Fuqua 06-07 Case Book

Fuqua Consulting ClubInterview Preparation Guide

2006-2007

December 2006

Dear Reader,

Thank you for entrusting us with the challenge of helping you to navigate the notorious

consulting interview process! We have made significant changes to the book this year—

changes we hope will improve your skills so that you can land a coveted FY internship

and then a full-time offer. For the first time, the Fuqua Consulting Club interview

preparation guide is proud to present:

Actual interviews from management consulting companies

An industry guide, to clue you in on the basics of some typical industries you will

encounter along the way.

A tip sheet to give you the critical edge in the interview process.

We owe a debt of gratitude to our fearless FY Consulting Team: Mahesh, Ioana, Vinod,

and Bogey. The learning curve was intense, but they proved up to the challenge.

Without their contributions, the book would not have been made a reality. Thank you,

team!

We also extend our gratitude to the second years who took time out of their schedules to

contribute cases from actual interviews and iron out some of the wrinkles along the way.

Sincere thanks to you all.

Finally, we wish you the best of luck in your upcoming interviews. It can be grueling,

but you will learn a lot along the way. Keep up the enthusiasm, and enjoy yourselves.

This is business school, after all.

Best,

Louis Amoroso & Darren Parker

- 2 -

TABLE OF CONTENTS

Interview Insights..........................................................................................5Consulting Industry Overview.........................................................................................6The Crucial Behavioral Interview...................................................................................9Behavioral Interview: Key Evaluation Criteria...............................................................9Behavioral Interview: Key Evaluation Criteria.............................................................10Behavioral Interview: Common Questions...................................................................11How to Behave During the Case...................................................................................13The Case Interview: Overview......................................................................................14The Case Interview: Background and Insight...............................................................15The Case Interview: A Short Example..........................................................................16The Case Interview: Key Evaluation Criteria................................................................18

Frameworks.................................................................................................19Frameworks: Overview.................................................................................................20Frameworks: A Primer..................................................................................................21Frameworks: The Three C’s..........................................................................................22Frameworks: The Four P’s............................................................................................24Frameworks: Porter’s Five Forces.................................................................................26Frameworks: Profitability..............................................................................................28Frameworks: VRIN Model............................................................................................29Frameworks: New Market Entry...................................................................................31Frameworks: Mergers and Acquisitions........................................................................32Frameworks: Market Estimation...................................................................................33Frameworks: Supply Chain...........................................................................................34Industry Cheat Sheet......................................................................................................35Tips to Put You over the Top........................................................................................36

Practice Cases..............................................................................................38Case Feedback Form......................................................................................................39Case #01: Japanese Golf Ball Market............................................................................40Case #02: Chicago Piano Tuners...................................................................................41Case #03: Disposable Diapers.......................................................................................42Case #04: Chewing Gum Market..................................................................................43Case #05: Publishing.....................................................................................................44Case #06: Yellow Cab Taxi Company - McKinsey......................................................45Case #07: Direct Mail Retailer......................................................................................48Case #08: Airlines – Accenture Final Round................................................................50Case #09: Slick Hick’s Farm Equipment......................................................................51Case #10: Heavy Equipment Manufacturer – Huron Consulting Group, Final Round.53Case #11: Purified Water...............................................................................................54Case #12: Nabisco’s Market Share................................................................................56Case #13: Bank Commissions - Accenture 2nd Round.................................................60Case #14: Schwarzenegger Defense-Accenture, Round 1............................................62Case #15: Napoleon’s Pizza Pies...................................................................................65

- 3 -

Case #16: Las Vegas Hoops – Bain, Round 1...............................................................68Case #17: Luxury Brand Jewelry – Bain Mock Interview............................................71Case #18: Nextel Cup Racing Team UPS #88- Accenture............................................73Case #19: Eagle Eye Drops...........................................................................................76Case #20: Portuguese Cement.......................................................................................79Case #21: Life Science Technology Startup..................................................................81Case #22: Hospital Chain - McKinsey..........................................................................83Case #23: Hotel Development – AT Kearney 1st Round..............................................85Case #24: Shaky Construction Firm..............................................................................89Case #25: Scotch Bar.....................................................................................................95Case #26: Yahoo, Google & YouTube - Katzenbach Partners, Final Round................98Case #27: Sgt. Slaughter’s Construction Co – Accenture...........................................100Case #28: DMB Satellite, Inc......................................................................................104Case #29: Tipsy’s Distillery........................................................................................107Case #30: Chemical Brothers International.................................................................112Case #31: NoPerx Consulting Company.....................................................................116

Appendix: Cases from Company Websites.............................................118McKinsey: Health Care...............................................................................................119Bain: Cost-savings analysis for food services company..............................................127Boston Consulting Group: Sugared Cereal..................................................................134

- 4 -

Interview Insights

- 5 -

Consulting Industry Overview

Industry Overview

Consultants provide a wide range of services to businesses. They identify managerial and institutional problems, perform in-depth quantitative and qualitative analyses, recommend and develop solutions, and assist in implementation. Time-constrained senior management in several companies often relies on consultants to bring an unbiased outside perspectives to problem solving. Consultants are thus expected to bring many resources to the table, including unique industry-specific knowledge and experience.

Recent economic developments and corporate trends have increased the number of consulting firms. The expansion of the internet and emergence of new technologies added to the groundswell. Lately, however, due to the economy, hiring has leveled off and firms are undergoing some consolidation.

Major players and types of Consulting

The industry began with the founding of Arthur D. Little in 1886. Today’s roster of prominent firms includes McKinsey & Company, Bain & Company, Booz Allen Hamilton, The Boston Consulting Group, and Deloitte Consulting, etc. Many firms do not specialize in just one industry or function, but the entire spectrum of services, mapped over a wide range of industries and specializations. This results in a variety that does not lend itself to easy classification. However, we can broadly classify the services offered by a firm as either strategy or implementation consulting.

Strategy consulting is often a purely information-based activity, yielding a series of blueprints outlining strategic idea paths and possible outcomes at the end of each path.

Implementation consulting projects require more hands on involvement of the consultants on projects that culminate in the delivery of a new production system or rollout of new software offering advanced functionality.

Clients are increasingly hiring a single consulting partner for all required services, which in turn has led to attempts by various firms operating at the ends of the service spectrum to expand towards the center. Therefore we find firms that have typically provided strategy consulting, move towards developing implementation competence while those with implementation oriented services have developed strategy practices in order to develop macro level ideas.

Why Consulting?

Consulting contributes significantly to the value chain in a given industry, and offers post-MBA students an opportunity to assume a high degree of responsibility at an early stage in their career, develop a broad perspective of industries and players, work with multiple levels of client organizations, interact with motivated and intelligent thinkers and enjoy the excitement of frequent travel.

- 6 -

Increasing globalization of consulting firms provides access to global informational resources, spanning different geographical locations. This provides and unparalleled opportunity to gain exposure to business worldwide.

Getting Hired

Consulting revenues have increased over the last several years, but the recent geopolitical turbulence and economic swings have caused a good deal of belt-tightening. While historically 30-40 % of MBAs entered this field, current trends have caused this number to settle between 10-20%. Most major consulting firms are still active in on- and off-campus recruiting initiatives. They usually host special presentations on campuses to inform and educate MBA students about their unique missions and cultures.

Hours and Compensation

Consultants’ hours generally aren’t nearly as grueling as those of investment bankers. About 60 hours per week is the norm, although some say they only work 45 to 50. Crunch periods can be more intense, with teams working 75-80 hours a week. These periods don’t usually last for more than a week or two. Whether you are an associate or a partner, you can expect the same general schedule. “Hours are pretty similar for all consultants, regardless of rank and position,” says one insider.

Just out of business school, you can expect to make anywhere between $85,000 and $150,000. Packages may include benefits and bonuses and some offer additional perks.

Travel

Most consultants travel three to four days a week. The typical schedule is Monday to Thursday on the client site and Friday in the home office. Of course, this can vary from project to project and firm to firm. Sometimes you will be lucky enough to have a client in your home city or nearby. A few consultants only have to travel one to two days a week or 25-30% of the time- but they seem to be the exception.

Office Culture

Collegial, friendly and close knit are terms that come up often in discussions of the atmosphere in this industry. Team bonding is an important part of most projects. There are many happy hours and team dinners, especially when working out of town. Though a couple of conservative companies still cling to dark suits and ties, many consulting firms these days are business casual. An important caveat: the consulting culture varies not only from firm to firm, but also from project to project and partner to partner within the firm.

People and Diversity

The overall consensus from the consulting crew is that they love the people they work with. The concept of work-fun balance surfaces again and again. In some areas, like strategy, almost everyone has an MBA. Other sectors are more academically diverse. Many of the large consulting firms are more international. Smaller or start-up firms are the most diverse in the industry. There are also more women in this industry than in banking or finance.

- 7 -

Consulting at Fuqua

Several top consulting firms hire the best and brightest from The Fuqua School of Business. The consulting club at Fuqua supports the efforts of students to pursue a career in this field. The club develops and nurtures relationships with the premier consulting firms in the industry and organizes interactive forums such as symposiums, career fairs and informational sessions to enable students to network with industry representatives and develop a deeper understanding of the profession. It also assists students in developing skills in case and behavioral interviewing through coaching and mock interviewing. Lastly, club members participate in local and national case competitions.

