay of our customers?
d. Are we pricing per-person, rather than per-ride? Is capacity maximized? If asked say that
the balloon ride costs the same for customers, even if only 2 people ride.
e. Can we separate our “all-inclusive” package into pieces?
f. Do we sell anything besides rides that could justify a higher price?
2. Cutting Costs
a. Fixed cost cutting
● Investing in the second hot air balloon
● Storage facilities iii. If asked, no fixed expenditures other than balloons
b. Variable cost cutting
● Does TakeFlight have enough inflation devices?
● Rising gas/fuel prices? Could we buy fuel for cars/balloons in bulk?
● Labor costs are too high?
● Flying the balloon? Can we tie the balloons together for one pilot?
● How do we drive people back from the landing zone?
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Q. Sanchit, after completing his entrepreneurship course from Sweden returned to India and
started a coffee shop ‘Aroma coffee can’ in a famous mall in New Delhi. The speciality of the
coffee shop was the special aroma of coffee and a wide variety of flavors to choose from.
Somehow, the business was neither profitable nor popular. Sanchit was keen to find out the
reason. He appointed Sandhya, an MBA from a reputed college, as a Manager to find out the
causes for the same. Sandhya took feedback from the clients and found out that they loved the
special unique aroma of coffee but were not happy with the long waiting time being taken to
process the order. She analyzed and found out that there were many unnecessary obstructions
in between which could be eliminated. She fixed a standard time for processing the order. She
also realized that there were some flavors whose demand was not enough. So, she also
decided to stop the sale of such flavors. As a result, within a short period Sandhya was able to
attract the customers. Identify and explain any two techniques of scientific management used by
Sandhya to solve the problem.
AnswerThe two techniques of scientific management used by Sandhya to solve the problem are:
(a) Time study: It seeks to determine the standard time taken to perform a well-defined job. The
objective of time study is to determine the number of workers to be employed, frame suitable
incentive schemes and determine labor costs. By using time measuring devices for each
element of the task the standard time is fixed for the whole of the task by taking several
readings.
(b) Standardisation and Simplification: Simplification aims at eliminating superfluous diversity of
products in terms of varieties, sizes and dimensions. It not only helps to reduce inventories but
also save cost of labor, machines and tools. Thus it helps to increase turnover by ensuring
optimum utilization of resources.
(c) Motion study: Motion study refers to the study of movements of limbs of a worker while doing
a particular task. It seek to divide all such movements into three categories namely;
i) Motions which are required.
ii) Motions which are necessary.
iii) Motions which are incidental.
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Health Insurance
Your client is FitCo, a health insurance company that has grown rapidly in the past five years. In
the recent regulatory environment, FitCo has been subsidized to expand into new markets, and
has done so quite successfully. However, in the last three years, its profitability has dropped
sharply. FitCo’s CEO has brought you on to determine the root cause of declining profitability
and suggest strategies for restoring profits to prior levels.
Question : What are the factors you would investigate to determine why profits have declined?
Answer1. Revenue Decline:
a. Prices have fallen:
● New markets include customers who pay less for healthcare
● FitCo has undercut competitors to win in new markets
● Regulation stipulates that larger companies charge less
b. Quantity sold has dropped:
● Unlikely because FitCo has expanded into new markets
● Potential for lower-margin products to dominate in new markets while higher-margin
products suffer
2. Cost Increase:
a. Fixed costs have increased:
● Government subsidies were a temporary thing.
● FitCo has invested in marketing, customer service, etc. in new markets.
b. Variable costs have increased:
● Customers in new markets are tougher to acquire due to rising competition.
● Customers in new markets are tougher to maintain as their choices are diverse and vary
from one to another.
● Customers in new markets are Expensive.
3. Market :
a. FitCo’s business model is no longer effective, or won’t scale well
b. Regulatory uncertainty has incentivized overexpansion, naturally reducing profits for the time
being. This is temporary and not worrisome.
c. FitCo insures a particular type of healthcare, but consumers are seeking out a different kind of
healthcare.
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Gold Mine
Your client is MyBank, a major financial institution. MyBank manages a portfolio with annual
returns of 10%. They have learned of an untapped gold mine in Peru that is for sale. A decade
ago, upon learning the mine was mineral-rich, the Peruvian government seized the land. Now,
the Peruvian government is cash-strapped and wants to sell it to MyBank for USD$250 million.
Is this an investment MyBank should add to its portfolio? MyBank’s portfolio manager wants you
to analyze the investment and offer a recommendation.
Question : What are the factors you would consider in determining the worthiness of the
investment?
Answer1. Financial Considerations – must be profitable at 10%+ year over year
a. Costs:
● Initial investment in the mine.
● Set-up costs for developing the capabilities of the mine.
● Variable costs of harvesting gold.
b. Revenues –
top candidates outline how they derive this, e.g. revenues = expected quantity of gold * market
price of gold.
●
●
●
●
Market price for gold – does this fluctuate?
How much gold can the mine produce annually?
Is annual production expected to grow?
How long before the mine runs out of gold?
2. Market Considerations:
a. Commodity Market
● Would we be investing in gold anyway?
● Are there any other minerals in the mine?
b. Alternatives
● Is it better to be in another industry instead?
● Does our portfolio normally take on this level of risk? Do we have precedent for such
investments?
3. Logistical Considerations:
a. Will we be expected to do anything unethical in the Peruvian market?
b. Are we outsourcing the mine’s operations?
c. Where are export markets, and do we have a way to get gold to these markets from Peru?
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Q. Bhuvan and Co. are running a shoe manufacturing company successfully. So they planned to
expand their business activities by adding more line of products, i.e, leather bags, belts, and
garments. Which type of structure would you recommend after expansion and why?
AnswerPresently, Bhuvan and Co. are manufacturing only one product so the most suitable
organization structure is functional but on expansion if they are adding more line of products
then the suitable organization structure will be divisional structure as it is a perfect structure for
multi product manufacturing company due to following reasons:
1) Product specialization. All the activities related to one type of product are grouped under one
department only which brings integration and coordination in the activities.
2) Fast decision making. The decisions are taken must faster in divisional structure because
there is no dependence on other departments for taking decisions.
3) Accountability. In this type of structure, the performance of individual departments can easily
be assessed and you can hold the department accountable for nonaccomplishment of
objectives.
4) Flexibility. Fast decision making leads to flexibility.
5) Expansion and growth. New departments can be added without disturbing existing
departments.
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Data Storage
Your client is DataCo, a data storage company that sells most of its products to other
businesses. DataCo has two main revenue streams: products and services. DataCo’s products
include high-capacity storage devices and data servers. DataCo’s services include data back-up
tools and cloud storage. In recent decades, DataCo has been an innovation leader, making
significant investments in new products as needed. Through the rise and fall of floppy disks,
hard drives, CDs, and USBs, DataCo has commanded the market. Lately, however, DataCo has
seen declining profitability. You have been hired to assess the root cause of decreased profits
and suggest strategies for restoring profits to previous levels.
Question : What are the factors you would investigate to determine why profits have declined?
Answer1. Revenue Decline
a. Prices have fallen
● Price war with competitors
● Willingness to pay has fallen
● Economic hardship
b. Quantity sold has dropped Larger storage means people buy fewer units.
● Companies manage their data with fewer products
● Companies switch from products to services
● Fewer companies buying data solutions
2. Cost Increase
a. Fixed costs have increased i. Manufacturing facilities are more complex ii. R&D expenditures
too high or misdirected b. Variable costs have increased i. Packaging more expensive for larger
products ii. Digital platform more heavily trafficked and expensive to manage iii. Support staff for
service solutions is expensive
3. Market:
a. People don’t buy data products anymore, because they purchase data services (or outsource
data management)
b. Data solutions are often developed in-house at companies
c. DataCo’s service solutions are often sold to end users as well, but DataCo still maintains a
business-to-business sales focus.
Q. With changes in the consumption habits of people, Neelesh, who was running a sweet shop,
has shifted to the chocolate business. On the eve of Diwali, he offered chocolates in attractive
packages at reasonable prices. He anticipated huge demand and created a website
chocolove.com for taking orders online. He got a lot of orders and earned huge profits by selling
the chocolate. Identify and explain dimensions of business environment discussed in the above
case.
Answer-
The various dimensions of business environment being referred to in the above case are as
follows:
a) Social environment:
● Immediate physical surroundings.
● Social relationships.
● Infrastructure.
● Industrial and occupational structure.
● Labor markets.
● Power relations.
● Cultural practices.
b) Technological environment:
● Disruptive technologies.
● Artificial intelligence.
● IoT (Internet of Things).
● New production processes.
● Machine learning.
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Pipelines Prompt:
Your client is GasCo, an integrated natural gas supplier. Their functions range from exploration,
extraction, production, and transport via pipeline operator. In the current market environment,
natural gas is quickly gaining prominence as a clean and safe energy source. PipeCo is a
pipeline operator interested in a potential joint venture with GasCo. GasCo has come to you to
assess the desirability of the venture. In the terms of the agreement, GasCo would contribute
the majority of the funds to build a pipeline from Pennsylvania to Louisiana. Upon completion,
GasCo would be the legal owner of the pipeline, which PipeCo would operate. GasCo would
then retain a majority of the natural gas profits flowing through that pipeline.
What are the factors you would investigate to determine whether the joint venture is worthwhile?
AnswerSample Framework:
1. Quantitative – Investment Costs
I. Pipeline construction costs
II. Miscellaneous costs – legal, regulatory, meetings
III. Variable costs upon pipeline completion of ownership
IV. Opportunity costs of investing elsewhere
2. Quantitative – Profits to Recoup Investment
I. Terms of agreement regarding profits
II. Expected profits from gas upon completion
III. Time to payoff, potential delays
IV. Synergies across other pipelines
3. Qualitative
a. Relationship with PipeCo
I. Is PipeCo trustworthy?
II. PipeCo’s history as a pipeline operator
b. Company Position
I. Is GasCo normally an owner? Should it take on less risk/profits or potentially more
risk/profits?
II. Is the pipeline in line with GasCo’s strategy?
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Business Class Airline
Our client is FlyCheap, a budget airline considering entering a new market for business class
flights. Think of a very cheap but low-quality airline. They are considering running an all
business-class service within Europe. They want your advice on whether this is a good idea,
and if so, how they should do it.
1: What factors should FlyCheap consider when deciding about launching an allbusiness
service within Europe?
AnswerSample Framework:
1. Customers:
a. Business Travelers
b. Luxury Tourists
c. Diplomats
d. How price sensitive are these groups, and what niche would offer them value?
2. Competition:
a. How will incumbent airlines react to this?
b. Are alternatives such as train travel serious competition?
c. Can they position themselves as competition to other airlines’ economy offerings?
3. Capabilities:
a. Will their budget brand be a limitation or an asset?
b. What capabilities do they have as a budget airline that are particularly useful? Do they have
access to landing slots?
c. What do they not currently do that they will need to be good at?
d. New staff and luxury aircraft?
4. Entry Mode:
a. Can this simply be launched as another route with a different service?
b. Whom could they partner with? Is an acquisition or partnership a viable option?
c. Should they consider setting up a new company (with a new brand)?
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H Health
H Health is a major health care provider in the United States. H Health’s business model is
simple: It signs contracts with patients and provides medical services via one of its 300
contracted physicians. The company’s key revenues then come from commissions. In the
scenario that H Health’s contracted physicians cannot provide the necessary medical treatment,
H Health gives the patient a “referral” to other provides. Last year, H Health suffered a profit
decline. You have been hired to solve this problem. Question 1: How would you approach this
problem?
AnswerSample Framework:
1. Revenue Declineda. number of patients dropped
b. unit price dropped
c. competition grew their market share
2. Costs Increased-
a. VC: number of visits increased (e.g. major flu), per person cost increased (e.g. cost of the
medicine), referral cost increased
b. FC: physician’s salary increased, facilities costs increased
3. Market Factorsa. Nobody pays for healthcare anymore via contract
b. People are healthier than before
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Q. Trilok Ltd was established with a total capitalisation of Rs 25.20 crores. The company
maintained a good balance between debt equity by having a debt equity ratio of almost 2:1. It
was established with a mission of generating employment and producing quality goods with fair
prices. It hired qualified and experienced staff even then, it organized training programmes to
improve the skill level of employees. Managers at different levels were of the opinion that
everything was organized very well, so subordinates can do everything, at their own level. So
they decentralized the authority till lowest level and restricted themselves to policy making. At
the end of the financial year, results were shocking. Annual target of production of 5, 00,000
units could not be achieved.
a) Name the functions of management practiced by managers.
b) Which management function was totally ignored by the mangers at different levels?
c) What would be the benefits, Trilok Ltd could get, by adopting this missed Function.
Answera) The function of management practiced by the managers are:
1) Financial management by maintaining good debt equity ratio.
2) Organizing function by decentralization of authority and responsibility to the lowest level so
that everything the employees can do at their own level.
3) Staffing by hiring qualified and experiences staff.
b) Directing function was missed by the management at all levels.
c) Directing is the function which initiates action. The management would have achieved the
desired target if they have done proper motivation, guidance, supervision and communication
with all the levels of management.
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Gasoline
Your client manufactures a commodity (gasoline for example). They are the market leader and
are the lowest cost producer. The CEO wants to increase profits in the next 3 months. What
would be your recommendation about how to achieve this?
AnswerKey observation:
The key to solving this case is using the fact that demand for commodities is highly inelastic.
Commodities are essential for consumers, which means that changes in prices have little effect
on demand.
It can be considered as, if the price of gasoline increases by 25 percent in one day, drivers
wouldn’t be very happy about it, but they would still fill up their tanks, because they need gas to
get to work, run errands, etc. In the longer term, demand for commodities becomes more
elastic, as people adapt to the price by changing their behavior.
Continuing with our gasoline example, higher prices would lead to people buying cars with
better fuel economy, and electric car technologies becoming more viable, leading to reduced
demand. Since this case is focused on the next three months, you can fully ignore these
long-term effects and assume that demand for the commodity is highly inelastic. Using this
assumption, you proceed to solve the case:
Framework and Approach:
We want to increase profits, so you use the following framework to determine the best way to do
this: Profits = Revenues – Cost We have already established that the client is the lowest cost
producer, hence the costs cannot be lowered any further. So the solution will thus focus on
increasing revenues.
You can decompose revenues like so: Revenues = Price x Quantity.
You should assume that the client is running at maximum capacity utilization, so quantity cannot
be increased in the short term. This leads to the conclusion that the only solution is to increase
price.
To determine the price, use the framework of supply and demand. The two ways to increase
price are to increase demand or to decrease supply. Due to the commodity nature of the
product, it is unlikely that the demand can be increased significantly in the short run. Hence,
focus on supply. Now you need to draw the supply and demand curves to show the effects
visually:
Using this diagram, you should make the recommendation to the client to decrease its capacity
utilization. This will cause the supply curve to shift towards the left, increasing the market
clearing price from P1 to P2.
You should point out the two boxes showing the increase (due to higher price) and decrease
(due to lower quantity) in client profits. The increase outweighs the decrease here.
TipThis is an industry analysis case, where you are expected to understand basic dynamics of
microeconomics, i.e. competition and consumer behavior. Ensure that you have a good
understanding of the concepts included in this solution: price elasticity, economic commodities,
supply and demand curves, and capacity utilization. Various other variants of a case like this
can come up in an interview, for example when products are differentiated instead of
commodities, or if the industry is a monopoly or an oligopoly. These are all concepts from
microeconomics, and we will cover with other cases in the coming days and weeks.
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Q. Mr. Anil has been appointed by suntech Ltd to ensure that the performance of employees is
going as per the plans made. In the report which he submitted to the management, he
mentioned that carriage charges had risen by 8 % however labour absenteeism had increased
from the previous year from 5 % to 15 %. He felt that this increase in absenteeism required
immediate action of management on priority basis.
a) Identify the step of one of the management functions referred above.
b) Identify the principle due to which increase in absenteeism required immediate action of
management.
Answera) Analysis of deviations: Deviations are the difference between actual and standard
performance. Deviations may be positive or negative. In the above paragraph negative deviation
is noticed by Mr. Anil as the absenteeism increased from 5% to 15%.
b) The Principle which requires immediate action of management is ‘Management by
Exception’. It is the practice of examining the financial and operational results of a business,
and only bringing issues to the attention of management if results represent substantial
differences from the budgeted or expected amount.
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R&D lab
This is an industry analysis case. A small R&D lab in the Swiss Alps has developed a
super-durable filament for light bulbs; with this filament, the light bulb will never burn out. The
lab is ready to license this product to a light bulb manufacturer. What will be the effect on the
light bulb industry? (given- The light bulb industry is dominated by two multinational producers.)
AnswerGeneral Assumption:
● The light bulb industry is dominated by two multinational producers. The two companies
sell their products side by side for essentially the same price in similar outlets
internationally.
● There are a several small local players in various regions of the world who produce local
brands and some private store brand light bulbs.
● There have been no technological innovations in light bulbs for many years.
ApproachThere are two possible outcomes. One outcome is that one of the two major players purchases
the technology. If the technology is patented and exclusively licensed, this player may enjoy an
advantage for a limited time. If the producer makes enough bulbs at a low enough cost, all
customers will eventually switch over to the permanent light bulb, thereby drying up the industry,
putting the competitor out of business and greatly reducing their own business.
Another solution is that all of the players obtain some version of this technology. If that were to
happen, the price for this product would decline to the normal industry profit level, and
customers would shift to the permanent light bulb. Over time, all bulbs would be permanent and
the industry volume would greatly decrease, making the industry more competitive and wiping
out industry profits.
TipsThis is a strategy case, where the solution depends on a good insight into competitive dynamics
and fundamental microeconomics. You need to be comfortable with qualitative cases of this
type, where no numbers are provided and you are still expected to provide valuable insights.
One of the best ways is to practice with different variants of these types of cases, which are
provided in this book.
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Magazine
Your client is the CEO of a publishing company that produces a line of educational magazines
as well as a line of women’s magazines. Both businesses are profitable but are not growing
quickly. He wants to start a third monthly magazine in the US targeted at 30-50-year-old men
(e.g. GQ Magazine). His stated goal is to generate circulation revenues of $10 million in the first
year. He has hired you to figure out whether this is possible.
AnswerTo estimate the potential revenues, estimate first the total market, then potential market share,
and finally, revenues resulting from that market share:
1. Total Market:
The total US population is approximately 320 million. Assume an average life span of 80
years and an equal age distribution up until the age of 60, with half the density above
that age. So, 90% of the people fall between the ages of 0-60, and 30% between 30-50.
Half of those are male, so 15% of the population, or approximately 50 million, falls into
the target group. Of the 50 million 30-50-year-old men in the country, assume that at
least 1/2 would read a magazine or 25 million. Given the wide range of magazines on
the market assume that only 10% of magazine readers would want to read a men’s
journal or 2.5 million target customers.
2. Market Share:
As a new magazine, assume that you can generate a 5% share of the men’s magazine
market in year one or 120,000 customers.
3. Revenues:
Based on what other magazines sell for ($2.50-$5.00) assume a cover price. Let’s say
$3/magazine at the newsstand and $2/magazine for a subscription. Now make some
assumptions on how many customers will buy on the newsstand versus subscription,
let’s say 50% subscribe (60,000) and 50% buy at the news stand (60,000). This comes
out to $180,000 + $120,000 or $300,000. Finally, this is a monthly magazine. For
simplicity assume that all target customers buy a magazine every month. This would
generate total revenues of $300,000 X 12 or $3.6 million.
Conclusion: In this case, given the CEO’s stated goal of $10 million in circulation revenues, it
would not make sense to launch the magazine.
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Q. Ganesh steel ltd. is a large and creditworthy company that manufacture steel for the Indian
market. It now wants to cater the Asian market and decides to invest in new Hi tech machines.
Since the investment is large, it requires long term finance. It decides to raise funds by issuing
equity shares. The issue of equality shares involves huge floatation cost. To meet the expenses
of floatation cost, the company decides to tap the money market.
(A) Name and explain the money market instrument that company can use for the above
purpose.
(B) What is the duration for which the company can get funds through this investment?
(C) State any other purpose for which this instrument can be used.
Answer-
a) Commercial papers can be used for bridge financing by Ganesh steel Ltd. as they are
issued by Ganesh Steel Ltd. on behalf of large and credit worthy companies. The
instrument is in the form of unsecured promissory note and is freely transferable by
endorsement. It is sold at discount and redeemed at par.
b) Its maturity period may range from a fortnight to a year.
c) It is also used to meet the term seasonal and working capital requirements of a business
enterprise.
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Meat packing
Your client is a US firm which owns a meat packing plant in Spain. Over the last few periods
profits at this plant have steadily declined, despite growing sales. You have been hired to figure
out why.
AnswerGeneral Assumption:
● The market is fairly regional; hence transportation costs and competition have not
changed dramatically.
● No substitute product has been introduced.
● Production costs have remained stable.
ApproachBegin by selecting an appropriate framework. Porter's Five Forces (a method of analysing the
operating environment of a competition of a business.)is a good framework to use here, as it
allows you to see whether external factors are affecting industry profitability. Furthermore, you
can also use a profitability framework to identify internal factors.
Using these frameworks, you first ask whether there is any information available on each of the
Five Forces. As assumed that suppliers have little power, no substitute product has been
introduced, and the industry rivalry/competition is unchanged.
Hence, there is no apparent external factor reducing your profitability. Using the profitability
framework (Profit = Quantity * Price - Costs), you ask whether costs have changed, and get the
reply that they remain unchanged.
As sales have been growing, you conclude that the reason for declining profitability must be the
price of your product.
Using the Five Forces framework again, this leads you to discovering the buyer link. Your
margins are being squeezed due to increasing concentration and buying power of your
customers.
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Airline passenger
One of the partners at your firm has just walked down the hall and asked us to look into a
question he wants to address in a pitch for new business. He received a call from the CEO of a
national airline based on the west coast. The CEO wants to increase his company’s profits and
would like us to see what impact having an additional passenger on every flight would have and
what it would take to achieve this goal.
Given Information:
●
●
●
The airline operates for 16 hours per day.
There are two planes on each route.
The following information is available for the routes:
Answer-
1. Impact of an additional passenger :
Let's start with the profitability framework (Profit = Revenues - Cost), discussing what the
effects will be in those terms. You should realize that the addition of one passenger has
a negligible impact on the cost of the flight. Therefore, each additional passenger's
revenue goes directly to the bottom line.
Before starting to calculate the additional revenues, you should also make sure that
there is capacity to add additional passengers on all flights, as this can diverse the
solution.
You should also understand that information on the number of flights on each route is
mentioned so it can be assumed. On a general basis two planes operate on each route,
and that all planes operate for 16 hours per day.
Now you can move on to estimating the numbers. The additional daily revenue from
each passenger on every flight is the ticket price times the number of flights per day:
Assuming the airline operates 360 days per year, this amounts to 12,000 * 360 = 4.32
million USD per passenger per year.
In relative terms, if each plane has a capacity for 200 passengers, and 80% of the seats
are occupied on average, an additional passenger will increase revenues by 1 / 160 =
0.6%.
2. What it would take to achieve this goal :
You should discuss main levers to increase the number of passengers, e.g.
advertising, promotions, partnerships, fare-sales, etc. You can also mention price
or service as two important but opposing levers available for increasing
passengers. Finally, you could segment into two passenger types (business &
leisure) and address differences in price sensitivity.
Moving beyond the question to the actual goal, you could also think about what
the ultimate goal is (i.e. increased profit), and talk about how it might be easier to
cut costs than increase revenue. Ideas here could include reducing turn time,
partnerships with other airlines, sales of ancillary products/services (e.g. food), or
other operational improvements.
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Q. ABC handlooms Ltd. Set up a factory for manufacturing jute bags in a remote village as there
was no raw materials available. The revenue earned by the company was sufficient to cover the
costs and the risks. The demand of bags was increasing day by day, so the company decided to
increase production to generate higher sales. For this they decided to from the nearby villages
as very few job opportunities were available in that are the company also decided to open
schools and creches for the children of its employees.
A) Identify and explain the objectives of management discussed above.
Answer(i) The Company is fulfilling the organizational and social objectives of management.
Organizational objectives include survival, profit and growth.
• In order to survive, ABC handlooms Ltd. earns enough revenues.
• Company’s profits are sufficient to the cover the cost and the risks.
• Since demand for bags was increasing day by day and so the company decided to increase
production to generate higher sales, it implies that the company exploits fully its growth
potential. Social objectives involve the creation of benefits for the society. ‘The company
decided to employ people from the nearby villages as very few job opportunities were available
in that area. It also decided to open schools and crèches for the children of its employees.
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Piano tuners
An local piano company wants to sell piano in Chicago for which it require the data of production
i.e. How many piano tuners are there in Chicago?
Answer-
This is arguably the most famous estimation question, and it frequently asked in some form by
firms today. As with other problems of this type, the important thing is to make reasonable
assumptions and be confident in your mental math. Let’s go through an example solution:
You start by making the following assumptions:
●
●
●
●
●
There are approximately 10 million people living in Chicago.
On average, there are two persons in each household.
Roughly one household in twenty has a piano that is tuned regularly.
Pianos that are tuned regularly are tuned about once per year It takes a piano tuner two
hours to tune a piano, including travel time.
A piano tuner works for 8 hours per day, 5 days per week, 50 weeks per year.
From these assumptions, you can calculate your estimate:
● Number of pianos tuned per year: 10m / (2 * 20) = 250k.
● Annual tunings per piano tuner: (8h / 2h) * 5 * 50 = 1000.
● Thus, there are 250 piano tuners in Chicago.
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Conglomerate
Your client is a large multinational conglomerate with multiple plants globally. They were formed
through mergers and acquisitions of many small firms over the last decade and there are still
integration issues. The CEO would like to increase the ROIC (Return on Invested Capital) of the
firm from 10% to 20% in 3 years.
Is it possible and how would you achieve this?
AnswerGeneral information given along with questioni) ROIC can be achieved by growing the profits of the firm and/or by decreasing the invested
capital.
ii) There are firms in the industry that have 20-30% ROIC. Hence the client’s target looks
achievable.
Competitive Landscape: This is a highly fragmented industry with around thousands of
competitors.
Customers:
i) Client has 30% customers in Europe, 10% in Asia, 50% in North America and 10% in rest of
world.
ii) The client has 2 types of products – Standard (almost a commodity) and Engineered
(designed specifically for the client).
iii) The standard products are getting commoditized, hence have significant price pressure.
The engineered products have good margins in the 1st year and then the margins decrease in
subsequent 3-4 years.
iv) The client has 30,000 SKUs in their product portfolio. The industries that the client serves are
as follows:
Approach-
Profits / Invested capital:
With the help of the 3 Cs, assessing the Company, Competitors, and CustomersStarting with the company, you are expected to pick up on the hint in the question, which states
that there are integration issues from past acquisitions.
While going through issues you can analyze that while the specifics are beyond the scope of
this case, there are indeed opportunities to integrate these companies better, decreasing cost
through economies of scale and improving coordination.
For understanding the company in more detail, asking for information on other important factors,
i.e. their competitive advantage, profitability (information on revenues and costs), plant capacity,
distribution, management, etc. So, you and the Company part by mentioning that a potential
lever for improving ROIC would be to reassess the number and locations of the client's plants,
which would be a part of their integration issues.
Moving on to the Competitors part, ywe should know wheteher the industry is consolidated or
fragmented? Lets’ say on given information basis the industry is highly fragmented, with
thousands of competitors. Are any of these competitors achieving the target that the CEO would
like to reach? Yes, there are firms with 20-30% ROIC. So, you conclude that the target seems
achievable. Finally, you move to the Customers. What types of customers does the client
have, and do we have any segmentations available, i.e. by product, industry or geography? It is
theoretically based on three segmentations: with the table above, and by telling you that 30% of
customers are in Europe, 10% in Asia, 50% in North America and 10% in rest of the world.
You ask about the economics of the two different types of products. On basis of this information
we can say that the Standard product is almost a commodity, while the Engineered product is
designed specifically for the client, with high margins in the first year of sales, but lower after 3-4
years. Furthermore, the interviewer tells you that in total, there are high number of SKUs offered
by your Client. Now you can make some concrete recommendations. Examining the table, you
state that revenues from Electronics are quite low despite the industry having the highest % of
Engineered products. The client should focus more on that industry.
Furthermore, you state that more SKUs will make the client explore ways to reduce this number,
which could reduce capital invested in development, manufacturing equipment, and inventories.
One way would be to evaluate the profitability of each product and its importance for the total
product portfolio. Production of commoditized products could be divested or outsourced to
reduce the capital invested.
So till now we have identified four potential levers to improve ROIC:Improve integration of
acquired companies to realize economies of scale and increase coordination Evaluate the
capacity utilization and supply chain for the plants, comparing them for example to the
geographical distribution of customers, reducing investment if possible Divest or outsource
production of commoditized products to reduce investment and improve profitability of the
product portfolio Focus on selling more of Engineered products, i.e. by growing in the
Electronics industry
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Q. Suhasini a home science graduate from a reputed a college has recently done a cookery
course. She wished to start her own venture with a goal to provide ‘healthy food’ at reasonable
price . She discussed her idea with her teacher [mentor] who encouraged her . After anaylizing
various options for starting her business venture, they shortlisted options Readymade and to
make vegetable shakes sattu milk shakes .Then they both weighed the pros and cons of both
the shortlisted options.
[a] Name the function of management being discussed above and give any one of its
characteristics .
[b] Also briefly discuss ant three limitations of the function discussed in the case.
Answer-
[a] Suhasini is engaged in planning function of management. One characteristic of this function
is that planning is pervasive. It is not an exclusive function of top management but is required at
all the levels of management and in all the departments of the organization.
[b] The limitations of planning are:
i) Leads to rigidity. Once a plan is drawn, the managers are abide by it and in case, the
circumstances change, they fail to bring the required modification.
ii) May not work in dynamic environment. The organization has to continuously adapt itself to
the changing environment. Any unforeseen change in the business environment upsets the
whole planning.
iii) Reduces creativity. Planning is done majorly by the top management. The rest of the
members are given the task to implement the plans. This leads to loss of initiative and creativity
among the staff.
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Bubble gum
Your client is the largest North American producer of a certain kind of bubble-pack packaging
material. Currently, the company has 80% of the market, and has asked your firm to assess the
strategic outlook for this company. How would you begin to assess the future for this client, and
what type of recommendations could you make?
AnswerGeneral Assumption:Costs:
The product costs can be broken down as follows:
● 20% for polyethylene, a plastic chemical 35% conversion costs, including
allocated fixed costs, labor and energy costs 10% distribution and storage 15%
marketing and overhead.
● Profit margins are 20%. Polyethylene is a commodity chemical.
Technology:
The factory is few decades old, and the technology used is the same as when the factory
opened.
Market/Competitors:
The client had 100% of the market until two years ago. Since that time, a localized upstart
company has appeared in the Philadelphia / New Jersey market and has captured nearly all of
that market. This factory has purchased technology from a German company. Your client does
not have much information about this competitor, but it appears that their factory is extremely
efficient. They have also been undercutting your client on price.
ApproachUsing the 3 Cs framework (Company, Customers and Competitors) analysis, we can reach the
following conclusion:
The competitor has used their new technology to produce a lower price product. As evidenced
in the Philadelphia / New Jersey market, nearly all customers prefer this product to your client’s.
Therefore, the future is bleak for your client, and they should respond immediately to the
competitive threat, perhaps by updating their own technology.
Now this update will vary from department to department i.e. occupying market, input resources
and cost balancing.