- 8 -

The Crucial Behavioral Interview

Preparing for a consulting behavioral interview is very similar to preparing for a behavioral interview in another function. The preparation simply needs to focus on the attributes a consulting firm seeks and the specific questions that consulting firms tend to ask. We have included in this casebook an overview of the behavioral interview process, the behavioral qualities that consulting firms generally seek, and specific questions that consulting firms may ask. In addition, we have included some thoughts on demonstrating positive consulting attributes through the case interview.

Many more resources can be found through the CMC and on the Career Compass website.

- 9 -

PRE –INTERVIEW

• Research the Company & Industry through:o Websiteo Fuqua alumnio Recent press releaseo Career services materialso Library materials (e.g.

Wetfeet and Vault)• Research your interviewer:

o Obtain a biographical summary

o Develop question related to the interviewer’s experience

• Customize your message:o Focus on key

competencieso Tie your skills and

experience to their culture and desired qualities

• Anticipate, structure and rehearse answers to potential situational questions

• Prepare “Tell me about yourself” question

• Practice behavioral interviews with CMC and other students

DURING - INTERVIEW

• Use SAR approach in answering the questionso Situationo Actiono Results

• Focus on key competences• Selling yourself

o Identify your key selling points

o Balance “I” versus “We”

• Package the producto Be conciseo Tie each answer to a

competence• The Closing

o Feel free to ask questions

o Provide concise summary but do not oversell yourself

o Exit with confidence

POST – INTERVIEW

• Follow-upo Thank you notes

• Ask for feedback if you plan to interview next year

Behavioral Interview: Key Evaluation Criteria

All firms have slightly different evaluation criteria, but most consultancies focus on finding the same core attributes in candidates: client presence, problem solving/ analytical skills, communication skills, leadership, initiative/ tenacity, and energy/passion. General definitions for each of these attributes are below.

Each firm has specific attributes it seeks and

varied weightings or priorities for each of the criteria. In addition to preparing for the general criteria, identify firm specific criteria through SIPs, company websites, or other research materials. Ensure that you are prepared to explain what distinguishes that particular company, and that you highlight how your skills, experience, and personality are a great fit for the firm.

- 10 -

• Positive first impression• Demonstrates poise and

professional demeanor• Generates credibility• Maintains posture and

controls emotions• Uses appropriate phrasing

and timing• Able to prevent conflicts-

recognizes sensitive issues & individual resistance

CLIENT PRESENCE

• Understands overall business problem

• Goes beyond the obvious, looks for insight

• Prioritizes analyses through hypothesis building

• Performs rigorous and thoughtful analysis

• Identifies key issues• Is resourceful and tenacious

in approaching problems

PROBLEM SOLVING/ ANALYTICAL SKILLS

• Able to convey ideas in a convincing way

• Listens actively• Expresses himself/herself

well• Understands quickly even if

issues are not clearly stated• Good eye contact, vocal

qualities, gestures and movements

COMMUNICATION SKILLS

• Active/enthusiastic• Ready to give 110%• Demonstrates passion for

particular firm

• Determined to find solution• Has natural inquisitiveness

• Shows ability to persuade• Able to suggest own

initiatives• Charisma

LEADERSHIP INITIATIVE/ TENACITY

ENERGY

Behavioral Interview: Common Questions

All consulting firms ask behavioral questions at some point in their interview process. Some firms include several behavioral questions as a part of each case interview; other firms conduct separate interviews to ask behavioral questions. Behavioral questions are typically very straightforward but they still require preparation. Answers to these questions will not get you the job, but they can lose it for you.

The following questions are typical questions given by consulting firms. The questions in bold were asked during internship interviews last year. For additional questions, check the CMC resources and the behavioral questions published on Career Compass.

General Tell me about yourself. Why do you want to be a consultant? What has been your biggest challenge? What have been your biggest success/ failure? Where do you see yourself in five/ten/twenty years? Tell me something about yourself that is not on your resume. What questions do you have for me?

Work Experience Tell me about working at [previous employer]? Why did you pick [previous career/employer]? Would you change your decision now? What was the best/worst part about working for [previous employer]? What specific duty did you like best/least at [previous employer]?

Academic Experience Why did you return to business school? Why Fuqua? Are you satisfied with your experience at Fuqua? What activity outside class has been most rewarding? What has been your best/worst class at Fuqua and why? Tell me about [activity/achievements on resume]. Where have you demonstrated leadership at Fuqua?

- 11 -

Consulting Fit What qualities do you have that would make you a good consultant? What do you think makes a good consultant? Please rate yourself on each of these qualities

and give supporting examples. Give me an example of a time you have demonstrated [leadership, communication, analytical

thinking, problem solving, initiative, teamwork]. Tell me about a situation when you had to handle criticism/complaint from a client/customer.

What was the circumstance and how did you handle it? What feedback did you receive? What was the result?

Describe a recent example when it was important for you to establish rapport quickly. What were the circumstances? What challenges, if any, did you face? How did you deal with them and what were the results?

Describe an occasion when you took responsibility for making a key decision. What was the circumstance and what was the decision? How comfortable were you with making the decision and why? How did you implement the decision and what were the results?

Tell me about a time when you had to manage multiple priorities. How did you deal with conflicting demands? What approaches did you use? What were the results?

Tell me about a situation where you had to work closely with other people to get things done, and you had to influence their actions without having formal authority over them. How did you influence the group? To what extent were you effective? Explain.

Describe the most difficult analytical problem you have ever had to solve. What qualities do you think a leader needs? What would make you a good manager?

Why Consulting Firm X Why do you want to work for this firm? And this office in particular? Who else are you interviewing with and why? Where is this firm on your list of priorities? What do you think the key differences are between Consulting Firm X and other firms? What do you think you can offer us? What are your strengths/weaknesses?

- 12 -

How to Behave During the Case

Many consulting firms will not perform a “traditional” behavioral interview as part of their initial recruiting efforts. Instead these firms will focus on the case interview as a means to evaluate candidates. Candidates often overlook the behavioral components of the case interview. It is essential that candidates recognize that the case interview is also inherently a behavioral interview as well. Some people focus so much on “cracking the case” that they forget how many other skills are being assessed at the same time. In simple terms, they are evaluating your ability to work with a client and your consulting team to help them solve a problem.

Think about showing the same attributes you want to demonstrate through answering behavioral questions. Following are some specific tips about what to do and what not to do during the case interview.

What to do… Walk in and exit with confidence and ease Smile, especially in the greeting, small talk, and start of the case Be prepared with some small talk Be energetic but relaxed throughout Look like you are having fun Show passion about consulting Actively listen and engage with questions Be perceptive to clues about mistakes or bad directions Demonstrate your presentation skills by showcasing your framework Take time to answer questions – a little silence is fine Talk out loud so your interviewer can understand your thought process Be flexible to changing gears in the middle of the interview State your conclusion first, then back it up with reasons (rather than walking through all the

logic first and then stating the conclusion) Bring great questions, and tailor them to your interviewer if possible Show interest in the case after it is complete Express interest in the position and thank the interviewer for the interview

What not to do … Mix up which consulting firm is which Forget the name of someone you interviewed with prior Be arrogant, cocky, insecure or unsure Be disorganized before or during the interview Forget the question you are answering Get obsessed with taking notes or not take notes at all Lose composure when you make a mistake Admit you have no idea how to proceed Talk too long when answering a question or summarizing your recommendation Give up before it is over – you never know how you compared to other candidates Ask your interviewer how you performed at the end of the case

- 13 -

The Case Interview: Overview

1. As the interviewer describes the situation, think about key issues facing management. Restate the question in a way to add value Ask clarifying questions

2. Create a framework and develop an early hypothesis Ask for a moment (<~1 minute) to create framework Determine the key issues Use structure and logic

3. Prioritize data needs Drive the process, but be coachable Listen closely to the interviewer and pay acute attention to non-verbal indicators What do you need to better understand the issues? Use facts and numbers as appropriate to build an argument

4. Test hypothesis Evaluate which facts are critical to key issues

5. Refine answer Probe for more detail in critical areas

6. Make recommendation Take a stand: Deliver your conclusion with conviction Give evidence to support your conclusion State pros and cons – be fact-driven Be brief

- 14 -

Determine Key Issues

Develop Hypothesis

Gather Data Test HypothesisMake

Recommendation

Refine Answer

The Case Interview: Background and Insight

Contrary to what many perspective applicants think, the case interview is not just a tool that consulting firms utilize to limit applications. The case interview creates a situation that models many elements of a typical engagement and, as a result, is highly indicative of actual consulting performance. Usually a case interviewer presents a business situation that a consultant might find on a consulting engagement: working face-to-face with an unknown individual in a high stress atmosphere with ambiguous information and the expectation of reaching a conclusion.

The case interview is designed to not only test the problem solving skills possessed by the applicant, but also to observe interpersonal skills and probe the business acumen of the applicant. Having this goal in mind, interviewers design cases to be challenging and stretch the abilities of the interviewee. Hence, there is not a magic bullet or canned solution that must be used to “crack the case”. Whether or not a candidate achieves the “right” answer normally isn’t even the main criterion on which an applicant is being evaluated.

A good case interview response shows that the interviewee understood the main issues/problems in the case, made reasonable and necessary assumptions, and recommended a logical solution. In order to meet these criteria, a candidate should listen carefully during the case explanation and then repeat back the main issues/problems to the interviewer at the end of the case description. This ensures that the candidate’s thinking and response will be on topic. In addition, the candidate should utilize highly logical thinking when creating their solution. As this is one of the areas of evaluation, it is important for the applicant to explain their logic to the interviewer during the solution creation process. One or more frameworks can be a great tool(s) to structure a candidates thinking and to ensure that the approach will be sufficiently broad.