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PC labs
A provider of PC labs for use in schools in the US is looking to enter the UK market. The
company has developed a somewhat innovative business model, whereby secondary schools
are provided with up to 15 PCs. The PCs come fitted with e-learning software, which is
structured and indexed by subject matter and level of education – e.g., GCSEs, Advanced
Level, etc. The main source of revenue relates to advertising revenues generated through the
display of banner ads on the screen. These ads are displayed when the PCs are in use during
the school day. Advertisers in the US include McDonald’s and the US Army. The company has
developed long-term leasing arrangements with the main hardware suppliers (e.g., Dell, HP,
etc.) and is therefore able to offer the kitted-out PC lab at no or a very minimal cost to schools.
Our first requirement was to determine the extent of the revenue opportunity for the company’s
proposition in the UK. What are the key inputs and assumptions that we would need to consider
in order to determine potential revenues? And using these assumptions, what revenues would
the company generate in Year 1?
Answer-
There are a number of key inputs that you should consider. A good solution will also show
evidence of sound commercial judgment when thinking through any key assumptions. Also, split
your solution clearly into assumptions first, and revenue calculations afterwards, as the
interviewer asked you to structure your response this way:
1. The key inputs and assumptions needed to estimate revenue are as follows:
●
●
●
●
●
●
The number of secondary schools in the UK. Using rough assumptions, we assume that
secondary school takes five years, the UK population is 80 million and age distribution is
uniform between 0 and 80 years. Thus, there are 5 million students in secondary school.
Assuming an average capacity of 1000 students, there are 5,000 secondary schools in
the UK.
The proportion of secondary schools signed up in Year 1. In order to keep the math
simple, we will assume that 10% are signed up in Year 1. We also assume that these
500 schools are customers from the start of the year.
The number of PCs per school. Let's assume that each school will be fitted with one PC
lab, with each lab having 15 PCs.
The average daily use of each PC. Let’s assume 5 hours per day – equivalent to a
typical school day.
The number of ads displayed in a day. Here, let’s assume that each ad lasts on average,
30 seconds. The price of each ad. Let’s assume a rate of £10 CPM (cost per mille) or
£10 per 1,000 ads displayed.
The number of weeks each year when the school (and therefore the PC lab) is open.
Here, let’s assume 40 weeks per annum (or 200 days, assuming a 5-day school week).
The utilization rate, i.e. the proportion of ad slots the provider manages to sell. Here, we
shall assume a 50% utilization.
2. Using these assumptions, we can now estimate the revenue in Year 1:
●
●
●
●
●
●
With an average daily PC usage of 5 hours, and 15 PCs per school, each school uses
75 PC-hours per day.
Each ad is displayed for 30 seconds, so 120 ads can be displayed per hour, or 120 * 75
= 9,000 ads per school per day.
With a 50% utilization, 4,500 ads are actually displayed per day.
With 200 school days per year, total ads displayed per year are 4,500 * 200 = 900,000.
So yearly ad revenue per school is £0.01 * 900,000 = £9,000.
With 500 schools signed up, total ad revenue in Year 1 is £9,000 * 500 = £4.5 million.
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PC labs,
Continued Question- This case is a continuation of the previous case. In order to validate our
Year 1 revenue estimate, the next stage of this project is to try and determine the size of the
advertising market targeting teenagers in the UK. Teenagers were the primary target
demographic group (given the focus on secondary schools). This information would be used to
determine what proportion of the teenage advertising market would be accounted for by our
revenue projection for the company. Given this background, what methodologies could be used
to size the teenage advertising market?
Answer-
Advertising as a % of spending This approach is based around the total amount spent by
teenagers in the UK. Key steps are as follows:
1. Determine the number of teenagers in the UK. Teenagers represent ~10% of UK
population or ~8 million teenagers.
2. Determine average annual spending by teenager. Consider pocket money, earnings,
cash gifts, etc. Here we assume that this amounts to just over £400 per month, or £5,000
per year.
3. If total teenage spending is 8 million * £5,000 = £40 billion, what is the advertising ratio –
i.e., the amount spent on advertising by advertisers as a proportion of total spending?
Definitely less than 10%. Let’s say 5%.
4. Total teenage market is about £2 billion The analysis of the teenage advertising market
provides a useful sense check of the Year 1 revenue estimate, which at £4.5 million,
represents a relatively small proportion of the overall teenage ad market.
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Drug launch
Your client, XYZ Pharma is a large pharmaceutical manufacturer in the United States. It has
recently launched Axeles, a cardiovascular drug that has proven to be the best of its class
amongst its peers in FDA testing. Axeles launched a year ago and, despite its effectiveness, its
sales have been considerably short of target and it has a much lower market share than the
competitors. In fact, the company as a whole has been losing market share for other products
as well but the focus is squarely on Axeles, as the analysts see it as a make-or-break product
for the company’s dwindling stock. The client has approached you to investigate the issue. The
CEO feels if they can figure out why Axeles is not doing well, they may be able to understand
the issues facing the company as a whole.
AnswerGeneral assuption with respect to the case:
● The drug had comparable awareness compared to its peers.
● Similarly, for distribution, there is adequate penetration in pharmacies relative to
competitors.
Approach:
The problem here is marketing-related, so you can choose any framework appropriate for the
situation. One example would be to form the hypothesis that the problem is in one of the
following three areas:
●
●
●
Awareness – consumers may not be aware of the product.
Pricing – the product may be very expensive.
Distribution – the product may not have adequate distribution in pharmacies.
Here, you go through each of these three potential causes by asking relevant questions i.e. that
awareness is similar, distribution is adequate, and the salesforce is both large and reaches all
doctors who prescribe the medicine.
This narrows the problem down to effectiveness of the sales force.
Now, you can revise your hypothesis: awareness, pricing, and distribution are probably not
significant factors. The sales force also is large enough, but maybe something is not working
well in the sales process. You then ask how the sales force is structured. Do they focus
exclusively on cardiovascular doctors or is their time distributed on other things as well?
So on that basis we can say that the sales force is responsible for selling all the products of the
company, not only Axeles. Thus, only a small proportion of their time goes into marketing the
drug, in contrast to the competitor, where the sales force only focuses on selling this one drug.
You can now revise your hypothesis further, stating that this indicates that the effectiveness of
interactions between the sales people and cardiovascular doctors is lower than for the
competitor.
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Commercial real estate
Buildbig Inc. is a commercial real estate development company in the United States, operating
mainly in the New York metropolitan area. The company has several branches throughout the
tri- state area but has most of its business in New York State. Buildbig is owned by the influential
Rockgate family and has been in business for decades. The company engages in land
acquisition and commercial property development and construction.
1) The management team recently made some rather unsuccessful investments in an attempt to
grow Buildbig’s business. The CEO is asking you for advice on their future growth strategy. How
would you approach the request made by the Buildbig CEO?
2) In order to be less vulnerable to the market forces, the CEO would like to know what her
options are. What would be potential ways to achieve this?
AnswerGeneral Assuption:
● The company’s previous investments were heavily influenced by changes in the market
place.
● Buildbig is still in the same position vs. its competitors as it always was.
● The customer base has not changed much.
● Internal capabilities are excellent for the commercial building market
Approach:
This case tests your ability to think about abstract strategic problems. For the first question, you
should have understanding that this is a market expansion problem and explore the market
dynamics:
●
●
●
●
Market: current size, growth, relative growth in comparison to other U.S. States / other
markets / GDP, market stability, market regulation.
Competition: who are the competitors, how big are they relative to Buildbig, how strong
is competition, are there new entrants, what is their relative growth.
Customers: who are the customers of Buildbig, have there been any changes in
customer composition and size of the customer base.
Capabilities: what is Buildbig good at, what are their key strengths relative to other
builders: e.g. relationships, sales & marketing, production, finance, supplier
management, etc.
For the best possible solution we can consider above points. But since the real estate market is
very sensitive to the market forces, market size and growth is a good start.
2) For the second question, the options are to:
●
●
●
●
Expand in current market space.
Expand to adjacent geographical market.
Expand to adjacent segments / product area.
Any combination of the above.
For the best possible solution we can consider an assessment of what the most interesting
options are based on real current developments, and why it is more attractive than the other.
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Q. Davinder is a class 12th commerce student in a reputed school in Punjab. Satinder and his
elder brother who is doing his Masters in Hospital Administration from Delhi after completing his
B.Sc course. During vacations when Satinder comes home, Davinder shows him the business
studies project that he is preparing on the topic “Principles of management”. Satinder tells him
that these principles are also a part of the MBA course curriculum at the beginner’s level as they
form the core of management in practice. But he finds these principles are different from those
of pure science. In context of the above case:
a. Outline the concept of principles of management.
b. Why does Satinder find the principles of management different from those of pure science?
c. Why do the principles of management form the core of management in practice? Explain by
giving any two points highlighting the importance of principles of management.
Answer(a) The principles of management serve as a broad and general guideline for the managerial
decision making and action.
(b) Satinder finds the principles of management different from those of pure science because
the management principles are not as rigid as principles of pure science. This is due to the fact
that they deal with the human behaviour and thus, need to be applied creatively in the light of
the given situation.
(c) The importance of principles of management are described below:
(i) Providing managers with useful insights into reality.
(ii) Optimum utilization of resources and effective administration.
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Concrete manufacturer
Your client, a concrete manufacturer is considering acquiring a small local firm. What factors
should be considered? After considering these factors, would you recommend the acquisition?
AnswerGeneral information given along with questionMargins:
● The target firm is currently profitable, with margins of 5%.
● Your client’s margin is 15%.
● Your client attributes its higher profit margin to economies of scale in trucking and
mixing, and a stable labor force.
Market:
● Both companies compete in the geographical market, the South- eastern U.S.
● Your client’s customers are large construction firms and contractors generally in the
office and commercial building construction business.
● The smaller firm sells mainly to other small businesses and contractors. (Swimming pool
installation firms, patio builders, etc.)
● Additional research shows that the smaller customers for concrete are growing, while the
major office building construction market is stagnant.
● The smaller firm has strong contacts with many local customers, and is often the
preferred supplier due to their customer responsiveness.
Financing:
● Your client is not able to fund the acquisition internally, but could obtain bank financing at
a rate of 10%.
● Similar acquisitions generally are made for two to three times current sales of the target
firm.
Approach:
This is a two-phased question:
1) What factors should the client consider?
Here, you should use an M&A framework to structure your response. There are many ways to
do this, but here is one example: When considering the acquisition, the client needs to consider
factors in four areas: strategic factors, financial factors, industry environment, and cultural
feasibility: Firstly, clarify the strategic effects of the acquisition: Does it improve market position,
Provide growth opportunities, Improve sales / distribution, Gain new talent or technology?
Secondly, consider financial and operational factors: Target's size and revenues Target's
profitability Target's mix of products and customers Financing options and cost of capital Thirdly,
assess the industry environment: Is the market growing or shrinking? Is the industry fragmented
or consolidated? Any changes occurring? Where is the negotiating power? Do suppliers,
buyers, or substitute products have power? What drives revenue and profitability growth of
firms? Lastly, evaluate the cultural aspect of an acquisition: Would the target be receptive to an
acquisition? What risks need to be considered? I.e. legal, political, cultural? Has the client
integrated companies like this successfully before? Is integration realistic? As you go through
this, the interviewer should provide you with the information provided below the question, which
you can then use to answer the second question.
2) Would you recommend the acquisition?
From a financial point of view, the acquisition is not attractive if there are no synergies between
the firms. With profit margins of only 5%, the income generated by the smaller firm will not cover
the capital charges (interest due to the bank) on the acquisition price. (Acquisition price = 3 x
sales. Interest on this amount will be 10% x 3 x sales, or 30% of annual sales. Profits are only
5% of sales. This analysis, of course, ignores the tax shields.) However, if your client were able
to use some of its competitive advantages to improve the financial outlook of the target firm, the
acquisition would be advisable. It is reasonable to expect that synergies would arise from
economies of scale in trucking and mixing, which could raise the profit level of the target firm,
and make the acquisition more attractive.
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Golf balls
You are visiting a client who sells golf balls in the United States. Having had no time to do
background research, you sit on the plane wondering what is the annual market size for golf
balls in the U.S. and what factors drive demand. Your plane lands in fifteen minutes. How do
you go about answering these questions?
AnswerApproach:
When solving an estimation question like this, break it down into an appropriately detailed
framework.
In the following framework and solution: The total number of golf balls sold can be broken down
into the total number of players, times the number of balls used per player per year:
# of golf balls = (# of golf players) X (# of balls used per player per year).
Let's begin with the first part of this equation. The US-population is 350 million. Let's assume
that those between the ages of 20 and 70 are potential players, or about 2/3 of the population.
Potential players then, are 230 million. Of these, let's assume that one in ten plays golf regularly,
so 23 million regular players.
Now for the second part of the equation. Let's assume that a regular player plays 18 holes two
times per week, or 36 holes. If one ball is lost or damaged every 10 holes, the player needs
approximately 4 balls per week, or 200 balls per year.
Multiplying 23 million players with 200 balls per year gives us 4.6 billion golf balls sold annually
in the United States.
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Paint
Your client is the CEO of a paint manufacturing company. One McKinsey team has previously
worked on optimizing their cost structure. The CEO wants to further improve their profitability.
How would you analyze the situation?
AnswerGeneral information given along with questionCustomers:
The customers are of 2 types: professionals (contractors) and private
consumers.
The customers are not very loyal.
They have multiple brands and have good basic quality paint.
Company:
● The total revenues are 1B.
● There are 3 sales channels as follows:
Company owned stores: 600M in sales. Focuses on contractors (professionals).
Consumer division: 300M in sales. Sold through mass merchandisers.
Independent dealers: 100M in sales. Sold to local mom & pop stores.
● The client maintains a separate set of warehouses to serve this channel.
● Return on sales is 5% for the company owned stores, 3% for the consumer division, and
1% for independent dealers
● The target for the firm is $80M.
Industry:
●
●
The industry growth rate is same as GDP growth.
Client has 30% market share.
●
2nd competitor has 35% market share. There are number of small regional and local
paint manufacturers as well which serve the rest of the market.
The competitors also have 3 distribution channels. There is no data on competitor’s
profitability.
●
ApproachStarting with the first step, we have been told that another team has already optimized the cost
structure, so the profitability framework may not be appropriate here. Instead, another way to
inspect the problem would be to use a strategic framework to understand the underlying
dynamics. One potential framework here would be the 3 C's (Company, Customers and
Competitors). Another one would be Porter's Five Forces.
Using the channel and return on sales (ROS) information, you can start by calculating the
current profitability:
600M * 5% + 300M * 3% + 100M * 1% = 40M.
Thus, the target of $80M would mean a doubling of the current profitability.
At this point, you should recognize that the company-owned store channel has the highest ROS
(return on sales). One recommendation then would be to focus on this segment. In contrast, the
independent dealer channel has the lowest ROS. The client needs to re-evaluate their strategy /
presence in that channel.
Another important point is that loyalty is an issue. One way to resolve this is to introduce
switching costs. One technique would be order automation by establishing web presence, which
will allow the contractors to quickly and easily re-order. Another would be an adjusted service or
delivery model to incentivize loyalty.
Thirdly, costs have been optimized, but revenues have not. The client should investigate
whether their sales force is effective in selling to the contractors, e.g. by assessing the sales
force compensation and commission structure. Another revenue area to inspect would be
pricing: perhaps higher prices, combined with better service or higher quality products, would
improve profitability for the company-owned stores channel. Contractors in particular may be
less price-sensitive, as they often charge their clients for material expenses.
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Aluminum cans
An aluminum can manufacturer has discovered a way to improve its manufacturing process. As
a result, its manufacturing cost has been reduced from $0.89 to $0.79 cents. How can the
manufacturer best exploit this cost advantage?
AnswerGeneral Assumption:
Market: The client is the leader in its market with a 40% share and supplies directly to major
beverage manufacturers. The number two player in the market has about 30% of the market
and many small competitors share the rest.
Substitutes: Aluminum cans have a lower priced substitute, steel cans, which have inferior
printing and stamping characteristics. Steel cans are used by customers who do not want to pay
the premium for aluminum cans.
Approach:
Here, the firm can either use the new improvement to implement a penetration strategy or a
price skimming strategy. Consider the impact of either strategy on the company and its
competitors. Also, don’t forget to think about any substitutes for aluminum cans.
Clearly, the client should either drop price or reap additional profits. If the client drops prices,
other competitors will have to follow since this is a commodity market and not following would
mean a quick demise. The lowering of prices might increase the client’s market share
marginally, but some smaller competitors will have to start exiting the industry and larger
competitors will have to start investing to discover the client’s cost advantage.
At the same time, steel can users will start switching to aluminum cans, thus hurting
manufacturers in that market. The resulting growth in the aluminum can market will attract steel
can manufacturers to enter it. Since some steel can manufacturers have deep pockets and a
strong backing, these new entrants could pose a future threat to our client.
In conclusion, it is best to retain prices and generate extra profits for now. The cost advantage
may help another day during a price war.
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Chicken vitamins
Your client is a US-based chicken vitamin manufacturer. The vitamin helps increase the size of
chicken breast and reduce fat content. Should they enter China?
AnswerGeneral information given along with questionChicken Industry in China:
● Chinese chicken industry is twice as large as US in terms of amount of chicken
consumed. Growth trends are similar to those of US.
Customers:
● The customers in US consist primarily of large corporate farmers e.g. Tyson, Purdue.
The customers in China can be segmented into 3 categories:
Firms Resources:
● Magnesium is an important ingredient used to manufacture the vitamins.
● The firm has one mine in Florida which is operating at max capacity. There are mines in
other parts of the world, which have a cost structure as follows (includes transportation
of raw material to China) 1 in China - 38 cents/lb.
Note: These are prices if the client were to acquire the mines. Total costs for the rest of the
value chain in China (manufacturing, sales & marketing, and distribution) is 10 cents/lb
ApproachYou can use any common business framework to uncover the information you require for this
case. When you have done so, the solution is straightforward:
You can begin by drawing a basic value chain for the vitamin manufacturing/distribution process.
Raw Material -> Manufacture vitamin -> Sales and Marketing -> Distribution
For the raw material, choose the mine in Africa, as it has the lowest costs. Adding 10 cents to
the price of raw material yields 45 cents/lb. as total cost for the vitamins in China. You can now
make a recommendation. The client should enter China for the following reasons:
●
●
●
The corporate market is growing rapidly (80% in 5 years). The corporate farms are more
likely to use vitamins than the small family farms.
The client should acquire the mine in Africa
Total costs are 2 cents lower than the substitute product, and there is no significant
competition.
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Cure for headaches
Your firm just discovered a breakthrough formula for common headaches. What would you do to
achieve more success over this formula?
AnswerGeneral information given along with question●
●
●
●
●
You are the CEO of this firm and your firm is a large MNC (multinational corporation).
The product has passed the first round of in-company testing very successfully.
We are highly confident that it will be provide the masses instant relief from almost all
types of headaches.
This is a unique discovery, and no existing product comes close to it in terms of
effectiveness.
Almost the same answer to all other questions: “Please make a reasonable assumption.”
No tables and no graphs.
ApproachThis case is more open-ended than most, meaning that the specific solution is not what is being
tested. Instead, the main purpose here is to assess your ability to think and communicate in a
structured manner, make reasonable assumptions, and display your knowledge of frameworks
and tools.
You should start your solution by first outlining a high-level picture of what you will assess, which
is called "setting the scope" in consulting, and then prove the details of each section, making
assumptions and discussing your observations using various frameworks and tools.
One example of setting such a high-level outline is to explore:
● Company’s current status
● Impact of new discovery
● Feasibility of product’s market success
● Next steps for the firm
Having done something akin to the above, you should be able to proceed on the detailed
analysis by leveraging some frameworks like:
● Customer/Competitor/Company (three Cs) analysis
● Internal/ External elements
● Cost revenue and profitability,
● Porter's five forces, etc.
Make necessary assumptions like implications of FDA regulations, patent protection, clinical
testing success, and competitor response.
In summary, you need to provide a structure to the problem, flesh out issues with probing
analysis and produce a clear next-steps summary for the firm.
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Q. Postage stamps have been unveiled to commemorate 140 years of existence of the country’s
first stock exchange Bombay Stock Exchange (BSE). The setting up of BSE is considered to be
the greatest revolution that took place in the financial markets in India as it acts as a key driver
for economic growth of a country. This is due to the fact that there exists a strong correlation
between economic growth and capital accumulation.
a) Identify the dimension of business environment of India being referred here.
b) State any three factors which broadly affect the dimension of business environment of
India as identified in part (a) of the question.
Answera) Economic environment is the dimension of the business environment of India being referred
to here. All the external economic factors that influence buying habits of consumers and
businesses and therefore affect the performance of a company.
b) The three factors which broadly affect the economic environment of India are stated below:
i) Stage of economic development of the country.
ii) The economic structure in the form of mixed economy which recognizes the role of both
public and private sectors.
iii) Economic planning, including five year plans, annual budgets and so on.
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Water purifier
A leading global consumer goods company has come up with a new product for cleaning water
to make it fit for drinking. The product is a sachet which contains a powder. The powder is
poured into a bucket of water and stirred for 20 minutes. At the end of the process, the silt/dirt
that was in the water will settle at the bottom of the bucket and the bacteria in the water will
have been cleaned/neutralized. On pouring, the recipient gets World Health Organization
certified drinking water. The company has launched this product with varying rates of success in
many developing countries and now they want to enter India.
Your first task is to make a rough estimate of the market size for the product. We know that 1
sachet can be used to clean 10 liters of water.
Answer-
Approach:
Tip: In such type of questions we should drive the estimation step by-step, talking the
interviewer through each of your steps and asking the interviewer for information where you
need it. If you are uncertain about any of the numbers you are estimating, then validate the
number and the assumptions you based it on with the interviewer.
The solution: You should acknowledge that, given the product can be used to purify 10 liters of
water, it will most likely be purchased by households.
1) estimating the likely market size (in number of households)
2) calculating the average consumption per household (sachets per annum).
Analysis-
1) Number of households Population of India = 1 billion people Assume an average 5
people in a household (Indian families are generally bigger than Western families) Total
number of households = 200 million.
A sensible hypothesis is that the product will probably be used by households which do
not already have access to clean drinking water through basic stateowned infrastructure.
These will most likely be households in non-urban areas. The product will be used by
households who do not have the disposable income to purchase easier, less time
intensive, alternative sources of purifying water, e.g. filters, bottled water, etc. These will,
therefore, be the lower income households. Given India is a developing country it is fair
to assume that a larger percentage of the population will be in non-urban areas.
You can use general knowledge of UK (a developed country) where the urban/rural split is
probably 70/30. Hence, in India it might be fair to assume that the split is the reverse –
Urban/Rural = 30/70. Based on this hypothesis, your initial market consists of the rural
households = 70% * 200 million = 140 million Based on your income hypothesis, estimate the
income division in the rural areas. Given that the Indian rural economy is mostly
agriculture-based and from your knowledge of the high poverty in India, it is also fair to assume
that the split between high/low income in rural India is 30/70. Based on this assumption the
initial market size estimate can be improved to 70% * 140 million = 98 million ~ 100 million.
Hence, you can say that the market for this product will consist of 100 million households in
India. Further refinement might include splitting the regions between urban (major cities),
semi-urban (towns and the poorer outskirts of major cities), and rural areas (villages), and make
their market size estimations on this basis.
Note: You should realize that though there is no proper drinking water infrastructure in villages,
water from the wells or rivers is probably cleaner than the stagnant water from the tanks in
towns and the outskirts of major cities and that, therefore, in rural areas it is probably fair to
assume that perhaps a quarter of the households are happy with, and healthy on, their current
water source. The next step is for you to calculate the drinking water consumed per household
and, hence, the number of sachets used per annum:
2) Consumption per household Assume that 1 household consumes 10 liters of water per
day based on fact that 1 person consumes 2 liters per day Estimation given that in the
West we are advised to drink 1.5 liters of water per day for healthy living, and India is in
general a hot country Given that 1 sachet can clean 10 liters of water, 1 household uses
1 sachet per day. Note: Other factors that you might want to consider are that the
drinking water consumption will vary with age of members in a household and on the
geographical location of the regions (hot/colder). In general, though, it is fair to mention
these points but then take average values. Note: It is vital for this type of “back of the
envelope” estimation not to overcomplicate the approach. Keep it simple, then add
comments about possible further refinements you might want to consider.
Conclusion This gives a total of 100 million sachets per day, or 36.5 billion sachets per year. You
should summarize that the target market will consist of people who live in semi-rural and rural
areas, and have low income such that they cannot buy the expensive substitutes for the
product.
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Water purifier,
Continued Question- This case is a continuation of the previous case, with two new tasks:
1) Having estimated the market size, your next task is to understand the revenues and costs
associated with the product. From the company's experience of launching in other developing
countries, the average price for the product has been 6.2 US cents. How do you think the
product should be priced in India?
2) Also, let's look at the costs of the product. From experience of launching in other countries,
the firm knows that the fixed cost of setting up a new manufacturing plant/machinery is 100
million dollars, the variable manufacturing cost is 3.5 cents per sachet, and the other variable
costs are 20% of the variable manufacturing costs. What do you think the other variable costs
are (i.e., the 20%), and how many sachets does the company need to produce to break even?
Answer1) Pricing in India:
You should use the information discussed in previous questions to come up with a pricing
strategy. Price can be determined on a number of different bases, some of which are better than
others:
●
●
●
Cost plus – cost of the product plus a margin.
Price of direct/indirect substitutes – you should note that all the direct and indirect
substitutes discussed before provide different benefits and therefore a different ‘value
proposition’ to the customer. You should assume that the company’s aim is to maximize
their profit, but that to obtain sizeable market share they need to be priced below the
closest, cheapest substitute, i.e., bottled water.
Customers' willingness to pay – this can be determined either by primary market
research, or by creative means of estimating the percentage of a typical household’s
disposable income spent on bottled water, or even the health bill related to waterborne
diseases.
The price for the company’s product should, therefore, be such that it covers the product cost
but is less than the price of the closest indirect substitute, i.e. bottled water. Note that purely
using cost-plus pricing will not work as is takes no account of competitors’ pricing or customers’
ability or willingness to pay. However, it is worth mentioning it as an option and any product price
does need to pitched above the product cost if the company is going to make a profit.
Given that India is quite representative of other developing countries, we can probably use the
average price charged in other countries, as long as that meets the criteria we have mentioned
above. Hence, it is fair to recommend that the company set a price of 6.2 US cents for their
sachet in India.
2) Cost analysis:
You should review the value chain post-manufacturing and identify other variable costs. Once
the product has been manufactured and packed (assume manufacturing costs includes
packaging), then you have to transport the packaged goods from the warehouses to the
distribution outlets. In addition to the transportation costs, you will have the sales effort of getting
the distributors and the commission paid to the distributors. Hence, to summarize the other
variable costs will be:
●
●
●
Transportation
Sales
Commission to distributors
Moving onto the calculation, you should first calculate the total variable costs:
VC = 3.5 + 0.2 * 3.5 = 4.2 cents
FC = 100 million
To break even, Price * Quantity = FC + VC * Quantity
Quantity = 100 million dollars / (6.2 – 4.2) cents = 5 billion sachets.
Hence, the company needs approximately 1/7th (5/36.5) of the market to break even.
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Pharma growth
Your client is a highly profitable pharmaceutical company that has a world leading position in
one therapy area (TA) and is a niche player in a non- related therapy area. The company
currently has annual sales growth of 8%, but the CEO has set a target annual growth rate of 1215% – in other words s/he wants to triple their revenue over next 10 years. However, their
research project pipeline is thin. The research-and- development organization is heavily
under-spending compared to their budget (they have a budget target of around 16% of revenue,
but are not using all the money allocated). Senior management has little insight in how the R&D
department operates.
Q. What is the client’s key issue/problem?
AnswerNotes:
● This is an open-ended question to test if you have taken in the information given.
● It is important to realize from the information that revenue is the concern, not profit.
Prescription drugs are a highly regulated area and that regulation is in place to ensure
that successful product launches typically generate the desired profit margins, without
exploiting customers.
ApproachThe client’s issue is that while they are growing at what sounds like a reasonable rate, they are
not meeting the annual revenue growth targets that the CEO has set.
They also have a significant problem in their R&D department. As the pharmaceutical industry is
very R&D driven (i.e., R&D is necessary to develop new products and there is usually a
significant time lag from initial research to product launch), strong R&D is necessary to produce
strong revenue growth. The research pipeline is thin and because R&D is under spending it
looks like the pipeline will remain thin, unless changes are made in that department.
In addition, senior management do not have a good understanding of the R&D department,
which means that they probably do not understand the underlying drivers of the thin pipeline &
the under-spending. I would hypothesize from what you’ve already told me that the problem in
R&D (whatever that problem is) is largely responsible for the lower than desired revenue growth.
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French fries
The owner of McDonald’s wants to check its production growth specific in Fries Industry for
which we wants to know how many individual french fries does McDonald’s sell in the U.S. each
year?
This is an estimation case. Previously, we have mostly used population/household estimates for
these types of questions. However, in this solution, we will estimate the number from the seller's
perspective instead of a demographic approach. Often, both approaches can be used, and it is
up to you to decide which one is more appropriate.
We first factor the estimate down to components which are easier to estimate:
# of fries sold per year = (# McDonald's restaurants in the US) x (# fries sold per restaurant per
year)
Let's begin with the # of restaurants.
This can also be decomposed: # of restaurants = (average # per city) x (# cities in the US)
On an average US might have around 10 restaurants on overall basis. Larger cities can have
much more, but smaller cities are more numerous and usually have fewer. For the cities, I will
assume that half of the US population lives in cities, and that the average population is 150-200
thousand. Again, small cities are much more common than large ones, which is the reason for
my estimate.
This gives me an estimate of (350M/2)/175k = 1000 cities So, I estimate 10,000 restaurants in
total. Now I will estimate the
# of fries per restaurant. I factor the estimate down to be able to make some quick assumptions:
# of fries per restaurant per year = # of registers (assumption: 4)
* # of hours open per day (assumption: 8)
* servings of fries sold per register per hour (assumption: 6)
* # of fries per serving (assumption: 50)
* # of days open per year (assumption: 360)
EstimateTotal number of fries=
4 registers X 8 hours per day X 6 servings per hour X 50 fries per serving X 360 days per year X
10k restaurants
4 x 8 = 32
32 x 6 = 192 ≈ 200
200 x 50 = 10k
10k x 360 = 3.6M
3.6M x 10k = 36 billion fries sold per year.
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Coffee shop
A friend asked me if I wanted to buy his coffee shop for $100,000. Do you think I should do it?
Information given by interviewer if asked: 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 The
candidate can assume that the coffee shop will bring in consistent profits over time
Answer-
This is a valuation question. So, to get the value of the coffee shop, you first need to calculate
the profitability.
Revenues Begin by estimating the market size. The assumptions below are just an example,
any reasonable assumptions would do. 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 20×4 + 10×8 = 160 customers/day. If we assume
all the hours as busy hours on Saturday, then we have 20×12=240 hours on Saturday.
Number of customers / week = 160 x 5 + 240 x 1 = 1040
Number of customers / year = 1040 x 50 = 50200
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 indefinitely and we use a 10%
WACC, then its value would be: Value = 31,500 / 10% = $315,000
[This formula is for the present value of a perpetuity. If you are unfamiliar with this formula, read
about it so you understand and remember it, as it is commonly used.]
Conclusion: The present value of cash flows is three times the asking price. So, as long as the
profits would be consistent for the foreseeable future, it would be profitable to buy the coffee
shop.