An excellent case interview response goes above and beyond the good response by considering future ramifications and long-term strategy points that the basic issues/problems and their solutions may create. When added onto a good solution, position sustainability and industry analysis are examples of additional recommendations that make an excellent case interview response.

- 15 -

The Case Interview: A Short Example

Scenario: Virgin Atlantic has recently spent $20 million to acquire the five-year licenses to SpaceShipOne after its successful demonstration flights into space. This company plans to purchase five Space Ships from SpaceShipOne at a price of $10 million each. Using these spacecrafts, Virgin will offer commercial space travels into space, where anyone with the guts will be able to experience weightlessness and gaze back at Earth from a height of more than 60 miles and with a beautiful view of the horizon 1,200 miles away.

Initial indications state that Virgin will offer three-hour travel aboard the spacecraft (which includes four minutes of time in space) at a price of $150,000 per trip per passenger. Each spacecraft can hold five passengers and one pilot. NASA research has showed that 2% of Americans would happily pay more than $100,000 for a trip into space. And SpaceShipOne has also indicated that any healthy individual should be able to ride on the spacecraft after completing a three-hour training course.

Is space tourism a good business for Virgin to invest in?

Additional Information Virgin plans to launch its spacecrafts in Florida, Australia, Singapore and Britain.

However, initially launches will only be available in the United States, since Virgin has not got the necessary export licenses to take the rocket out of US.

Total cost for all the four launch sites will be $2 million. The Ground Operation costs will be $10 million per year. Maintenance for the five spacecrafts will be $5 million per year. Insurance costs for operations will be $25 million per year. Pilots’ compensation will be $20,000/flight. Each flight will need $100,000 for fuel.

Good Answer:Find out whether Virgin could make money in this business.

Check every aspect of the company’s potential cost structure for the business. o Sunk Costs: $20 million (Licenses) + $50 million (Space Ships) + $20 million

(Launch sites) = $90 million.o Fixed Costs (per year): $10 million (Ground Operations) + $5 million

(Maintenance) + $25 million (Insurance) = $40 million.o Variable Costs (each flight): $ 100,000 (Fuel) + $20,000 (Pilots) = $120,000.

From the capacity and price per flight: 5 passengers and $150,000 each, we could get the breakeven number of flights for fixed cost: $40 / [($0.15 million x 5) – ($0.12)] = 64. This means that for the first year, if each spacecraft could have 13 launches for 65 passengers, Virgin will break even in this business.

- 16 -

From the NASA research, we could get the approximate Market Size: 300 million (total American Population) x 2% = 60,000. Then we get the total potential Market Revenue: $9 billion

Conclusion: Taking into consideration the big potential market and less competitive environment in the initial years, Space Tourism will be a good investment for Virgin.

Note: If you could finish the above calculations and analysis through the interview process, Congratulations, you are now a good interviewee. However, if you want to be an excellent one, you should think further about the business.

Excellent Answer: Building on the ‘Good Answer’, utilize Porter’s 5 Forces to check the EXTERNAL aspects, and VRIN to have a deep and comprehensive INTERNAL analysis..Questions you should also ask during the interview could be like:

Is Space Tourism a good business? (punch up 5 Forces)o How much demand will there be? At what price?o How easy is it for competitors to enter?o Will customers bargain down prices? Is this an industry where reputation

matters? If so, what are the key elements of reputation that matter and why?o Will firms compete aggressively once they enter? (e.g. will China, Russia, and

others use this not as a source of profits based on full costs but just to subsidize space research? If so, what will happen to firms that are trying to make money?)

o Will environmental regulation get in the way? Who is going to profit most from space tourism? (Add to supplier part of 5 forces;

list things like reputation, patents, etc.)o Who are the suppliers of the technology? Early entrants?

Will Virgin thrive in this business? Why? (capabilities list, resources list)o Does it have the right skills / capabilities?o Does it have other complementary resources it can leverage or that will

benefit from space tourism?o Will this be too much for Virgin to manage? Is it getting stretched too thin?

If not Virgin, who will do well? Why?

Note: You should work hard to develop a comprehensive response like the one illustrated above.

- 17 -

The Case Interview: Key Evaluation Criteria

- 18 -

• Understand the question being asked

• Develop an approach to answer the question

• Always draw final conclusion relating discussion to initial problem

STRUCTUREDAPPROACH

STRONGANALYSIS

REASONING& LOGIC

• Framing/organizing the problem

• Prioritization of issues• Identifying relevant

information• Synthesizing and filtering

data provided by the interviewer

• Comfort with numbers and ability to make reasonable assumptions

• Drawing conclusions from facts

• Identifying key implications and next steps

• Identifying and prioritizing key issues as they arise

• “Sanity check” – Does the answer make sense?

• Ability to use the original approach and logic to sort out a problem

SUCCESS-ORIENTEDBEHAVIOR

• Presentation • Listening• Articulation• Charisma/spark• Credibility/maturity

PROFESSIONALISM & ENGAGEMENT

• Tolerance for ambiguity• Toughness/resilience• Initiative/motivation

PRESENCE /COMMUNICATION

• Enthusiasm and interest in the question

• Engage your interviewer• Mature and confident

demeanor

Frameworks

- 19 -

Frameworks: Overview

The following frameworks provide a fairly comprehensive set of tools for a successful case interview. The case book suggestion is to learn these frameworks thoroughly so that during the interview it is easy to recall and utilize a framework and valuable time is not wasted deciding which framework to use. Remember that a specific framework is not needed to “crack the case”.

Key Frameworks in Case Interviews

3 C’s

4 P’s

Porter’s 5 Forces

Profitability

To crack the case you must first separate the problem horizontally and then drill down vertically:

Make your framework “MECE” or “Mutually Exclusive and Collectively Exhaustive.” Do not

force a case into a particular framework and be prepared to use elements from multiple

frameworks.

- 20 -

Example: A client’s profits are declining. Why?

Revenues Costs

Price Fixed VariableQuantity Mix


Revenues Costs



Revenues Costs


Frameworks: A Primer

Knowledge of the following frameworks can be critical to conducting a successful case interview. These tools help to structure a candidates thinking logically and ensure that multiple angles are studied.

The interviewer is not looking for a cookie-cutter approach to solving problems. During the interview a candidate should be sure to incorporate their own intelligence and creativity.

A single framework is often inadequate to identify all of the issues present in a case. It is therefore recommended that candidates look at more than one framework and combine the positive elements of each approach into the recommendation.

Interviewers generally are not impressed when candidates explicitly state the framework or frameworks that are being utilized. Moreover, this approach demonstrates a lack of creativity on the part of the candidate.

“Students should note that (a) they are panning for gold and are not on a treasure hunt - most interviews. are chances to make good points not find a single hidden right answer and (b) any tool (compass, map, knowledge of geology...) will be helpful in finding gold in any terrain but only if it that tool is understood well enough to apply. I hope this (overwrought?) imagery will help students to be relaxed and confident going into and during their interviews and that it will encourage them to study a few frameworks deeply rather than trying to know a little about many frameworks.” --Scott Rockart, Assistant Professor, Fuqua School of Business

- 21 -

Frameworks: The Three C’s

While, the order of listing of the frameworks in this case book is not of any particular significance the 3C’s can be viewed as the most rudimentary of frameworks. When first examining any basic situation that a firm may find itself in, it provides a structure that is extremely useful to focus your initial thoughts on what needs the organization is trying to fufill, which group has those needs, who else can fufill the same needs, and how is the company placed with respect to others in fufilling these needs. Thus the 3C’s framework provides a basic approach to viewing the strengths and weaknesses of a company with respect to its customers, competitors, and internal company attributes. In addition, this framework also provides a means to identify the opportunities and threats a company faces in its current industry position.

In general the customer section should help to identify the fit of a company’s product offerings. The key elements of the Customer section are understanding the customer and the needs this customer wants to be filled. Once these elements have been identified, more interesting questions about adapting products to meet customer needs and segmenting customers to more aptly target marketing efforts develop.

The second C in the 3C framework represents Competition in the marketplace. This part of the framework should generally cover the substitute products (and their precise positioning) that might impede a company’s ability to sell to its targeted customers. The competition analysis should cover more than the products that compete, it must also include the overall attributes of the firm producing the competing product. Competition analysis helps identify the companies in competition, rival products, and also how market actions will be received in the marketplace.

The final C stands for Company analysis. The insight that developed from this third part of the framework should generally identify strengths and weaknesses in a firm’s capabilities and resources and highlight the overall priorities of the firm.

- 22 -

Potential 4th C

- 23 -

• Who are they?

• Demographics

• Segmentation

• Do they have unmet needs that we could serve?

• The what, where, how, when, and why of the buying

• Who are they, and what is the overall market like?

• How well have they been doing?

• How are they different from us in products, services, or costs?

• Can new competitors easily

• Company’s strengths & weaknesses

• How do we compete (e.g. low cost vs. high end)?

• How well can we keep new competitors from being a threat (e.g. pre-emptive actions, barriers)?

CUSTOMERS

• Who are they?• Demographics• Segmentation


• The what, where, how, when, and why of the buying decision

• Is there anyone else that we might be able to sell to (growth)?

• Are there any services that they might find useful?

• What is our share of customer market?

COMPETITORS




• Can new competitors easily enter the market?

• Do we have to worry about substitute products?

• Do they have deep pockets?• What will their response be

if we pursue a certain course of action?