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Dress shirts
Our client is a large department store chain. The CEO knows that men’s dress shirts are much
less profitable than the rest of his product lines. He believes that if they were evaluated on a
fully loaded basis that they would in fact be unprofitable. He is considering taking action to
correct this problem. What would you want to know to determine whether or not the CEO is
correct? What corrective action would you recommend?
AnswerGeneral information given along with question●
●
●
●
●
SG&A includes floor sales staff costs as well as promotional and advertising costs.
Operating Cost mainly comprises cost of maintaining and stocking inventory.
The store can be thought of as similar to Nordstrom’s or Macy’s.
The phrase “fully loaded” means “including all costs associated with the product”.
The table below will be shared all at once when some information in it is requested.
Approach-
Your main goal in this case is to logically allocate costs and then determine the appropriate
action. Essentially, it is a cost accounting problem. You are given a good deal of leeway to
provide logical arguments for your allocations and suggested actions. Below is an example
solution.
Operating Costs.
Interpolating from the department as a whole would allocate $400 * 1/5 = $60. However, an
adjustment could be made based on the inventory numbers, which presumably cause this cost
item. For the dress shirts, inventory as % of sales is 15% as opposed to 20% for the
department. Thus, we allocate $60 * 15% / 20% = $45 to the dress shirts.
SG&A.
Here we will assume that marketing and promotional costs are a significant item. A potential
argument here is that shirts are promoted less than other items. Possibly, they are not “features”
in ads (usually suits and shoes instead), so a partial allocation could be appropriate here as
well.
Additionally, we see that dress shirts take up less space per dollar of revenue in the store than
the department as a whole (250 sq. ft. per $1000 for dress shirts vs. 1500 * 1/5 = 300 sq. ft. per
$1000 for the department). This also leads us to conclude that SG&A allocation should be lower.
Instead of allocating $300 * 1/5 = $80, we will allocate half of that, or $40, to dress shirts.
ConclusionRunning the numbers after these allocations, we have a gross profit of $1,000 * 25% = $250.
Subtracting both cost items yields $250 - $45 - $40 = $165, or a 16.5% net margin. For the
department as a whole, the net profit is $5,000 * 35% - $300 - $400 = $1750 - $700 = $1050, or
a 21% net margin.
Thus, the dress shirts, while less profitable than the department as a whole, are still profitable
for the retailer. Additionally, dress shirts play an important role in the value proposition for a
men's department store. They can be considered a necessity purchase that drives traffic and
thus sales of complementary items, such as suits, t-shirts, and ties.
The CEO should perhaps reassess.
Nevertheless, there are still potential opportunities to explore in order to improve the profitability
of the dress shirts. This includes adding private label brands, changing vendors, increasing or
decreasing the scale of offering, promoting more or less, or adjusting pricing.
*************************************************************************************************************
Maldovian coffins
Our client is a coffin maker in the Eastern European country of Maldovia. Up until now, he has
been in the business of building high-quality, hand-crafted coffins largely by hand with a skilled
labor force. Recently, he has seen a substantial change in his market in recent years and is
contemplating the future of his business. What are his strategic alternatives, and which one
should he choose?
AnswerGeneral information given along with questionValue of business:
● Market size
● Population of Maldovia: 4M
● Population Growth: 0%
● Average Life Expectancy: 75 years
● Age Distribution: assume a flat age distribution (i.e. same number of people at every
age)
● Burial Customs: 75% of deaths are buried in coffins
● Price: Coffins are priced at $5,000 for a hand-made coffin.
● Costs: Material accounts for 10% of the direct cost, while laboraccounts 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.: Assume that the market is expected to continue as it
currently is.
Value of assets:
●
●
●
●
●
Fixed 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.
Book value (i.e. original purchase price) of Land: $20,000
Book Value of Improvements: $80,000
Years Owned: 48
Avg. Real Estate Appreciation: 6% / year
ApproachYour answer should begin by outlining all three possibilities for the manufacturer:
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.
The question revolves around deciding which of these three options would be most profitable for
the owner. You should also realize that options 1 and 3 are the same, the value of the business,
if sold, should be the same as the value of the business if the owner keeps on operating it. Let's
begin by exploring options 1 and 3. Ask for the relevant information you need, which should
result in you having what is provided above.
For the market size, you should quickly realize that every year, 1/75th of the population will turn
76 and therefore (on average) will die. So the total market size is 4M * 1/75 * 3/4 = 40k coffins
per year.
For the profits, the company has a contribution margin of $200 per coffin, and sells 40k * 10% =
4k coffins per year. Thus, gross profits are $800k per year. Subtracting fixed costs, annual
profits are $100k.
Assuming a discount rate of 10% and perpetual cash flows, the value of the business is $100k /
10% = $1M, regardless of if the owner sells or keeps on operating.
Now explore option 2. Ask for the value of all of the company's assets, and use the information
provided to value them:
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 the most sense to liquidate the business and sell the assets.
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Soft drink six-packs
Your client is a major soft drink company. They have been approached by their bottling company
with a proposal to change how six packs will be packaged. Instead of using the standard
cardboard boxes that hold individual six packs, the bottling company would like to use a plastic
device that holds the six pack together by clinging to the top of each can. Is this a good idea?
Answer-
First, divide the potential impact of the change into three areas: cost, revenue/marketing and
competitive considerations. This will give you an overall picture of required analysis.
●
Manufacturing cost:
Consider what fixed cost investment, or increased variable costs the bottling company
will charge to make this switch. Cardboard is probably more expensive than plastic.
Analysing the supplier power for these two materials. How will the fixed cost investment
in plastic production be passed on to our client?
All issues that should be considered.
●
Marketing/revenue impact:
Consider who our client’s customers are (grocery stores, 7-Elevens, etc.), and what they
want. Does the plastic make it easier for them to stock their shelves, or is the standard
cardboard better for stacking. What does the customers prefer plastic or cardboard?
Propose some market research, and try to determine whether switching will affect the
price you can charge per six-pack or the volume of six packs you will sell. As indeed this
all thingsare indirectly affect the final analysis.
●
Competitive considerations:
Is our client a market leader, or a market follower? This move gives us a strategic
competitive advantage or is it necessary to just keep up, or is not necessary at all?
On all this key points we can develop an strong opinion. Weather it is an good idea or not.
*************************************************************************************************************
Q. Understanding of the environment by business managers enables them not only to identify
and evaluate, but also to react to the forces external to their firm. In light of the statement,
explain by giving any five points why in the present day competitive market, it is essential for a
business enterprise to remain alert and aware of its environment.
AnswerImportance of business environment:
● Identify opportunities and get first mover advantage: Early identification of opportunities
help the firm to be the first to exploit them instead of losing them to competitors.
● Identify threats and early warning signals: Environmental awareness can help managers
to identify various threats on time and serve as an early warning signal.
● Tap useful resources: A business firm assembles various resources called inputs like
finance, machines, raw materials, power and water, labor, etc. from its environment.
● Assist in planning and policy formulation: Since business environment provides both
opportunities and threats for the firm, its understanding and analysis can be the basis for
planning and policy formulation.
● Helps in coping with rapid changes: Managers must understand and examine the
environment and develop suitable courses of action to cope with rapid change in
business environment.
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Hepatitis C
A hospital is your client. They conduct Hepatitis C testing for the local community. The hospital
has the following testing information: In the current population, 10% have Hepatitis C and 90%
don't have it Test result probabilities are the following:
If a test result is positive, what is the probability that the patient actually has Hepatitis C? And
can doctors do anything to increase this certainty?
AnswerIn this situation we can use Bayes' Theorem for the best possible solution. Draw up a tree with
the probabilities, which allows you to calculate the answer using simple multiplication and
division:
Using the calculated numbers on the right-hand side, you can now find the answer. The
probability of having Hepatitis C, given a positive test result, is 9% / (9% + 36%) = 20%
For the second question, you are expected to come up with different alternatives and discuss
their merit. Examples include:
●
●
●
Run multiple tests. This would improve the certainty but would probably be expensive
Look for other related symptoms. The doctor could perform a physical if the results are
positive, before disclosing the result. This would increase the certainty, likely at a lower
cost.
Take a complete medical history. By inspecting the patient's family history and
environmental risk factors, their risk of contracting Hepatitis C could be assessed more
accurately, also increasing the certainty.
*************************************************************************************************************
Diapers
Pampers is an diaper making company. They want to increase their market area in whole
America for which they have to estimate the size of the disposable diaper market. How will you
do it?
ApproachAs with other market sizing questions, there are many ways to reach an estimate. The important
thing is to use reasonable assumptions, talk through the solution logically, and strike the right
balance between detail and rough estimations. Here is an example solution which assumes that
the interviewer does not want to spend too much time on this question.
First, I will assume that there are 350 million Americans. I’m going to further assume that the
average life expectancy of an American is 80 years. I’m also going to assume that there are
even numbers of people in each age group. And that there are exactly same numbers of
8-year-olds as 68-year-olds.
You divide 350 million by 80 and you get about 4.4 million people per age group. Children wear
diapers from ago zero to 3 so that’s 13.2 million kids wearing diapers. So, we’ll round it off to 13
million kids. You said disposable diapers. So, I’ll estimate that 90 percent of children wear
disposable diapers, as they are more convenient for parents than reusable ones. So now we’re
talking 12 million children wearing 5 diapers a day. That’s 60 million diapers a day times 365
equals approximately 22 billion diapers a year.
*************************************************************************************************************
Airline manufacturing
In the 1970’s, Lockheed Martin manufactured L-1011 wide-body aircraft for commercial airlines.
The industry was very cyclical with swings in demand occurring a frequently as every 6 months
(see chart below). During the down months, the Lockheed would have to lay off employees and
shutter the plants, which created turmoil for the company and the local community. Jet aircraft
were normally built to the order specification of the purchasing airline. To alleviate the costs of
cyclical swings, Lockheed considered building aircraft to a predetermined schedule based on
average expected aircraft sales over the next five years.
{ It is graph between number of aircrafts build v/s Years. The curve show actual number of
aircrafts build, straight line shows average expected need}
Do you think this is a good idea? What are the pros and cons of pursuing such a plan?
AnswerHere we shall identify the cost drivers and risks and arrives at an educated guess of the right
answer. Let’s look at some of the costs and how they would be impacted by a build to schedule
plan:
Inventory or Working Capital Holding Costs:
This could be huge under a build schedule. If demand is not as predicted or the market heads
into a cyclical dip, Lockheed could end holding a lot of very expensive (tens of millions of
dollars) of inventory that just sits on the books. At a 6-8% risk-free rate of return, the inventory
holding costs of such expensive assets would add up rapidly.
Labor Costs:
Labor would probably be cheaper under a build schedule. The company could avoid costly
retraining and rehiring of its workforce after the layoff. Additionally, the company would have to
pay fewer severance costs due to fewer layoffs. With a more guaranteed production schedule,
the company may be able to extract wage concessions from its unions. But, such savings would
evaporate if the company were to busily build new aircraft that the market doesn’t want.
Technological Obsolescence:
With build to schedule, you run the risk of building aircraft that aren’t demanded in the
marketplace because they are obsolete. Thus, if a competitor introduces a much better model at
the existing price points or a technology change renders current models as inefficient, Lockheed
would have to liquidate any existing inventory at fire-sale prices.
Forecasting:
A build to schedule plan for such costly goods requires a very accurate forecast of future
demand. Can demand really be forecasted with sufficient accuracy?
Rework Costs:
Airlines request specialized configurations of the aircraft to meet their particular needs. If the
company pursues build schedule, they would need to budget rework costs to change pre-built
models to the specifications of the purchasing airline. Or, if they only build aircraft partially, how
will they handle the production backlog of moving these partially completed aircraft through the
remaining production steps?
Fixed Production Equipment and Facilities:
In general, the fixed costs of production equipment and facilities should not change with a
change in production approach. Now, if the company amortizes equipment on a per unit basis
(vice yearly), then net income could be affected under the new plan. But, cash flows, the
important thing to look at when making business decisions, should not be affected.
Variable Materials Costs:
These include materials and components required for building the aircraft. Under a build to
schedule plan, Lockheed could probably negotiate lower costs from their suppliers since they
would be able to guarantee a steady stream of purchases.
Unused capacity:
Under build to schedule, you’re likely to have unused production capacity since you currently
carry sufficient capacity to meet cyclical demand surges. The analysis should carefully examine
the existing production assets to determine if savings could be realized through capacity
reduction.
After identifying the variables, the interview would expect you take a guess on the right answer
based on your assumptions. It turns out that build schedule approach is not viable for this
company because they cannot predict demand with sufficient accuracy and the capital holding
costs are too expensive.
*************************************************************************************************************
Q. With the abolition of licensing requirements a company has decided to enter into a new
industry and the government’s support is making the movements of goods easier. The company
has lost its foothold in the previous industry in which it was once a leader. All this happened
because of the opposition of a project which the company had undertaken in a village. The
villagers started to gather and the incidence caught the attention of media. There were protests
and the result was the closure of the plant. The biggest competitor of the company wanted to
ensure that they gain from this situation. They started their vigorous efforts to increase their
business output. This company knows that all the inputs are the resources from the outside
environment and they have to be converted into successful products. Five years back the
company used to make products which used to suit its production requirements. Now it has
decided to manufacture products according to the requirements of the potential customers. The
product can only reach customers in the best possible manner only if the company prepares
itself. For this the company invests a lot in its employees so that they can meet the best
standards of providing services which suit the customers. The revenue of the company can
decline in the next few years. The reason for this could be the different types of innovative
practices involved by various competitors in producing goods with the latest technology. For this
the company will have to prepare itself.
Which economic reform is highlighted in the initial lines of the above case? Which dimension of
business is affected here in the initial lines of the passage? Which importance of business
environment is highlighted here? Name three different types of impacts of government policy
changes on business and industry you can find here.
AnswerThe economic reform which is highlighted in the initial lines of the above case is Liberalisation.
With the abolition of licensing requirements, the company has decided to enter into a new
industry and the government’s support is making the movements of goods easier.
The dimension of business which is affected in the above lines is Political. There were protests
and the result was the closure of the plant.
The importance of business environment which is highlighted here is Tapping useful resources.
There were protests and the result was the closure of the plant.
Three different types of impacts of government policy changes on business and industry we can
find here are:
●
Market Orientation: Now it has decided to manufacture products according to the
requirements of the potential customers.
●
Need for developing human resource: For this the company invests a lot in its
employees so that they can meet the best standards of providing services which suit the
customers.
●
Rapidly changing technological environment: The reason for this could be the different
type of innovative practices involved by various competitors in producing goods with the
latest technology.
*************************************************************************************************************
Q. The internet has taken the whole world by surprise. The government has also been lenient in
giving the online companies a chance to flourish in the changing business scenario. Interneters
Online is an entrepreneurial initiative by a group of young engineers. The company has entered
in the domain of providing products online. Many new firms have also entered after seeing them
enter this mode of business and many of these firms are foreign in origin. The companies
dealing in online business know that in today’s world customer has many options. The customer
is no more dependent on a single company for the product he requires. This has empowered
the customer who has more choices and the result is a fragmented market. The firms selling
with monopoly in the market are the stories of the past. The products offered by the companies
are going through different types of technological changes. The companies are trying to give
variety of products which are technologically advanced. “Internetters Online” is a firm which is
right now selling 200 products online. Recently if tried to increase the number of products to be
sold by 15 but it realized that many of these products were not allowed by the government to be
sold in their territory.
Identify three impacts of government policy changes on Business and Industry highlighted in the
above case. Also identify the dimension of business environment highlighted above.
AnswerThe three impacts of government policy changes on Business and Industry highlighted above
are:
●
Increasing Competition: Many new firms have also entered after seeing them enter this
mode of business and many of these firms are foreign in origin.
●
More demanding customers: This has empowered the customer who has more choices
and the result is a fragmented market.
●
Rapidly changing technological environment: The companies are trying to give variety of
products which are technologically advanced.
●
The dimension of business environment which is highlighted above is Legal
environment: It realized that many of these products were not allowed by the
government to be sold in their territory.
*************************************************************************************************************
Eye drops
You have worked as a McKinsey associate for two years and have recently become an
engagement manager. As you complete your preparation for a progress review, a former client
calls you needing immediate help.
The client, a marketing vice-president of a major pharmaceutical firm, is working on a business
plan for a new revolutionary product. The client quickly explains that their researchers have
developed eye drops which completely eliminate nearsightedness in 60% of the cases (the
cases caused by eye strain rather than irregularly shaped eye lenses) if the drops are used
twice a day.
The client needs to complete his baseline business plan within an hour so that he can share it
with the management committee later that afternoon, but is having a difficult time with two parts
of the plan:
1) The client needs a directional estimate of the retail price they should set for the drops so
that he can complete the business plan. How would you help the client structure his
thinking on the price and what is your back-of-the envelope estimate on the price that he
should use?
2) The business plan is also missing a ballpark estimate of the market for the product.
Specifically, what dollar level of sales might he be able to expect per year in the long run
in the US market?
Answer1) Pricing
The client needs thoughtful pricing insights which provide him with a reference point to
choose a price estimate for the eye drops.
One rough cut pricing analysis would determine the market price for the product that is
being replaced…in this case, eyeglasses or contact lenses. For example, if eyeglasses
cost $120 and last on average 2 years, then a two-year supply of drops could be sold for
$120.
A more advanced analysis might determine that eyedrops are simple to use and
completely trouble-free so that they should replace the most expensive option including
all the costs associated with that option. For example, this may include $100 per year in
optometrist fees, $180 in contact lenses ($120 per pair plus on average each user loses
on lens in a year), and $25 in contact lens cleaning solutions and other supplies, for a
grand total of $305. Using this example, the retail price of the one-year supply of drops
should sell for $305.
The most advanced issue trees will include the fact that this new product is actually
much better than the alternatives, issues of dynamic pricing strategies (e.g. start high
and reduce over time to best understand elasticities), and pricing so that marginal
revenue equals marginal cost.
Considering these different possibilities, you end up recommending to the client to use
$200 per year as a price estimate. This seems like a good number to use to assess the
business case, given the different estimates of $120/2y and $305/y from two of the
approaches.
2) Market size
The client also asked you for a quick estimate which market size should be used.
Because you have already determined a reasonable price, you must now estimate the
number of yearly supplies that the client can expect to sell in the US. One possible
organizing structure (with estimates) is:
Estimate the number of people in the US: 350 million.
Estimate the percentage of (1) using corrective eyewear: 20%.
Estimate the percentage of (2) that are nearsighted: 70%.
Use the client’s figure for the percentage of (3) that can be helped: 60%.
Estimate the percentage of people that will adopt the new product: 50%.
Put it all together: (350 million)(.2)(.7)(.6)(.5) = 14.7 million people.
Multiply be the price per unit (14.7 million)($200 per unit) = $2.9 billion.
*************************************************************************************************************
Retail bank
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.
AnswerGeneral information given along with questionPricing: 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
salesperson 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:
Customers: 20-25% of customers purchase more than one product. 75- 80%% of customers
purchase only one product. They are segmented into 5 groups:
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.
ApproachAs before, first confirm with the interviewer that you understood the problem and the supplied
information correctly. Then, use an appropriate framework to ask the questions you need to
discover the available information (3Cs would be appropriate here, for example). Then proceed
to the analysis:
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-selling 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 cross-sell 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 crosssell 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.
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Gas retailing
For the past thirty years the national government has set the retail price of gasoline for cars.
Under a new market reform program, the government has decided to allow the gasoline
distribution companies to determine the retail price of gasoline for cars. The CEO of Iberia
Gasoline has hired us to advise her on an appropriate strategy for pricing in the country. What
would be your recommended price on the first day of deregulation and your ongoing pricing
strategy?
AnswerGeneral information given along with question-
Current Situation and Process● In a deregulated environment, firms have the capacity to change prices hourly at any
service station based on the pricing strategy.
● Currently gasoline sales have been growing 5% per annum as more people live in
suburbs and commute by car to work.
● Currently there are three companies that have 95% market share. Iberia Gasoline has
45% market share, whilst the remaining two firms have 25%.
ApproachAfter getting the information you need, you are supposed to demonstrate an understanding of
three key things: the revenue curve with regards to volumes, the impact of retailing on overall
profit growth, and the interrelations between gasoline sales, retailing and overall profits.
There are two key areas to consider.
Firstly, recognize that retail gross margins on gasoline range low around 5-6 %. With net
margins apt to be under small weitage of 2%, well below what most companies want to earn
therefore so price increases are in order. As a market leader, Iberia should clearly signal that
they want to raise prices. The firm should actively change prices to maximize yield on their
service stations as competitors change their prices. At this point the interviewer should provide
different volumes-price scenarios for interviewee to calculate profit- maximizing price (give the
above Table to the interviewee).
Secondly, the gross profits are the same across products. Iberia should explore if all segments
are equally price sensitive. Finally (for extra credit), firms are making most of their money in the
convenience stores so driving car volume through the station is key.
Summary solution would be as follows:
Margins on gasoline erode shareholder capital and should therefore be raised to provide
adequate returns. Competitors face the same costs and will follow suite. If we’re wrong we can
always lower prices and lose little. If we don’t take a price leadership then we may permanently
lose the chance to do so later. The upside of this strategy is high, whilst the downside risk is low.
*************************************************************************************************************
Consulting firm
You are the managing director of a large international consulting firm. Traditional strengths of
your firm have been solving strategy and organizational issues. Recently, you have noticed an
increasing number of your firm's proposals are being rejected because of a lack of information
technology expertise in your firm. So far, your firm's growth has been strong enough that
proposals lost have not hurt annual earnings. Nonetheless, you are becoming increasingly
concerned about the need to develop the firm's capabilities in information technology.
Q1: Assuming your concern is valid, what reasons will you provide to other partners about the
need to acquire information technology skills?
Q2: Assuming you are able to convince other partners of the importance of IT expertise, what
steps would you take to rapidly build IT capacity in this area?
Q3: What are the major risks in executing an IT capacity-expansion?
Answer1. Good answers focus on the value of IT to clients: discussion topics include the
increasing importance of information in business, strategic value of information and
information flows, importance of information systems for implementing new
organizational structures and management control systems. Better answers focus on the
costs of losing clients to competitors: discussions included the encroachment costs of
having clients talking with competitors about IT problems, risk of losing credibility with
clients by not being able to solve a problem.
2. Good answers will focus on various methods to build expertise: buying expertise by
acquiring another firm, by raiding IT practices of other firms for a few key consultants,
building capacity through recruitment of IT experts and training them to be consultants,
building capacity by training current consultants in IT practice skills, establishing a
strategic alliance with a IT boutique firm. Candidates should discuss the pros and cons
of each method proposed; impact on firm's current culture, cost to the firm, time needed
to build expertise, etc. Better answers will realize the importance of stimulating client
demand as capacity builds through seminars, articles strategic studies in IT areas, etc.
3. Good answers depend on the expansion methods discussed, but an important issue is
the loss of the firm's focus away from just strategy and organization. Better answers will
focus on the difficulty of implementation in IT; rapid technological changes in the IT
industry require significant ongoing training and development costs; new practice
cultures may be significantly different from current culture, especially if "external experts"
are brought into the organization.
*************************************************************************************************************
Q. In a company all recruiting, screening and training processes for data entry, etc. are done by
one officer only. Their competitor was attracting the most qualified employees. As a result this
company had to choose from candidates who have soft skills and less qualifications. On the
basis of above case answer the following questions:
i) What problem do you see company is facing?
ii) How can this problem be solved?
Answeri) This company has failed to recognise the human relation approach. This approach considers
human resources as most important factor. They are dependent on personnel officer for all the
activities whereas they have failed to recognise the importance of human resource
management.
ii) This problem can be solved by setting up a human resource management department which
performs following functions:
(a) Human Resource Planning. It means determining the number and type of personnel
required to fill the vacant job positions of an organization.
(b) Employing people, i.e., recruitment, selection and placement of personnel.
(c) Career growth, i.e., training and development of employees.
(d) Performance appraisal including feedback.
(e) Motivation by offering financial and non-financial incentives.
(f) Compensation or remuneration of employees keeping in mind their qualifications and other
factors.
(g) Providing social security and welfare of people.
(h) Review and audit of personnel profit and procedure.
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Home security
This is a broad, qualitative strategy case and was given in a very open and conversational
manner. No hard data was provided – instead, the interviewer asked the candidate to come up
with assumptions and estimates to drive the case forward. Therefore, there is no “right” answer,
but the candidate must be able to come up with reasonable assumptions and then follow them
logically to a conclusion. Verizon is the nation’s largest provider of local telephone services.
They are considering entering the home security market. Should they?
AnswerInformation gathering :
Use a strategic framework you are comfortable with, discussing the themes
which will affect your recommendation. Try to cover all of the following
Subjects:
Market Size:
As no info is provided, you need to assess the market size. A
sample calculation based on sample assumptions follows:
● Total Households in the US: 100M
● % Households Serviced by Verizon: 50%
● % Households That Can Afford Service: 50%
● Annual Subscription Price: $250
● Total Addressable Market: 100M x 50% x 50% x $250 = $6.25B
Cost Structure:
Discuss the fixed vs variable costs, and whether Verizon has an advantage over other players.
The business has the very little fixed cost beyond the infrastructure already installed in potential
customers’ homes (i.e. the existing phone wiring). Customer would need door/window/motion
sensors installed, which could be done by a third-party installer and billed to the customer at
cost + markup and owned by the customer.
Variable costs are also very small – essentially just the cost to maintain enough call center
operators to dispatch police when alarms are tripped. Verizon does not seem to have much or a
cost advantage over other players since they are all using the common carrier phone network.
Verizon might have some economies of scale in operating the call center, but this effect would
be slight.
Competition:
The market is composed of a large number of mom-and-pop alarm company operators. No firm
has over 5% market share overall, although there are some strong regional players.
Customer Segments:
We can reasonably divide the customer base into urban and suburban customers, having
different needs and different price sensitivities. Urban customers are likely to have lower
incomes but a high willingness to pay due to the increased crime rate of the city. Suburban
customers are likely to have a higher income but a lower perceived threat due to a lower
suburban crime rate. By first-degree price discrimination, it may be reasonable to charge the
suburban customers a higher price because they are presumably less price sensitive. We can
assume that 50% of customers are urban and 50% suburban.
Pricing: Areas to consider:
●
●
●
●
Insurance companies generally give breaks on homeowner’s insurance for having an
alarm. This will increase the EVA to the customer and can inform pricing.
What other services to homeowners pay for monthly? Cable, phone, DSL. How are the
values of these services perceived compared to the value of the alarm?
Pricing will need to be competitive with other market players.
The candidate might assume a net margin based on the competitive landscape and use
this with assumed market size to determine attractiveness rather than determining an
end-consumer price.
Marketing: Points to identify include:
Verizon has monthly customer contact with a large pool of potential alarm services customers
through its phone bills. Verizon already has brand loyalty for phone service, why not alarm
service? The sheer size of the company (and deep pockets) make it more able to achieve scale
economies in marketing and reach a broad audience.
Conclusion:
Having discussed the themes above, you then move on to making your recommendation: So,
should Verizon enter the home security market? Yes. Verizon possesses several small but
important competitive advantages for entering into this new market. It has economies of scale in
call center operations that will enable it to be highly cost-competitive in operating a security
network. It has an established brand that the consumer associates with reliability as well as with
networking and communications – the primary function of a home security system. More
importantly, Verizon already reaches 50M households every month through its phone services
bill that it could leverage to launch and market this new service. Also, the company has deep
pockets and the ability to advertise such a service far more effectively than the small, regional
competitors.
The size of the opportunity is large enough for Verizon to consider. Assuming a potential market
size of $6B in Verizon’s territory, even at only a 10% share, Verizon can add $600M in revenue.
Given the low-cost structure of this business and the high perceived value to the customer, this
is likely to be highly profitable revenue as well. With Verizon’s marketing clout and customer
reach, the company should be able to gain significant market share and become the national
leader in this space.
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Q. Human Care Ltd. Deals in medical equipment business. They import goods from Korea and
sell in domestic market. Recently the Korean company increased prices making goods
expensive. India being price sensitive market will not accept the increased price. The Director of
the company is thinking of options of importing goods from other countries like Thailand and
China. He is also thinking of purchasing goods from the existing supplier in Korea but without
packing so that it is cheaper. He will save freight charges. All this will reduce the total cost and
will enable him to make profits as before.
Mention what steps must be followed by Human Care to make sure that their objective of profit
maximization is achieved.
AnswerHuman Care Director must follow basic steps of planning process like:
I. Setting the objective. He must decide if he wishes to continue with same supplier or he can
afford to change the supplier and introduce a new brand all over again.
II. Developing premises. He must make specific assumptions and basis for evaluation.
III. Identify the alternative courses of action or alternative options for purchasing: Prices from
different suppliers from all three countries; various options of purchasing like packed
product or without packing; credit period offered; quality of product etc.
IV. Evaluate each option with proper calculations in terms of how much each option will cost
and what will be the comparative savings. He must also check the quality of products and
their acceptance in the domestic market. V. Select the best alternative and go ahead with
placing the order.
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Q. The sales manager of Sell Well Ltd. Visited a hospital to sell his company’s products. The
purchase manager of the hospital was keen to purchase the products in fact for all the branches
of his hospital across India but he asked the sales manager to give 30% discount. Though the
manager knew it was a big order and company would be able to make profits even after offering
30% discount but he could not offer prices better than the price he had been given by the sales
director. He tried to contact the director but he was unavailable. As a result the order could not
be finalized.
Identify and explain the limitations of planning the sales manager had to face while discussing
order with the prospective customer.
Answer1] Rigidity. The prices were fixed and there was no scope or authority given to the sales
manager to finalize the order.
2] Does not guarantee success. The prices were decided but with no scope of negotiations. In
the changing business environment, there is a possibility of competitors offering lesser prices. In
such cases if prices are non- negotiable there is a possibility of losing orders to competitors.
3] Reduces creativity and motivation to do things differently. The sales manager has no scope of
offering products to match customer’s needs or requirements. In the present scenario he will
simply visit customers and give prices, if the prices are acceptable to the customer the order will
be finalized otherwise the sales manager may not put in extra effort to convince or attract
customer to buy his products.
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Plants
Our client is one of three players in a commodity industry. There are six manufacturing plants
operating in this industry. Two belong to our client, two each belong to the other players. One of
our client’s plants is profitable, one is not. Both are operating at better than 80 percent capacity.
Of the other plants in the industry, all but one are profitable. What do you think our client might
do to increase profitability?
AnswerIn this mini-case, you are expected to demonstrate your ability to use microeconomic principles
to deliver a strategic recommendation. Below is the specific way through which you can do it.
Knowing what we know about commodity industries, we should suspect that unprofitable plants
mean too much manufacturing capacity.
We cannot control the other plants but we can control our own. I would want to study the
scenario of shutting down our unprofitable plant in conjunction with skimming our most profitable
customers and shifting them to the remaining plant. This should eliminate our cash sump while
raising the price of the commodity (lower supply and same demand now clear at a higher price).
Meanwhile, we can focus on the most profitable customers and, as an added bonus, we will
have a plant in mothballs as a credible threat against new entrants thinking of joining the fun at
a new, higher price.
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Health clubs
Our client runs a major chain of health clubs in the UK, alongside hotels and casinos (which are
not the focus of this case). The health clubs are large out of-town sports centers offering a gym,
Jacuzzi, swimming pool, etc. They are relatively expensive, about £30-40 per month for an
individual membership. As part of a broader strategy review, the client wants to know what they
should do with their leisure clubs division – should they sell it, rapidly build more clubs (if so,
what sort), or maybe acquire another player? Your specific task on this case is to look at the
market trends and assess competition in the leisure clubs industry. The first key question is –
what factors might you analyze to determine what is going to happen to demand for leisure
clubs? (In consulting terminology, we are looking at the ‘drivers’ of demand in the industry)
Answer●
Trends in society towards more or less participation in sport –
whilst more participation in sport generally may be positive for demand, increases in
popularity of sports not offered at health clubs may have a negative effect (e.g. people
may play football instead of going to the gym).