COMPANY




• Supply chain issues• Financial and capital

resources• Personnel / management

issues • Given its capabilities, what

can the company do?

COLLABORATORS

Buyer Selection:• Purchasing potential• Growth potential• Structural position• Cost of servicing

Supplier Strategy:• Stability and

competitiveness of the supplier pool

• Optimal degree of vertical integration

• Allocation of purchases among qualified suppliers

• Creation of maximum leverage with chosen suppliers.

Frameworks: The Four P’s

When attempting to analyze a specific product or action plan for markeing of a firm to market that product, The 4P’s offers a structured approach that highlights the key levers a firm can utilize when formulating and implementing its action plan. In this way the 4P’s presents a means on which one can create/test potential solutions to issues that were crystalized in a 3C’s analysis.

The first step in analyzing a specific corporate action plan is to identify the Product and understand its current positioning (real and perceived). By understanding the product’s current position, the strategy implemented can be tailored for maximum impact. Additionally it is important to examine factors such as first-mover advantage and product adoption when analyzing any given action plan.

After analyzing the product, the next step is to consider how customers are made aware of the product and its benefits. Promotion specifies which customers are targeted and by what method. In certain circumstances it might make sense to implement a pull campaign and in others a push campaign. It is important that the overall promotional plan incorporate the analysis of all 4P’s.

The third P is Place. When conducting analysis of the corporate action plan, it is crucial to understanding the choice of channels used to move product and channels move information. The place analysis should emphasize the value contributed to customers and the channel member’s motives.

Once the product has been promoted properly and set in the appropriate market place, the firm must create profits from its sale. Price is the only P of the 4P’s that captures value from consumers and determines firm profitability. Therefore is extremely important to the overall action plan. In addition to determining base prices, it is also important to account for channel costs and price sensitivities of the market and how these variations will influence the overall analysis.

- 24 -

PRODUCT

• Does the product have the right positioning in the marketplace?o Does it serve a particular segment of

the marketo Is it a mass market or niche market?

• What kind of brand equity does the product uphold?o What are some of the features that can

be added to the product that would add to the value or the perception?

• What are the packaging issues?o Does the packaging reflect the

positioning of the product?o How does the product fit in the

overall strategy?

PRICE

• What will price be?• What are the competitors’ prices for

competing products?• What discounts or other incentives will be

offered?• Will prices vary across geographic lines?• How much do the target customers value

the product? • Will the product be priced at or below its

perceived value?

PLACE/DISTRIBUTION

• Which channels are the most closely aligned with the company’s strategy?

• What functions does the company want to the channel to serve?

• Will it be more appropriate to go direct to the end-user or deliver the product through intermediaries?

• What are the economics of the channels?• How much control is the company willing

to give up on the delivery of the product?• How would the company address any

potential shifts in power to the channel?

PROMOTION

• What message is the company trying to communicate? What is the objective?

• What are some of the barriers to communicating the desired message?

• Does the promotion/branding focus on the long-term view of relationship building with the consumer?

• How is the marketing strategy different from the competition?

• Which vehicles will the company use to influence the decision making process?

• How much money is being allocated to marketing?

Frameworks: Porter’s Five Forces

Porter’s 5 forces is a framework to analyze and understand the intensity of competition with in an industry and thus profit potential in an industry. This tool is useful when analyzing the competitive strategy of an organization and is especially helpful in situations like new market entry, mergers & acquisitions and the long-time viability of staying in an industry.

According to Porter, the intensity of the competition is determined by five key structural forces: (1) bargaining power of buyers, (2) power of suppliers, (3) threat of new market entrants, (4) intensity of rivalry among existing competitors, and (5) competition from substitute products.

Bargaining power of buyers: Buyers compete with the industry by exerting price pressure or by other means that will affect the profitability of the business (like a demand for better quality). The power of buyers is determined by factors like, size to the organization, differentiation within industry, switching costs for the buyer, and possibility of backward integration.

Bargaining power of suppliers: Suppliers can squeeze the profitability of an industry by increasing the prices or decreasing the quality of supplies. Power of supplier is much higher when the supply industry is dominated by a few players, industry is not an important customer for the supplier, supplier groups’ products are differentiated and possibility of forward integration by the suppliers is higher.

Threat of Entry: New entrants bring more capacity to an industry and thus take away profits. The threat of entry depends on the barriers to entry that exist in the industry and the reactions of the existing players to a new entrant. Barrier to entry is determined by factors like economies of scale, capital requirement, access to distribution channels and the regulatory environment created by the government. The existing players in an industry might preempt a new entrant by strategies like entry deterrent prices.

Intensity of rivalry among existing players: Rivalry among players can take on forms like price competition, advertising battles, and increasing service or warranty levels that might erode profits. This intensity of rivalry is affected by the size and number of players in the industry, proportion of fixed costs, level of differentiation, and exit barriers.

Pressure from substitute products: Substitutes limit the profit potential in an industry by providing competing values to the customer. Identifying the substitutes is a matter of great significance as the substitutes can arise from a totally unrelated industry. Substitute products that pose a significant threat are those that have decreasing cost trends, or from industries that have the capacity to bankroll the costs involved.

- 25 -

The analysis of the five forces can help identify a defendable position for an organization within an industry in terms of positioning, exploiting shifts between forces, or identifying a new industry for diversification.

- 26 -

• Who are they?

• Demographics

• Segmentation


• The what, where, how, when, and why of the buying




• Can new competitors easily




POWER OF BUYERS

• How many buyers does the industry serve?

• How many firms serve the buyers?

• How “big” are buyers relative to industry?

• How critical is your product/service to the buyer?

POWER OF SUPPLIERS

• How many suppliers serve the industry?

• How many firms within the industry does a supplier serve?

• How “big” are suppliers relative to industry?

• Do the suppliers serve other industries?

• How critical is the supplier’s product/service to the industry?

INDUSTRY RIVALRY

• How does the industry compete?

• Price• Product differentiation• Is the market expanding or

contracting?• Is the industry

concentrated?• Many small players• One big player and several

small players, etc.• What are our company’s

strengths/ weaknesses relative to competitors?

THREAT OF ENTRY

• What barriers to entry are present?

• What are the entry/exit costs

• Have you reached minimum efficient scale?

• Are there any large asset requirements

• Are there any patents

THREAT OF SUBSTITUTES

• What is your competitive advantage?

• How easy can your product/service be imitated?

• Industry standards?• Introduction of new

technologies

Frameworks: Profitability

- 27 -

PROFITABILITY =

• What are the business economics?

• Cost/benefit

• Market share

• Are there any synergies or overlap issues with existing businesses?

• Likely response from competitors? • What are they selling?

• Products & Related Services• Sales Trends? Why?• New markets? Geography?• Underserved Customers• New Products/Services• Are they gaining or losing customers?• Why do customers buy?

REVENUES +

MIX

QUANTITY

PRICE

• Price trends?• How do prices compare to industry?• Is it possible to raise/lower prices?• Price sensitivity of customers?

• Selling high/low margin products?• Product and margin mix shift among different customer segments or geographies?

COSTS

• Fixed Costs

• Factory

• Equipment

• Land

• Unusual Charges

• Variable Costs

• Wages

• Materials

• Inventory

• Shipping

• Selling

------------or--------------------

• Raw Mats Procurement

• Price, Quantity, and Efficiency

• Production Costs

• Process

• Labor

• Distribution Costs

• Channels

• Transport

PROFITABILITY =


• Cost/benefit

• Market share


• Likely response from competitors? • What are they selling?

• Products & Related Services• Sales Trends? Why?• New markets? Geography?• Underserved Customers• New Products/Services• Are they gaining or losing customers?• Why do customers buy?

REVENUES +

MIX

QUANTITY

PRICE

• Price trends?• How do prices compare to industry?• Is it possible to raise/lower prices?• Price sensitivity of customers?

• Selling high/low margin products?• Product and margin mix shift among different customer segments or geographies?

COSTS

• Fixed Costs

• Factory

• Equipment

• Land

• Unusual Charges

• Variable Costs

• Wages

• Materials

• Inventory

• Shipping

• Selling

------------or--------------------

• Raw Mats Procurement

• Price, Quantity, and Efficiency

• Production Costs

• Process

• Labor

• Distribution Costs

• Channels

• Transport

Frameworks: VRIN Model

While the 3Cs, 4Ps and Porter’s Five Forces will be familiar to most of us, none of these frameworks provide much insight into the question “why is this firm or that firm able to sustain higher performance than others within its industry?” To answer this question strategy research has developed the Resource Based View of strategy. The Resource Based View asserts that sustained differences in profits among firms in the same industry can be traced back to specific resources that only a few firms have. The “VRIN” model helps us to identify which resources are likely to lead to sustained profits. VRIN sets out four necessary and sufficient conditions (i.e., if you have all four you have something great, if you have less than all four you have nada) for a resource to lead to sustained profits.

Each of these four necessary and sufficient conditions provide one letter for the VRIN acronym. The first condition is that the resource be valuable (V). Clearly an inefficient production plant is not likley to be a valuable resource. It is not valuable because its costs leave little margin when compared to what people might possibly pay for the product. Even if the firm’s production plant is efficient (and thus valuable) it won’t lead to sustained profits if everyone else has an efficient plant as well. Competition would soon drive prices down to the production cost of an efficient plant and thus wipe out any profits. If the firm is going to get profits from the resource, then the resource must be rare (R). If, for example, only one or two companies have efficient plants they are far more likely to keep prices high.