●
Trends in obesity - if the population is getting more obese, there are two possible
implications of this. One is that people are getting more obese because they are not
exercising (i.e. declining demand for leisure clubs). The alternative interpretation is that
an increasingly obese population will create demand for facilities to exercise more,
●
Trends in available leisure time and money.If people have more spare time, they are likely to use health clubs more.
●
National income / state of the economy – leisure clubs are likely to be a luxury good, for
which demand will decline if there is a recession.
●
Demographics – younger people are more likely to be members of gyms. Therefore, if
the population as a whole is getting older, demand for leisure clubs is likely to decline.
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Chemical sweetener
Your client manufactures a chemical sweetener used in beverages and other food products. The
chemical will come off patent in one year. You have been asked to predict what might happen to
the profitability of this product when the product comes off patent.
AnswerGeneral information given along with question-
Product● This is the only product of its kind, in terms of taste and safety (lack of harmful health
effects) as proven in lab tests.
● The companies feature the brand name of your client’s chemical on their product, and
consider it a sign of quality.
ApproachThis is a classic customer analysis problem. While most products that come off patent quickly
drop in price (e.g. pharmaceuticals), this product will be able to retain some of its premium due
to the strong brand name. Because the major two customers feature the chemical name on their
product, and because the chemical represents such a small portion of their total costs, they can
be expected to be willing to continue to pay the premium into the future. Therefore, the outlook
for the product is good even after the patent expires.
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Chewing gum
Let’s say there is an single chewing gum company who is dominant in the industry (having
around 80% of market value) in America. How would you estimate the size of the annual U.S.
chewing gum market of the company?
AnswerEstimate the number of people who chew gum: of the 300 million population,
15% are between the ages of 10 and 20, the heaviest users, for a total of 45 million.
Estimate that these people chew two packs per week, for annual sales of 4,500 million packs.
For the other users over age 20, (70% of the 300 million population, or 210 million) estimate a
usage rate of one half pack perweek, for a total of 5,250 million packs per year.
Total packs per year is 9,750 million, or approximately 10 billion.
So, 80% of 10 billion. I.e. 8 billion
To check for reasonableness, figure the dollar sales that these packs represent: at 25 cents per
pack, annual sales would be $2 billion.
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Gas plants
Your client is a gas manufacturer. Currently the client owns and operates its gas plants
nationwide. They have hired McKinsey to investigate whether they should enter into the
business of running 3rd party gas plants. How will you structure the analysis of this case?
Should the client enter or not enter into this business?
AnswerGeneral information given along with question●
●
●
●
●
●
The client manufactures hydrogen, oxygen etc.
The customers are other industrial goods companies which use gas for producing steel,
waste treatment etc.
The client has highest market share in the market (about 30%).
By being the largest producer of gas, the client has achieved the highest economies of
scale.
There are 3 other national firms that manufacture and provide gas.
Their market shares are smaller than that of our client.
ApproachThe client can create value by operating 3rd party gas plants by lowering the operational cost
somewhat. More importantly by minimizing the downtime of the gas plants they can add more
significant value. Therefore, based on the value proposition, the client should enter into this
business.
The client then needs to consider barriers to entry for other firms and implementation strategy.
Barriers to Entry:
The client’s capabilities are unique in the industry. They can sign exclusive long term contracts
with 3rd party clients to operate the gas plants. The client also needs to consider their pricing
very carefully.
Implementation:
Evaluate the capital investment of this market entry. Since the client’s infrastructure is well
established, the capital cost will be minimal. The client could offer to operate 3rd party gas
plants which are located reasonably close to their own plants. This would allow the client to go
up the learning curve while ensuring uninterrupted gas supply to the customers.
SummaryThe client should enter this market since there is value to be captured and the
capital investment is low.
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Corn feed
A corn feed company has eight manufacturing plants located in the Midwest. These plants
service the entire United States. Their plant in Ohio needs refurbishing. The company has four
possible options:
1. Refurbish the existing plant
2. Build a larger plant at the current location
3. Build a similar size plant at a new location
4. Build a larger plant at a new location
AnswerGeneral information given along with questionMarket: There are four main competitors; our plant is the second largest.
All four competitors have similar manufacturing processes and similar cost structure.
ApproachThere are two issues to this decision. The plant size and the plant location
should be considered separately.
1. Size of Plant
Corn feed is a commodity product. Pricing on the product is dependent on current corn prices as
opposed to the manufacturing process. The purposed largest plant will not have economies of
scales not currently present at the existing plant. Without increased economies of scale, there is
no reason to increase the size of the plant.
2. Location of Plant
Transportation cost and perishability are the main issues with location. Cost analysis of the
transportation cost of feed versus raw materials should be completed. This analysis should
include the % of spoilage for longer transportation of corn stock.
In summary, the current plant is located close to the cornfields and this is the
best location for the plant from the cost/benefit analysis. A larger plant
should not be built.
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Candy
Your company is a rather successful producer of candy. It originally started as a single product
line. The production process consists of two basic activities: manufacturing and packaging. The
firm has also expanded its salesthrough product line extensions. Management is concerned that
sales are growing but profits are not increasing at the same rate. What can your
company do?
AnswerGeneral information given along with questionRaw materials are commodities with cyclical prices which have fallen in recent years, but are
expected to swing up again. Labor and fixed capital costs per unit have increased compared to
ten years ago.
The company's controlling system still focuses on the manufacturing part of production and the
cost explosion occurs in packaging (the product line extension is primarily adding new types of
packaging) Controlling processes are focused on manufacturing, which is rather efficient
already, but not packaging, thus causing slack in labor and fixed capital. (small batch sizes, high
setup times) There are a number of other issues: concentration of retailers, trade brands,
retailers demand large introductory discounts for new products, high failure rate of new
products.
ApproachAfter learning about all the issues, i.e. by using the Profitability framework, you can suggest a
number of potential actions:
Reduce product variety if customers (retailers) are willing to accept the reduced selection
Reduce low margin trade brand production Explore opportunities for increased automation to
reduce labor costs Analyze utilization of tooling, equipment and factory floor space, to find
opportunities to reduce fixed costs Emphasize pull marketing, reduce introduction rate for new
products Introduce controlling/scheduling measures for packaging.
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Cola
RC Cola and Coca Cola both compete in the same industry. Their cost structures are vastly
different, however. Using Coca Cola as a benchmark, estimate the likely cost structure for RC
Cola. In other words what are the factors affecting the costs of RC Cola?
AnswerCost:
● RC Cola would be higher due to their lesser power in negotiating price breaks from
suppliers.
Distribution:
● RC is not distributed in as many outlets as Coca Cola. Therefore, the average truck
driver will be driving more miles and spending more time to deliver a truckload of RC that
the Coca Cola driver, who will have several stops within an immediate area.
● Also, the typical order size for RC Cola would be smaller, meaning that more stops
would have to be made. In the case of Coca Cola, it is conceivable that one truckload
may be delivered to just one customer.
Sales:
● Could be lower for RC, as there are fewer, but more loyal customers.
Marketing:
● Lower for RC Cola, as they are not a frequent advertiser like Coca Cola. Administration /
Overhead Lower for RC Cola, as they are more of a “one-product” company than is
Coca Cola
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Banking branch
How would you determine whether a location in New York City holds enough banking demand to
warrant opening a branch?
(Hint -Because this is a demand-oriented question, you should consider a marketing
framework, such as the 4 P’s.)
AnswerThe demographics of the area surrounding the prospective branch should be examined.
Population, business concentration, income levels, etc. should be compared with those of
historically successful branches. Competitor reactions could easily make this venture
unprofitable, so it is essential to anticipate them. These will depend on the importance of the
area to competitors (in terms of profit, share, etc.)
The client will have to match competitors’ incentives to customers and should estimate the cost
of doing so. The client must examine if the new branch would complement their existing
competence and strategy (retail or commercial, high growth or high profitability, etc.) and what
purpose it would serve. If the need focuses on deposits and withdrawals only, maybe a cash
machine would suffice.
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Calling centers
You have a have recently been assigned to a project with one of the nation’s super regional
banks. The bank is one of the top 10 largest retail banks in the country. Like most banks in its
class it has branches in 8 geographically contiguous states. Your client has recently concluded
that the old “local branch” way of business is no longer viable. Typically, this bank has
canvassed its territory with small freestanding branches; however, the new age of electronic
banking and commerce is changing all of that. They are considering replacing many branches
with Calling Centers. Calling Centers offer both live and phone automated services that may be
accessed by phone. The new Centers would offer virtually all of the services currently offered
through local branches plus some additional things. The question to you is: how would you go
about setting up the engagement to determine the viability of this new concept? Specifically,
what kinds of things would you investigate? And what hypothesis would you form?
Answer-
It is recommended to structure the solution as a cost benefit analysis. The number of new
customers times the expected revenue from them plus the additional revenue generated by
potential new services plus the cost savings must outweigh the forgone revenue generated by
the customers you end up driving away.
This is a very open broad-brushed case. There certainly is no right answer; however, this type of
case occurs frequently. The following is a guideline of some things you should probably
consider:
Market analysis
● What kinds of customers would be attracted to this no service?
● What kinds of customers would be turned off? (Hypothesis: younger people would be
heavier users and more attracted than older)
● Of the people attracted to this new service, how profitable are they?
● How profitable are the people who are turned off by this service? (Hypothesis: older
people have more money and thus are more profitable)
Revenue
● What types of new services could be added to increase revenues?
● Automatic bill payment, Fund transfer, etc.
Cost Savings:
● How much would it cost to establish a Calling Center and what are the risks involved?
● Do we have the expertise in-house to do this?
● How many branches could we close?
● Can we cut down on traffic to existing branches - thus requiring fewer tellers?
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Descriptive set of questions
1) DELI MEAT PRODUCER
Background: You have been hired by a producer of deli meats to investigate the cause of its
recent decline in market share. The client would like an action plan for resolving the cause of
this decrease.
Details:
● The Company:
- Product: The firm produces plastic-wrapped packages of sliced deli meats at all price
points (generic, midrange, and premium). The market share loss is primarily in the
premium category. The deli meats carry a well-known brand label.
- Price: Products in the premium category carry a higher price and have slightly higher
margins. Although price decreases will garner market share, the competitors have
maintained prices during the recent loss in market share.
-Place (Distribution): The product is sold in grocery stores and delis. Company
investigation has shown that grocers have maintained the same amount of shelf facings
and space for your product (so the decrease in share was not caused by changes in
display or incentives provided to the grocers by competitors).
- Promotion: Advertising and marketing efforts have been steady during this period of
decline and there has been no noticeable change in the competition’s efforts.
●
The Competition: There are three other competitors in the deli meat industry. Each of
these competitors has about 20% of the market share; the client has 40% of the market
share. Overall the market (generic, midrange and premium) is growing. The competition
uses the same channels to sell its products.
●
The Customer: Although the customer buying premium deli meats has not changed, a
survey of the customers indicated a variability in the quality of the product produced by
the client. Sometimes the product was better than the competition; sometimes not. This
was causing customers to change to the competition.
SolutionProduction Process: The client receives chunk meat in bins which meet a certain
average quality measurement. Meat is rated on a scale of 1 to 100 (100 being best). The
client is in a long-term contract with a supplier for bins at three quality ratings: 40, 70,
and 90. Individual chunks within a bin may vary from this average. The premium deli
meats are made from a mix of the three bins with the majority coming from the 90-rated
bin. Meat in the 90-rated bin ranges from 80-95 while meat in the 70-rated bin ranges
from 55-80. The variability in the quality of the premium product is being driven by the
variability within a 90-rated bin.
To reduce the variability, the client could (1) negotiate with the supplier to narrow the
range within a bin or (2) sort the meat within the 90-rated bin at his own facility. The
impact of the first proposal will depend on the relationship with the supplier. That is, is
the client a major buyer; how much longer is the contract set to run.? The second option
will add cost to the production process and reduce margins.
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2) AUTO MANUFACTURER
Background: Your team is hired by a large U.S. automobile manufacturer (GM). They are
interested in your evaluation of their $10B after-market parts business. This business can be
segmented into two sets of buyers: dealers authorized to sell GM parts ($8B) and non-dealer
merchandisers ($2B). This second group can be subdivided into mass merchandisers and
“service” providers. Mass merchandisers are of two types -- those which specialize in auto parts
(e.g. AutoZone) and those which sell diverse products including auto parts (e.g. Sears).
“Service” providers include Goodyear or Western Auto. GM would like for you to answer two
questions:
(1) Is there an opportunity to expand this part of the business?
(2) How would they go about doing it if they chose to expand?
Additional Details:
● Company Economics: There are tremendous fixed costs in the auto business (including
labor). All of GM’s parts manufacturing facilities are fully depreciated and they currently
have excess capacity.
● Competitors: While Ford and Chrysler make parts for their own cars, they are not nearly
as integrated as GM and tend to focus in specific parts categories. There are hundreds
of small parts manufacturers which tend to focus on commodity-like auto parts (e.g. oil
filters).
● Products: GM produces a full spectrum of parts classified as either platform-specific or
universal.
Key Points (approaches):
● Threat of Entry is minimal for a broad category because the fixed costs are very high.
However, a manufacturer could go after a niche play if it were to develop an advantaged
cost structure or superior product. Switching costs among consumers is very low. •
Industry Rivalry is important for the mass merchandiser category because margins are
slim (meaning price wars are more prevalent). Brand names (e.g. Fram, AC Delco,
AutoLite) are important to many consumers.
● Substitute Products are relevant only in the sense that there are many competing
products and future technologies such as electric cars could eliminate the need for many
types of parts.
● Power of Suppliers is not a significant factor because inputs are commodity raw metal
and rubber.
● Power of Buyers is important since there are few mass merchandisers such as Sears or
Kmart and they demand full range of products and tremendous volume discounts. GM’s
Position: GM may have a cost advantage due to its fully depreciated plants and excess
capacity in a fixed-cost environment.
Thus its variable costs must be below sales revenue. Also, its brand names are respected and
are valuable to merchandisers in maintaining margins. GM’s ability to produce a full-range of
products is also an advantage. These advantages combined with the high growth rates for the
non-dealer merchandisers should motivate GM to expand it business in this segment.. GM
should use its cost advantage, brand names, and full range of products to go after the most
lucrative market -- the mass merchandisers.
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3) INFORMATION SERVICES COMPANY
Background: You are hired by a library information services company that provides a
computerized article search product on CD-ROM. The product allows users in a library to locate
articles by keyword search. The company currently has a weak market share of only 10% of all
installed units. The company wants to understand
(1) why they have so small a market share.
(2) what could be done to improve the situation.
(3) where it should focus its resources.
Additional details●
Market Segmentation: The following table outlines many of the details of the market
segmentation and client product data.
●
Pricing: The client sells its product at a 25% discount to the major competitor and has
the lowest prices in the industry. The pricing and profit schedule for each version are
shown below.
Key Points (approaches):
●
The client’s product does not match the needs of the large segments of the market (i.e.
the client’s high quality of search only appeals to a small segment of the total market)
==> weak market share.
●
The client should reallocate its resources to create products in the larger market
segments -- products that emphasize content and ease of use over search quality.
The most profitable segment can be identified by using current client prices which should allow
it to gain market share (due to the 25% discount to the major competitor) and calculating the
maximum market profit. Academic = 5000 x 500= $2.5M; Public = 10000 x 500 = $5.0M;
Secondary = 20000 x 100 = $2.0M. Therefore, if we realign our product to emphasize ease of
use and content, the potential profit is 4500 x 500 + 10000 x 500 = 7.25M ( minimum since profit
in academic segment is > $500 per unit).