What we really want is profits that are sustained over time. This means that resources must not only be valuable and rare, they must stay that way over time. If they are to stay rare, they must be hard to imitate (Inimitable). It must be difficult to build efficient plants or else efficient plants will become commonplace and any profits they provide today will be competed away. If they are to stay valuable, they must be hard to substitute (be Nonsubstitutable) with other resources. Fro example, the value of an efficient plant is quickly lost in an industry where competitors can substitute cheap labor – perhaps by outsourcing manufacturing abroad – for the technologically advanced machinery and plant layout that currently make another company’s production efficient.

The VRIN acronym doesn’t really capture well one last consideration: to provide profits to the firm the resource must not be able to bargain up its own price. This is most clearly seen in cases of productive people rather than productive plants. An individual can demand higher pay if they are the source of a firm’s profits and as long as they could produce similar profits somewhere else. That is, to be a source of profits the firm must either have control over the resource (e.g., own it) or be uniquely able to make the resource valuable so that it does not have to compete for the resource.

The VRIN model can be used to analyze both the single business strategy (at the business level we talk about resources and capabilities) and corporate strategy (at the corporate level we use the term core competencies). The logic is identical at both levels: in fact core competencies are really just resources or capabilities that help several distinct businesses within a corporation.

- 28 -

- 29 -

Rare

• Is there an informational advantage in owning these resources?

• Produces a cost advantage that is not available to other firms

Valuable

• What resources are valuable to competitive advantage of the firm?

• Does the resource produce intrinsically different levels of efficiency?

Inimitable

• Is there firm-specific learning?• How imitable is the resource?

• If imitable patent protection not possible, so small entry lag

• If inimitable, big entry lag, what other special resources can be built

• Are there casual ambiguities that prevent would-be imitators?

• Mobility barriers that create prohibitive switching costs & entry barriers.

• The nature and process by which the resource is attained

• Non-tradable assets developed within firms

Non-substitutable

• Immobile of Imperfectly mobile resources.

• Co-specialized assets that have high value when employed together.

• Sharing the benefits between the organization and the ‘owner’ of the resource (like human resources).

Frameworks: New Market Entry

- 30 -

REQUIRED CAPABILITIES

• What resources and capabilities are used to succeed in this market?

• Does the client have these resources or capabilities?

• Can the client obtain these resources or capabilities? How?

• Partnership

• Acquisition

• Alliance

MARKET OPPORTUNITIES


• Cost/benefit

• Market share


• Likely response from competitors?

ENTRY MECHANISMS

• Joint Venture

• Direct Investment

• Acquisition

• Carve out

• Build Organically

INDUSTRY ATTRACTIVENESS

• How big is the industry and the profit margins?

• Identify the level of competition in the market

• Look at market dynamics. Use Porter’s 5 Forces.

• Is this industry growing, stagnant, or declining?





• Partnership

• Acquisition

• Alliance





• Partnership

• Acquisition

• Alliance



• Cost/benefit

• Market share





• Cost/benefit

• Market share



ENTRY MECHANISMS

• Joint Venture


• Acquisition

• Carve out


ENTRY MECHANISMS

• Joint Venture


• Acquisition

• Carve out












Frameworks: Mergers and Acquisitions

- 31 -

INDUSTRY FUNDAMENTALS

• Is this an attractive industry?

• Should we continue to play in this market?

• What are the relevant industry dynamics?o How do companies

compete?o Who are the

customers?o Where’s the growth,

etc.?• How would competitors

respond to an acquisition?• Any regulatory hurdles to

overcome?

AUTOPSY OF TARGET VS. REST OF INDUSTRY

• Who are the target’s customers? How do these customers perceive both the client and the target?

• Analyze target performance… market share, profitability, product, etc.

• What are the relevant strengths & weakness of the target?

VALUE OF THE DEAL(SYNERGIES)

• Synergies • Cost: SG&A, R&D, Mfg,

etc.• Revenue: Enhanced

product, improved distribution, robust customer solutions, cross-selling opportunities, new customer segments, etc.

• “Softer” Synergies (Management capability, technology, etc).

• Compare base line valuation + synergies to the purchase price

CULTURALISSUES

• Clash of company cultures, or a good fit

ALTERNATIVES

• Discuss alternativeso Outsourcingo JVo Corporate

restructuringo Carve outo Etc.

Frameworks: Market Estimation

Often embedded within a case, estimation problems can be approached in multiple ways. Example: If Wal-Mart installed kiosks to print digital photos, how many prints could they sell per year?

- 32 -

TOP DOWN

• 250-300M people in US• Uniform distribution• Average lifespan = 80yrs• Age range of digital camera owner is 20-

60 ~150M people• 150M people are ages 20-60• 10% own digital cameras = 15M people• 10% are Wal-Mart customers = 1.5M

people• 20% will use photo finishing kiosk =

300K people• Average person prints 50 prints per year =

15M prints/year

BOTTOM UP

• How many customers does a Wal-Mart have?

• 2000 customers per day• How many own digital cameras?• 10% =200• How many would use a kiosk?• 10% = 20• What % of their visits would be for prints?• 10% = 2 kiosk customers/day• How many prints would each person

make?• 10 -> 20 prints/day/store• What does this mean on a yearly basis?• *400 days/yr = 8K prints/year/store• 1,500 Wal-Mart's = 12M prints/year•

Frameworks: Supply Chain

Key Components of the Supply Chain

- 33 -

Industry Cheat Sheet

I ndustry Key Revenue Components Key Cost Components Operating Margins Other Characteristics to ConsiderAirlines Business vs. Leisure segmentation,

Capacity Utilization, Price discrimination (day of week, # of days in advance)

High fixed costs, High operating leverage, security

Low Potential government regulation, Hub-and-spoke vs. point-to-point

Automobiles Financing, Warranties, Parts, New Cars, Used Cars, Maintenance (some of these at dealerships)

Large PPE, Extensive R&D Moderate Powerful Negotiator, Union Issues, Oligopolistic, Pensions, Tight supplier relationship, Cyclical business

Health Care Providers

Insurance reimbursement, Occupancy Rate Specialty labor, facilities and equipment, IT systems

Moderate Medicare/Medicaid, Privacy Issues

Financial Services Business vs. Consumer segments, Portfolio of products, Cross-selling opportunities

IT systems, Customer service, Fraud detection

Moderate to High Robust systems architecture, Risk management, outsourcing call centers

Pharmaceuticals Relationship-driven sales R&D, Advertising Expenditures High Patent protection, Long product cycle, High risk and high return

Retail (Apparel) Converted customers*average sales* frequency, Premium Brand vs. Private Label, Same-Store-Sales metric

Store costs, Commission-based sales

Low to High (it depends)

Seasonality, Promotion, Placement on shelf, Profitability per square foot, Store layout, Store location, multi-channel strategy, Customer service

Hi-Tech Software vs. hardware, subscription vs. license model (recurring vs. one-time)

R&D, Labor (software), Fixed assets (semiconductors)

High (software), Low (hardware)

First-to-market vs. leapfrog strategy, short life cycle, product and process innovation

Defense Monopsony buying from oligopoly R&D, Technology spend High Long-term relationship, contracts, and sales cycle, Security concerns, Patents, Government regulation

Hospitality Business vs. Leisure segmentation, Capacity Utilization, Price discrimination (happy hour, seasonality), Tips

Operating Leverage (hotels), Customer service

Low to High (it depends)

Seasonality, Cyclical business

Telecom Subscriber revenue (wireless), Customer segmentation (frequent vs. infrequent), Cross-selling and integrated services (DSL)

Customer Churn, Cell phones as loss leaders

Moderate to High Growth industry, Short product cycles

Oil and Gas High demand with ability to manipulate supply

Resource exploration, extraction, and refining, High PPE

High Vertical Integration, Oligopoly, Seasonality

- 34 -

Tips to Put You over the Top

Read this list and put it into practice. It represents advice that we have gleaned along the way. It is worth more than its weight in gold.

Interviewees Try to avoid coming up with a ‘3 C’s or 4 P’s framework’. These concepts are

important and frequently employed, but dress them up with different names (for

example, say ‘End User’ instead of ‘Customer’).

Do not be afraid to ask for moment to collect your thoughts, at any point in the

interview. Haste makes waste.

While you are cracking the case, do not forget that the interviewer is analyzing

your behavior as well.

Do not neglect the behavioral portion of the interview. We can say it until we are

blue in the face, but some of you will underprepare in this area anyway. Don’t be

that guy!

Expand your practice interview network. Change case partners.

Use this casebook early and often.

Understand the differences and nuances between the firms themselves. There are

differences and this question does come up on occasion.

Turn your page with your framework so that your interviewer can better follow.

The more the interview can follow and remain engaged, the better your interview

will be.

Be personable. Smile. Some personality can take you a long way. If it looks like

you’re not enjoying the case interview, why would your interviewer expect you to

enjoy consulting as a career? If you really don’t enjoy cases, ask yourself if you

will really enjoy consulting as a career.

Get plenty of sleep and eat breakfast when you have a morning interview.

Be vocal with the math. People get lost and lose interest in your numbers when

they are not engaged.

To that end, walk your interviewer through your thinking throughout the case.

- 35 -

Always keep the original case question in the back of your mind. What are you

trying to solve—don’t get lost in the tall, thick weeds.

Listen and take cues from the consultant. They are there to help you.

For every numerical conclusion you come to, you should be doing two things:

o Is this number reasonable (is it logical)?

o What does it mean (drive the process forward and find inferences)?

Finish strong—your conclusion is the last impression you make in the case.

o Take a stand: “In looking at…(insert original goal/question here), I

recommend…(put a stake in the ground). I feel this way because…(list

two or three or four analyses from the case that buffer your position).

o Other factors to consider: “If I had more time, I would look at…(show the

interviewer some depth of thought here: run sensitivity analysis, explore

international expansion, conduct further market research).”

Practice math in your head. The book, “How to Calculate Quickly,” by Henry

Sticker, is really helpful. People on your project teams at school will be amazed

at your mathematical dexterity.

Send thank you notes and make them personable. You don’t have to write a

novella, but a quick note is appreciated. This is not just for you, but makes the

school look good as well.

Interviewers When you give a case for the first time, prepare the case well for the candidate

sitting across the table. The better you know the case, the better it will flow and

the more realistic it will seem.

Give the candidate honest feedback. If you are not being candid with them, they

will continue to make the same mistakes.

Use our “Case Feedback Form” to give valuable feedback to the candidate.

Give cases. Give cases. Give cases. You learn quite a lot by giving cases.

Challenge the candidate. On thought-provoking, brainstorming questions, ask

“What else” to generate more creative responses from the interviewee.

- 36 -

Practice Cases

- 37 -

Case Feedback Form

Use the below criteria to structure the feedback to the interviewee for every case. Remember that while these are some of the recommended parameters, you can create your own as well.

Main Aspect / Criteria Grade 1(low)-5(high)

Other observations

1. Framework:a) Quality of structureb) Time (under 1 minute)c) MECEd) Presentation

2. Problem Solving:a) Logical questionsb) Listening Skillc) Leads/Drivesd) Coachabilitye) Depth of Quant analysisf) Verbalizes thought process

3. Conclusion:a) Time (~30-40 seconds)b) Answers original questionc) Gives supporting pointsd) Additional insight (risks, alternatives, etc.)e) Shows conviction

4. Presentation Quality:a) Poise under pressureb) No annoying ticks c) Good postured) Seems attentivee) Enthusiasticf) Eye contactg) Firm handshakeh) Non-verbal signsi) Legible, uncluttered notes

Case #01: Japanese Golf Ball Market

Scenario: You are going to visit a client who sells golf balls in Japan. Having had no time for background research, you sit on the plane wondering about the size of the market for golf balls in Japan, and what drives demand. Your plane lands in fifteen minutes. How do you answer these questions?

In estimation cases there is no one right answer. You make up the numbers as you go along, so try to make your calculations as easy as possible. A good rule of thumb: use nice, round numbers. The interviewer will expect you to think out loud, outline a general framework for how you are going to solve the problem, and then come up with reasonable assumptions about the inputs that you need.

Approach:

Golf ball sales are driven by end users. Population of Japan: 125 million. Proportion that play golf: 1/5. Purchase Frequency: the average golfer plays 20 times per year and uses four

balls per time. 125 * 1/5 * 20 * 4 = 2,000 million. The estimated market size for golf balls in

Japan is 2 billion.

Case #02: Chicago Piano Tuners

Scenario: How many piano tuners are there in Chicago?

This is an estimation case - there is no right answer.One potential solution:What is the number of households in the Chicago area? (Presume 3 million households)

Make an estimate of how many people have pianos. Break the income of the households into four quarters (750,000 each).

20% of highest income quartile has pianos10% of second quarter 5% of third0% of fourth

Estimate how often these pianos are tuned:Highest income quarter tunes pianos once a year Second quarter once every five years Third quarter once every 10 yearsFourth quarter doesn’t tune at all

Estimate a piano tuner can tune five pianos a day, 250 days a year, therefore: 112,500/250 = 450 pianos a day to tune 450/5 = 90 pianos tuners needed.

How could you check this? Look in the yellow pages. Would all the piano turners be in there? You can guess half might be, while half work on word-of-mouth advertising. By the way there are 51 piano tuners listed in the Chicago Yellow Pages.

Income Population % w/ Pianos # of Pianos Times tuned/year Tunings/year1st tier 700,000 20% 140,000 1 1400002nd tier 700,000 10% 70,000 1/5 14,0003rd tier 700,000 5% 35,000 1/10 3,5004th tier 700,000 0% 0 0 0Totals 2,800,000 245,000 157,500

Case #03: Disposable Diapers

Scenario: You have been retained jointly by Pampers and a federal commission on waste management to estimate the volume percentage of disposable diapers in the total US household garbage.

Approach:

Volume percentage = Diapers (volume) / US household garbage (volume)

Numerator Population of the United States: 300 million Proportion of population that are disposable diaper-wearing children: 10% = 30

million Number of diapers used per day: 4 = 120 million diapers per day. Volume per diaper: 500 ml (or use another number in gallons/oz if you prefer) Volume thrown away per day = 500 * 120 million = 60,000 million m1= 60

million liters

Denominator Population of the United States: 300 million Average volume of household garbage can: 10 liters (or use gallons if preferred) Average number of emptied bags per day: 1 = 10 liters per day Total volume of garbage/day: 300 * 10 = 3,000 million

Ratio 60 million liters of diapers/ 3,000 million liters of garbage = 2%

Case #04: Chewing Gum Market

Scenario: How would you estimate the size of the annual U.S. chewing gum market? Check your answer for reasonableness. Approach:

Population of the US: 300 million The heaviest users are between the ages of 10-20. They comprise roughly 20% of

the population, or 60 million. Estimate that these people chew two packs per week. Estimate number of

packs/year: 2 packs/week * 60 million people * 50 weeks = 6,000 million packs. For all other users, (80% of 300 million population, or 240 million) estimate a

usage rate of one half pack per week: 0.5 packs/week * 240 million people * 50 weeks = 6,000 million packs.

Adding these two figures, estimate the total chewing gum market to be 6,000 + 6,000 = 12,000 million (or 12 billion) packs per year.

Now check for reasonableness. We have the volume, what about the revenue? How much is 12,000 million packs in terms of dollar sales? Estimate for average price of pack: $0.75. 12 billion packs * .75 = $9 billion, which appears quite reasonable.

Case #05: Publishing

Scenario: Your client is the CEO of a publishing company producing a line of educational magazines and a line of women's magazines. Both businesses are profitable but not growing quickly. He wants to start a third monthly magazine in the US targeted at 25- to 55-year-old men (e.g. GQ Magazine). His stated goal is $12 million in circulation revenues in the first year. Is this possible?

The candidate needs to recognize that this is a simple market estimation case. He/She should make assumptions and use round numbers to make the math less cumbersome. Give the candidate latitude in exploring possible approaches to solving the problem. There is a fine line between drilling too deep and not going into enough detail when sizing the market.

The total US population is approximately 300 million. Based on a normal distribution with the average life span of 80 years, approximately

1/2 of the population falls between 25-55, or about 150 million people. Approximately 1/2 of them are male, or 75 million. Of the 75 million 25- to 55-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. As a new magazine assume that you can generate a 5% share of the men's magazine

market in year one, or 200,000 customers. Based on other magazines selling for $2.50-$5.00, assume a cover price of

$4/magazine at the newsstand and $2/magazine for a subscription. Now make some assumptions on how many customers will buy at the newsstand

versus subscription: assume 50% subscribe (100,000) and 50% buy at the newsstand (400,000).

This comes out to monthly revenues of $200,000 + $400,000 or $600,000. 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 $12 million in circulation revenues, it would not make sense to launch the magazine.

Profitability

Case #06: Yellow Cab Taxi Company - McKinsey

Scenario: You are a taxicab operator Yellow Cab Taxi Company in New York City. You have just dropped off a fare at LaGuardia Airport, which is 12 miles from downtown Manhattan. You have two options.

1) Go back passenger-less to Manhattan2) Queue up and wait 2 hours for a fare to go to Manhattan

Question: As the taxicab operator, what factors would help in making your decision?Question: If the answers to Q1 are sufficient, ask them to run some numbers.

The following data is to be provided when asked for by the candidate:Typical taxicab fare structure:

1st Mile - $4.00Each additional mile - $2.00Tips - Assume 15% of total fare

Engine efficiencies, fuel consumption data:Fuel Efficiency - 24 miles/gallonFuel Cost - $2.00/gal

Fees (Operating Company):50% of the meter reading to be turned into the taxicab company (e.g. Yellow Cab)

Other miscellaneous questions the candidate may pose:Do I have to worry about traffic?

No. Assume times and distances are consistently applicableAny additional costs to consider – ex: baggage, extra passenger

o No. No other data/factors affect this case in any way.

The framework to be used is simply the revenue/costs attributable to each decision and hence maximize profitability / minimize losses for the cabbie.

If the candidate is marching down the above path, and asks for numbers such as above, provide it to him/her, and guide toward running the numbers to answer the second question. The approach we should really take is look at the costs / revenues of each scenario for the taxicab.

Profitability

Analysis: Assume that we stay at the airport. In this case we pick up a fare to NYC.This would generate revenue of:

$4*1 (for the first mile) + 2*11 = $26.00 base fareTips = 15% of base fare = $3.90

===========Total $30.00 (approximately)

Now let’s look at our costs in this scenario:Given 24 miles/gal, we use ½ gallon of fuel for the entire 12-mile trip.At $2 per gallon:Fuel Costs = $1.00Taxi Cab Company Cost

50% of $26.00 (meter cost)= $13.00=======

Total Cost $14.00

Profit = Revenues – Costs = $30.00 - $14.00Operator Profits = $16.00

Question: Say we leave and head back to Manhattan without a passenger. What is the net margin for the cabbie?