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4) LOGGING COMPANY
Background: You are hired by a Canadian logging company to analyze its current operations
and provide advice on future operations. The logging industry in Canada is regulated by the
government. Land is leased to individual companies by the government. The company is
making a lot of money and is unsure why. You have been asked to determine: (1) Why they are
making money? (2) Is it sustainable? (3) Is it replicable?
Additional Details:
● Products: The company produces lumber boards of two sizes 2”x4” and 2”x8”. Lumber is
a commodity product and as such the company is a price-taker in the market. Leases:
The government leases tracts of land at a annual price that is set to allow for a 12%
profit margin for the entire logging industry. Thus, all tracts of land have the same lease
price per acre. The leases last for 99 years and the original lessee has the right of first
renewal on the lease.
● Profit Structure: The profit equation for the lumber industry can be written as: Profit per
ft^3 = Revenue per ft^3 - Non-land cost per ft^3 - Lease Cost per ft^3.
● Revenues: There is a revenue advantage for the company due to its product mix.
Margins are higher on 2”x8” boards than on 2”x4” boards. The company’s product mix is
made up of a greater percentage of 2”x8” boards than the “typical” logging company
percentage.
● Non-land Costs: The company has a 5% cost advantage in its ”tree-to-dock” production
process. There is no significant difference between the distribution costs among the
industry firms.
● Production Process: The cost advantage is not generated by a better logging process
(i.e. better equipment, more skilled laborers) but instead exists because of the
exceptional quality of the trees on the particular piece of land that the company leases.
The mineral content of the land leads to faster growth of healthier trees which improves
both yield and turnover. Healthier trees are straighter and easier to cut, thus reducing
costs in each phase of the logging process. These healthier, taller, straighter trees yield
more 2”x8” board-feet than is typical and leads to the advantaged product mix. There are
no significant economies of scale to the process.
Key Points (approaches)-
●
●
●
The company leases land with a significantly higher quality of trees. This leads to a
revenue advantage because more 2”x8” board-feet can be produced per acre of land.
Additionally, there is a cost advantage because the higher quality inputs make the
logging process easier and increase yields and turnover.
Since the leases are for 99 years and renewable, the current situation seems
sustainable.
Since it is unlikely that another piece of land similar to this one exists or that another firm
will give up advantaged land, the situation is not replicable.
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5) NEW MAGAZINE
Your client is the CEO of a publishing company that produces a line of educational magazines
as well as a line of women’s magazines. Both businesses are profitable but are not growing
quickly. He wants to start a third monthly magazine in the US targeted at 30-50 year old men
(eg. GQ Magazine) His stated goal is to generate circulation revenues of $10 million in the first
year. He has hired you to figure out whether this is possible.
AnswerPossible Approach: This is an estimation case. The key here is to clearly define your
assumptions, the specific answer is not important as long as you are making reasonable
assumptions. For exampleTarget Customers:
The total US population is approximately 240 million. Based on a normal distribution with the
average lifespan of 80 years, approximately 2/3 of the population falls between 30-50 or about
160 million people. Approximately 1/2 are male or 80 million.
Of the 80 million 30-50 year old men in the country, assume that at least 1/2 would read a
magazine or 40 million. Given the wide range of magazines on the market assume that only
10% of magazine readers would want to read a men’s journal or 4 million target customers.
Share: As a new magazine assume that you can generate a 5% share of the men’s magazine
market in year one or 240,000 customers.
Revenues: Based on what other magazines sell for ($2.50-$5.00) assume a cover price. Lets
say $3/magazine at the news stand and $2/magazine for a subscription. Now make some
assumptions on how many customers will buy on the news stand versus subscription, lets say
50% subscribe (120,000) and 50% buy at the news stand (120,000). This comes out to
$360,000 + $240,000 or $600,000. Finally, this is a monthly magazine. For simplicity assume
that all target customers buy a magazine every month. This would generate total revenues of
$600,000 X 12 or $7.2 million.
In this case given the CEO’s stated goal of $10 million in circulation revenues, it would not make
sense to launch the magazine.
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6) SUPER REGIONAL BANK
You have a have recently been assigned to a project with one of the nation’s super regional
banks. The bank is one of the top 10 largest retail banks in the country. Like most banks in its
class it has branches in 8 geographically contiguous states.
Your client has recently concluded that the old “local branch” way of business is no longer
viable. Typically, this bank has canvassed its territory with small free-standing branches;
however, the new age of electronic banking and commerce is changing all of that.
They are considering replacing many branches with Calling Centers. Calling Centers offer both
live and phone automated services that may be accessed by phone. The new Centers would
offer virtually all of the services currently offered through local branches plus some additional
things.
The question to you is: how would you go about setting up the engagement to determine the
viability of this new concept? Specifically, what kinds of things would you investigate? and what
hypothesis would you form?
AnswerPossible ApproachThis is a very open broad-brushed case. There certainly is no right answer; however this type of
case occurs frequently. The following is a guideline of some things you should probably
consider:
Market analysis: What kinds of customers would be attracted to this no service? What kinds of
customers would be turned off? (Hypothesis: younger people would be heavier users and more
attracted than older) Of the people attracted to this new service, how profitable are they? How
profitable are the people who are turned off by this service? (Hypothesis: older people have
more money and thus are more profitable)
Revenue: What types of new services could be added to increase revenues? Automatic bill
payment, Fund transfer, etc.
Cost Savings: We shall consider following situations. How much would it cost to establish a
Calling Center and what are the risks involved? Do we have the expertise in-house to do this?
How many branches could we close? Can we cut down on traffic to existing branches - thus
requiring less tellers?
Summary: It probably is best setup as a cost benefit analysis. The number of new customers
times the expected revenue from them plus the additional revenue generated by potential new
services plus the cost savings must outweigh the forgone revenue generated by the customers
you end up driving away.
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7) MERGER CANDIDATE IN CHEMICAL INDUSTRY
Background: One major chemical producer has retained McKinsey to evaluate another major
participant in the industry. Both companies are bulk commodity chemical producers. We have
been asked to begin our work by analyzing the future prospects of the target company's major
product line, a bulk chemical used in the production of plastics. Essential facts included:
Production of this chemical has slowly declined over the last five years Prices have declined
rapidly
There are 7 to 8 major producers; the largest producer has a 30 percent share; number two has
20 percent: out target company has 15 percent; the rest is divided among other competitors.
The two largest competitors earn a small return; target company is probably at break-even; rest
are operating at break-even or loss.
The largest competitor has just announced construction plans for a major new plant. ‘
What are the key points to analyze for companies future prospects?
AnswerBasic assumption and understanding1. What markets use this chemical, and what has been the nature of growth in these
markets? (End-use markets are largely automotive-related.)
2. 2. How much overall capacity exists now? (Far too much.)
3. 3. What has been relative capacity utilization of competitors in the industry? (60 to 70
percent for last 3 years).
4. 4. What are relative cost positions of competitors? (related to size/efficiency age of plant;
target company has reasonably "good" position.)
The answers shall address:
1. Reasons for announced capacity expansion. (It is a bluff to try and get smaller competitors to
shut down.)
2. Is regulation important? (Yes: all competitors have installed pollution control equipment.)
3. What is nature of operational improvements that target company could make? (multiple.)
4. How is product sold and distributed? (Economies of scale in marketing and transport are
critical.) Is there synergy between our client and target?
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8) STEAM BOILER HOSES
Background:
McKinsey was asked by a diversified manufacturing client to help turn around the steam boiler
hose division. This boiler hose division provides boiler hoses for both external customers and
the client's boiler division. Background information on the client and industry includes:
● Boiler hoses are sold both with original equipment and as replacements.
● There has been increasing price pressure in the industry.
● The client is third of eight industry participants.
How would you structure an analysis aimed at restoring profitability? Where do you expect to be
able to save costs?
Basic assumption and understanding1. Drop the product line. (apparently not possible because hoses are necessary for boiler
sales).
2. Raw material prices. (they are the same as everyone else's)
3. Allocation of overhead. (no cash savings and provides little potential)
4. SG&A (standard industry fee paid for independent installers)
The best answers:
Following a logical progression, should stumble upon the actual answer: the product has been
over-designed, requiring excess raw material. The answer should the following organizational
implications:
l. How is our product engineering operation wired into the marketplace? (there is little contact
between the engineering and marketing/sales organizations)
2. What kind of feedback are we receiving form our sales force? (customers are delighted with
our hoses, but require all the product features)
3. Are there other areas in the company where similar problems exist?
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Q. 'Runners Ahead’ is an emerging software consultancy company. The a specific manner but
political, social and economic conditions affect it in a general way. The company has decided to
prepare an emergency plan to meet unpredictable challenges which change the business in a
very fast manner particularly in the field of Information Technology. The changes in the IT sector
are very fast. So the chances of success are high; like in the case of new software launched
where the company has the advantage of entering the market early. However, things are not so
easy. Every time circumstances pose new challenges. The organization has decided to monitor
the external business environment so that it can adopt suitable measures to increase its client
base.
Recently the company has been given a project by the government to study and analyze its new
policy. The policy of the government is to give a bigger role to the private sector by reducing its
own role in the Public Sector Undertakings.
In order, to meet new challenges the company has to exploit various aspects of business.
Recently it has invented a new type of advanced software for social networking sites for the
aged people catering to their specific needs. The company is expecting huge rise in its revenue
through the help of this project.
Which features of business environment is highlighted in the above case?
Identify the importance of business environment highlighted in the above case.
Which economic reform is highlighted in the above case in the second paragraph of the above
case?
AnswerRecently the company has been given a project by the government to study and analyze its new
policy. The policy of the government is about giving a bigger role to the private sector by
reducing its own role in the Public Sector Undertakings.
In order to meet new challenges the company has to exploit various aspects of business.
Recently it has invented a new type of advanced software for social networking sites for the
aged people catering to their specific needs. The company is expecting a huge rise in its
revenue through the help of this project.
The features of business environment highlighted in the above case are:
Specific and general forces. The company finds its business affected by customers,
competitors, tax taking authorities in an isolated manner but political, social and economic
conditions affect it in a general way.
Uncertainty. The Company has decided to prepare an emergency plan to meet unpredictable
challenges which change the business in a very fast manner particularly in the field of
Information Technology.
The importance of business environment highlighted above:
●
It enables the firm to identify opportunities and get the first mover advantage: So the
chances of success are high; like in the case of new software launched where the
company has the advantage of entering the market early.
●
It helps in improving performance: The organization has decided to monitor the external
business environment so that it can adopt suitable measures to increase its client base.
●
The economic reform highlighted in the above case is ‘Privatization’: The policy of the
government is about giving a bigger role to the private sector by reducing its own role in
the Public Sector Undertakings.
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9) Retailer Growth
A major retailer of clothing and household products has been experiencing sluggish growth and
less than expected profits in the last few years. The CEO has hired you to help her increase the
company's annual growth rate and ultimately its profitability.
● The retailer has 15 stores located in shopping malls in metropolitan and suburban areas.
● Total revenue from the 15 stores has declined, despite major back-end cost savings.
AnswerGeneral Information to analyze situation:
• Use the profitability framework. The case tells you that cost savings have been achieved.
Focus on the revenue side.
• Focus on the fact that the company has 15 different stores, in two different geographical areas.
What are the key differences between the two in terms of the consumer, competition, and
growth?
Analysis:
● Are some stores more profitable than others? Yes they are. We see variations
throughout.
● Are there differences in profitability between the metropolitan and suburban stores? Yes
there are. We see that the suburban stores are more profitable than the urban ones.
● Is there more competition in the urban areas? No, not really. It's proportionally the same.
● Do the stores sell the same products? Yes they do. All stores have the same product
mix.
● [Given that all stores sell the same product mix and some are more profitable than
others, this should lead you to look at consumer behavior].
● Do consumers in the suburban areas have different purchasing behavior than the urban
dwellers? Yes, as a matter of fact, they do. The suburban customer tends to buy more of
the major appliances and electronic equipment than the urban consumer. The urban
consumer buys mostly items such as clothing, small furniture items, and small
appliances.
● [You can make the assumption that suburban consumers have higher incomes and are
in more need of major appliances given the difference in living quarters between houses
versus apartments in the city.]
● Is there a difference in profitability between the goods purchased by the suburban and
urban consumers? Yes. Major appliances and TVs and stereos are higher profit items
than clothing and minor appliances.
● Would you say that the current product mix is more suited for the suburban customer
than for the urban? Yes.
Key Findings:
● The consumer in the city has different needs and purchasing behavior than the suburban
consumer. The stores in the city are not catering to the demographics of its
surroundings.
● Unnecessary costs are being incurred through inventory and lost floor space in the city
stores, resulting in lost revenue for the retailer.
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10) Juice Producer Profitability
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.
AnswerGeneral information to understand situation:
Use the profitability framework. Gather information on the revenue side, but focus mostly on the
cost side.
Analysis:
●
●
●
●
●
●
●
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.
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.
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.
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11) VieTire Competition
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.
AnswerLay Out Your Thoughts :
● Specify what steps we must take to understand the cost differences now, and in the
future, of VieTire and its competitors
Analysis:
● 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.
●
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.
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.
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12) World View TV Profitability
A cable TV company from Canada, World View, had recently entered the US market in the
northeast to expand its market share. World View saw this move as an opportunity to capture a
large part of the US market (4MM consumers) in a market with very little competition.
However, in the last couple of years, much to the surprise of management, World View has
been unable to make a profit. You have been hired to figure out why and advise them on their
next move.
AnswerGeneral information to understand situation:
• Use the profitability framework.
• Focus very heavily on the consumer.
Analysis:
• Let's look at costs first. Did World View incur additional costs per customer on average in the
new market? No, based on the potential number of subscribers, they have instituted the same
system that was in place. Costs associated with cable wire, debt, maintenance costs, etc. are
all proportionally the same.
• What about the number of subscribers. Out of the 4MM potential customers, how many are
signed up? Only 2.1 MM.
• Are other cable companies capturing the remaining market? No, competition is not an issue.
Those that we have not acquired as customers simply do not have cable.
• What about substitutes and viewing behavior? How is the consumer in the northeast US
different from the one in Canada? Well, the Canadian consumer does not rely much on local
stations for watching TV. Cable is a major source of entertainment and news coverage. In the
northeast US, we tend to see consumers shy away from paying the $40 a month. They settle
for watching local stations.
• Does the new market lave a lower income level? Yes, they do, by about 20% on average.
• What about the local stations? How many are they? Do they meet most of the needs of the
consumer? There about 16 local stations that have coverage over the entire northeast. I guess
they are doing pretty well by providing programming that the consumer wants.
You tend to see the average consumer in the northeast watch regular TV more than Cable
when compared with the Canadian consumer.
• Do these stations have good reception and how much do they charge? They have a very good
reception and they are part of basic TV, so they are free.
• Is World View providing any type of programming that the local stations are not providing?
Some, but the consumers don't seem to be interested. They don 't feel that it's worth $40.
Key Findings:
• There is a great deal of competition in the area, not from other cable companies, but local TV
stations.
• The consumer in northeast US is quite different from the consumer in Canada with respect to
television viewing habits.
• Consumers are not willing to pay $40 for a service that they already get for free.
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13) Le Seine Investment
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.
AnswerGeneral information to understand situation:
• 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?
Analysis:
• 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).
• Has the company thought about which to enter? No. But what do you think, at a high level,
which segment should they enter?
• [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 Finding:
• 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
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14) Auto Service Expansion
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.
AnswerGeneral information to understand situation:
• You need to understand the nature of the business.
• Focus on the customer segmentation.
• 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?
• Use the Profitability Framework. Focus on how revenue has changed given the environment.
Analysis:
• 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.}
• 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 off-the-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 are 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.
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15) Travel Agency
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?
AnswerGeneral information to understand situation:
• 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.
• 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.
Making 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.
• [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.]
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.
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