Interviewer: Make sure the candidate understands the reasoning as to why he/she is doing this. The candidate should deduce that the time spent sitting at LaGuardia could be used to get fares in Manhattan and make money. Let them proceed with the following data about fares in Manhattan:

Toll to be paid to go back to the city : $5.00Time to search for fare once in Manhattan : 10 minDistance to be driven for fare pickup : 2 milesTime fare engages cab : 10 minDistance fare travels : 2 milesSame fare rate.

This is a cycle and the candidate needs to identify the revenues generated in such a 2-hour cycle with the equivalent 2-hour wait and passenger pickup at La Guardia calculated earlier.

Profitability

Candidate continues…Break down the revenues generated per cycle:

4*1 (for first mile traveled) + 2*1 (for the second mile) = $6.00Tip 15% of the base fare = $0.90 = $1.00 (approximately)

======Total $7.00

Let’s break down the costs:A sharp candidate will realize that there is a cost associated with driving back.Cost of fuel (12 miles takes up 0.5 gal, @ $2/gal) = $1.00Toll booth cost (yes, both ways) = $5.00

=========Total Cost (to get back to Manhattan) $6.00

Cost associated with each cycle:Cost of driving around (2 miles) to find a fare = (2/24) * 2 = $1/6 = $0.16Similarly cost of driving the fare (2 miles) = $ 1/6 = 0.16 cents approximately

Now we know 50% of the fare goes to Taxicab Company.We know fare = $6. Therefore company nets 6/3 = $3 and operator keeps $3Therefore Net cost of a cycle = ($0.16 + $0.16 + $3.00) = $3.33

Net margin per cycle for operator = ($7.00 - $3.33) = $3.66

At this point the Candidate has identified one-time cost to Manhattan as $6.00, and the net margin per cycle to be $3.66. Candidate should continue with analysis…Given each cycle lasts 20 minutes and we have 2 hours equity time we can expect the taxicab operator to generate six revenue cycles. Adding up the margins operator stands to make:

Total margin in six cycles = (6 * 3.66) = 21.96From this we need to subtract the one time cost to get to Manhattan ($6.00)Therefore, operator generates profits of (21.96 – 6) = $16.00 (approx)

Bottom-line: Both the approaches net the same margins for the operator. So neither path confers a bigger advantage.

Question: Why are the bottom lines for the two strategies comparable, and can one expect this in real life?

A good answer would be merely the observation that it’s interesting that both the routes net the same result. A superlative answer would consider why that makes logical sense., and tie in supply and demand equilibrium, explaining why the market steers itself towards the equilibrium point. Discussion along the lines of “if too many cabbies stay back then they wont get their fare in 2 hours, but they will notice that other cabbies are getting fares quickly by heading back and so they will also head back, leading to equilibrium.” The alternate of too many cabbies heading back—resulting in equilibrium—is left as an exercise for the student.

Profitability

Case #07: Direct Mail Retailer

Scenario: You are consulting for a direct mail retailer that sells ladies clothing. Your client's catalog postage costs have just increased to forty cents per catalog. How can your client decide if the new price is acceptable?

The candidate should take some time to draw a framework and walk through the framework for the interviewer. A profitability analysis should follow, with the candidate requesting revenue and cost information. When the candidate asks for revenue information, show him/her Exhibit 1. Provide the following information on request:

Profit margin on catalog orders: 15%, excluding mailing costs Postage costs: $40 for each 100-catalog bundle mailed (100 x 40 cents).

The candidate should be able to deduce the following information from the Exhibit.

Average response rate: 2%, i.e., two orders placed for every 100 catalogs mailed in 2001. This number has increased slightly over time to 3% in 2005

Average order size: Decreased over time from $150 to 66.67 (= 400,000/6000 as per Exhibit 1)

Percentage of customers who reorder within six months: Hovering over time between 20% and 25%, on average

The candidate should calculate the revenues and profits from the information given for 2005. Every 100 catalogs will result in 3 orders, plus 3*(1,500/6,000) = 0.75 additional reorders, for a total of 3.75 orders placed per 100 catalogs mailed. The 3.75 orders will result in 3.75 * 66.67 or $250.00 in revenues.

The candidate should continue with the profitability analysis, now looking at costs. At a profit margin of 15%, approximately $250 in sales will return a profit before postage of $37.50, which is not sufficient to cover the mailing cost of $40.

Conclusion: The client should not accept the printing arrangement at $0.40 cents per copy.

Question: The client is interested in improving the revenues per catalog metric. How might they achieve this?

Brainstorm. Be intelligent. Relax. The best answer might have the candidate take some time to come up with a structured response. One example might be the book itself (bigger pictures, layout, more product selection, print in color, etc.). Tweak sales strategy through better-targeted advertising or by offering a pre-holiday sale to spur volume.

Profitability

Exhibit 1: Mail Retailer Revenue Data

Year No. of Catalogs Mailed No. of Orders Received SalesNo. of Reorders (within six

months)

2001 50,000 1,000 $150,000 200

2002 100,000 2,000 $150,000 600

2003 200,000 3,000 $300,000 1000

2004 150,000 3,000 $300,000 600

2005 200,000 6,000 $400,000 1500

Profitability

Case #08: Airlines – Accenture Final Round

Scenario: Your client manages Northwest Airlines operations at DTW (Detroit Wayne County Airport). Detroit is a hub city for Northwest, and it is 5:30 pm on a Thursday evening, one of the busiest times of the week. Suddenly, there is a security breach, and passengers in the airport are required to exit the terminal and re-enter through security.

Question: What are the costs of this event?

Here, the candidate can break down the costs down into two main groups: direct and indirect. The candidate should simply list out and briefly explain the costs here.

Direct costs:Airlines: Wages (workers there for more hours), fuel (pilots will fly faster to compensate for late takeoffs), utilization/maintenance costs (it is widely known that airlines lose thousands of $/minute for planes on the ground)

Airport: Gate fees (few planes taking off), wages (workers will have to work more hours until all of the planes are gone for the night), and taxes (fewer people sitting around the airport = fewer people drinking beers, buying books, etc.)

Customers: Loses time, productivity

Indirect costs:Airlines: Goodwill/future business (next time, customers may choose to fly another airline or to not fly through DTW)“Ripple effects”: Basically, if a flight is flying from Detroit to Chicago and then onward, then all of the connecting/subsequent flights will be late.

Question: How should the airline decide which planes to send off and which planes to hold for the passengers?

Think about the number of customers/flights/connections. If a flight has no connection at another airport, hold it. If customers have connecting flights, you would have to analyze the connection in terms of # of customers affected, # of connecting flights, etc.

Question: The airline VP you are sitting with asks you if the number of customers that have connecting flights is the best metric to analyze?

Realize that some customers are more valuable than others, like first-class customers who pay a higher fare, like business customers who have premier status (Fly 100,000+ miles/year on the airline). The candidate should basically realize (if he/she hasn’t already) that the airline needs to look at connections, etc., but needs to value each plane/flight in terms of the value of each customer.

Profitability

Case #09: Slick Hick’s Farm Equipment

Scenario: Your client is Slick Hick, a large agricultural equipment manufacturer. Its primary product line, farming tractors, is losing money.

Question: What questions would you ask of your client to help them solve their profitability problem?

Approach: Market dynamics, Porters five forces, revenue - cost (PQ - FC + VC*Q)

This information should be given if asked for:

Number of direct competitors: Two direct competitors. Market share: Client has 40% of the market, competitor #1 has 30% competitor

#2 has 15%, with the remaining 15% belonging to many small manufacturers. Market share trends: Five years ago, your client had 60% of the market,

competitor #1 had 15%, and competitor #2 had 10%. Your client has lost significant market share to its two main competitors over the last few years.

Customers: All three competitors sell to the same customers. Price: Client's product is priced higher than others. This has always been the case. Features: The products all have the same basic features. However, tractors are

not commodity items and a few differences do exist. Differences that allow for a premium price: Client has a strong

reputation/image of quality in the market and the market has always been willing to pay a premium for that reputation because it implied a longer lasting more reliable product. This is critical for some farmers because they cannot afford to have a piece of equipment break down.

Change in sales revenues: Revenues are down. Change in sales quantities: Quantity is down. Change in price: Prices are up. Change in costs: Costs are up; Change in fixed costs: Unchanged. Change in variable costs: Variable costs have increased tremendously. The

client does not know why material prices have gone up so staggeringly. Type of operation (manufacturing or assembly-only): Primarily assembly. Change in finished part prices: Finished part prices have gone up. Change in raw material prices for suppliers: Not to client's knowledge. Change in supplier labor costs: No change. Also, no change in suppliers. Reason for suppliers charging higher prices for the same products: They're

not--the prices have increased as a result of product improvement efforts. Client has tightened tolerances and improved the durability of component parts.

Reason for product improvements: Client strives to sell the world’s best tractors.

Customer willingness to pay for product improvements: Client assumed yes.

Solution:

Profitability

Prices have been raised to cover the costs of improvements, but customers do not place a high value on the improvements, so the price increase has resulted in a drop in sales. The client needs to incorporate a cost/benefit analysis procedure into its product improvement process. The client should also evaluate their marketing plans to ensure their customers are aware of product improvements and understand their value. Before scaling back their product improvement process, the client needs to evaluate competitor's R&D and product improvement positions.

Profitability

Case #10: Heavy Equipment Manufacturer – Huron Consulting Group, Final Round

Scenario: Your client is a manufacturer of heavy equipment. Revenues have been increasing but margins have been dropping. The CEO, Peter South, has asked you to figure out what is going on.

Note: This is a straightforward profitability case. Candidates should use a profitability framework, but add 2 “Cs” for segments/products and competition. An initial hypothesis could be that product mix has changed.

The following information should be given if requested:1. Product Mix: The client sells construction equipment (bulldozers, backhoes, etc.)

similar to Caterpillar. The product mix has not changed recently. 2. Pricing: List price has been increasing at 3-4% annually. We have not changed our

discount policy.3. Fixed Costs: Ask the candidate what he/she thinks the fixed costs are (SG&A and

PP&E come to mind). There have been no changes in these recently.4. Competition: There is no real competition in our segments. We have been doing great

and we have a backlog of orders. Our factories are running at 100% utilization.5. Variable costs: The candidate should list out some variable costs (fuel, raw materials,

labor are three biggies). Labor probably contains a union component. However, no major changes here. We have, however, passed fuel cost increases onto our customers.

6. Manufacturing for export: Overseas transport is not a concern. We are not impact by those exchange rates and high fuel usage.

7. Quantity of equipment sold: Growing 8. Sales Force: The sales force negotiates with each customer, and is compensated based

on top-line growth

Solution: The candidate should realize that the sales force is giving away freebies to get the sale “maybe additional service, better payment terms, etc.,” which is reducing profitability.

Profitability

Case #11: Purified Water

Scenario: Your client, a cafeteria manager, needs to make a decision regarding which purified drinking water option to select. He has three options: individual bottled water, fountain water (larger refill containers), and on-site water purification. Which option should he choose?

There are several directions this case could go in, based on the introduction. Obviously, a cost-benefit analysis comes to mind. What information would the candidate need to conduct the analysis? Are there other considerations, like environmental concerns? Perhaps the water purification process must adhere to certain legal standards? Do customers care one way or the other? Provide the following information on request:

The manager’s objective is to find the low-cost solution. The number of customers per month could be between 500 and 3,000. The

manager is unsure and has never counted. Cost Structure of Water Purification system

o Initial cost of $14,400 and $200 monthly service chargeo Lifetime of a water purifier: your client estimates it is four years.

Cost Structure of Bottled Watero Variable cost of $.50 per bottle

Cost Structure of Fountain Water (large refillable containers)o Number of dispensing units required: Twoo Fixed cost of setting up the dispensing units: Negligibleo Cost of refilling one container: $35o Frequency of replacement of water in the two containers: Daily if the

restaurant has more than 2,000 patrons per month. Every other day if between 1,000 and 2,000 patrons per month. Every third day if there are fewer than 1,000 patrons.

Results of customer research (if any) to determine customer preferences: customers do not have a preference.

The cafeteria is open 20 days per month

From an economic standpoint, the best option will vary with the number of customers. It is necessary to set the options equal to each other in terms of customers. Water purifier: $200 per month, plus an upfront charge of $14,400 that one can

depreciate over the purifier’s lifetime (i.e. $14,400/48 months) = $300 per month). Total cost is therefore approximately $500 per month, regardless of the number of patrons per month.

Bottled water: $0.50 per patron. Bottled water costs equal purifier costs at $500/$0.50 = 1,000 patrons per month. Below 1,000, the bottled water costs less. Above 1,000, the purifier is cheaper.

Drinking fountain: Less than 1,000 per day = 2*6.33*35 (replace both of them every three days, or 6.33 times per 20-day month). For 1,000 - 2,000 patrons per month,

Profitability

the drinking fountains will cost $35*2 every other day or $70 x 10 = $700 per month. At more than 2,000 patrons, it costs $70 x 20 = $1,400.

The candidate should review the possibilities for the interviewer, and should synthesize his/her inferences without having to be prompted. For example, “at very low numbers of patrons, bottled water is the cheapest solution.”

Question: The manager finds some daily count data over the past year and reports back that the average number of customers is 1,700. What option should we choose now?

IT DEPENDS. The average monthly number of customers is 1,700, but individual months may vary widely. If he/she said this, then tip your hat to him/her. For example, if the cafeteria is in a school, then for several months out of the year there might be few people juxtaposed with several very heavy traffic months. This is the best answer. Other suggestions might include tracking how the volume of water that people are drinking is changing over time. The capital required for the purifier (the cheap option at 1,700) might be cost-prohibitive if we’re required to pay it upfront.

Consumers 0 500 1,000 1,500 1,700 2,000 2,500 3,000Cost of Option:Purifier $500 $500 $500 $500 $500 $500 $500 $500Bottled $0 $250 $500 $750 $850 $1,000 $1,250 $1,500Fountain $450 $450 $700 $700 $700 $1,400 $1,400 $1,400

Profitability

Case #12: Nabisco’s Market Share

Scenario: The salted food division at Nabisco has been steadily losing market share over the past two years, from a high of 20% to the current level of 18%. Profits as a percentage of sales, however, have been growing. What could be causing this?

The candidate should take some time to draw a framework and walk through the framework for the interviewer. Astute candidates will recognize this as a case dealing with company revenue-cost structure (internal), as well as some external factors. The candidate should prepare a framework before asking relevant questions.

External Factors: A decrease in market share may suggesto Competitor dynamics:

Existing players have increased market share New players have entered the market

o Market dynamics: Market is growing Client is unable to capture the growth. Why?

Internal Factorso Market share loss may suggest that the company is not spending enough

on promotionso Growing profits may suggest that the company is reducing cost

The candidate should ask the following questions to test the above framework.

Provide the following information on request: Market Size or Company Sales (Show Exhibits 1 & 2).

The candidate should be able to figure out the following from the above chart:Change in market size over 2 years: grown from $15 to $17 billion. Change in client's total dollar sales: grown, but not kept pace with the market

Did the candidate make remarks about the mistakes in the charts? Get over it, buddy, the data is the real-world lives of consultants is not always “clean.”

Main competitors: Largest competitors are two multinational consumer products companies that feature complete lines of snack foods. Together, the two companies have about 50% of the market share.

Differentiation from competitors: Nabisco’s sales reps are regarded as the best in the industry.

Change in client’s product line: None Change in client's costs over the period, as % of selling price (Show Exhibit 3)

Exhibit 3 may generate questions about promotion, sales force reductions, sales channels, reasons for changing the marketing budget, etc. When asked, provide the following information about sales channels, sales force, promotions, etc:

Profitability

Reason for sales force cut: Sales force cut to reduce costs, but number of outlets unchanged.

Cause of change in the marketing budget: The changes come from reduced trade promotions.

Sales channels: Products primarily sold in large grocery store chains and convenience stores.

Sales force/customer interaction: Sales force visits each customer at least once per quarter.

Timing of promotions: Promotions usually occur at the end of each quarter. Impact of promotions: Promotions required for end of aisle displays and

advertising space.

Conclusion: Please inform CEO John Keebler of your findings.

The candidate might come up with the following conclusion:

The data show a large decrease in sales force and marketing expenditure. Most of the marketing reduction was in trade promotions. Product is sold through grocery chains and convenience stores, which are traditionally driven by periodic trade promotions. The reduction in trade promotions brought about a loss of shelf space, which led to a decrease in market share. Also, the product line did not change in a product category where new products and line extensions are routine. The market has been growing, indicating a missed opportunity for new products in the market. Lastly, profitability increased due to lower costs, but it may not be sustainable.

Profitability

Exhibit 1: Growth in Total Sales, Nabisco

Company Sales

$3.02$3.07

20042006

Exhibit 2: Growth in Total MarketTotal Market

$15.10

$17.04

$14

$15

$15

$16

$16

$17

$17

$18

$18

2004 2006

Profitability

Exhibit 3: Company Cost StructureCost Current Two Years Ago Raw Ingredients 28% 26%Conversion costs 24% 24%Distribution 8% 9%Marketing 16% 18%Sales force 7% 9%Pre-tax profit 17% 14%

Market Entry

Case #13: Bank Commissions - Accenture 2nd Round

This case format was recorded in a conversational style, which means no specific framework at the front end is required. It also means that we will suggest a possible scenario of how the conversation might develop but as you will notice things are not forced to show up in exactly the same order, so as an interviewer you must know all the facts well enough to take the different roads the case might take to get to the same conclusion.

Scenario: Your client is a regional bank, trying to improve its profits. To do so, the CFO is thinking of paying a commission to tellers if they sell products to customers. Your job is to figure out how much the bank should pay in commissions for each sale.

So why don’t you begin by telling me what is the first aspect you would analyze and why you start there?

The Interviewee should ask for more information about the products, because unless we can ascertain the profitability of each we cannot establish how much we can afford to pay in commissions. Think of it as a breakeven analysis.

The bank has 4 products it wants to sell in this program, CDs, Checking accounts, Mutual funds, and IRAs.

Candidate: Well, I’d like to understand the profitability of each of these products, and that will determine how much we can afford to pay the tellers. Do we know the profit margin the banks make on each of these products?

Interviewer: Yes we do, but before we get into that, why don’t you tell me this first: What elements would you expect give these products their earnings?

C: I imagine they make money on interest generated, on the commissions, maybe there’s also an overnight float that we can take advantage, there could be synergies or economies of scale because of the cross selling.

While the candidate is stating his reasons push him to come up with at least 4 reasons by using the famous “What else” words. The candidate should write down his ideas so that he may use them on the recap.

I: For now lets focus on the ‘spread’ of interest of what the bank makes versus what it has to pay out.

The profitability is as follows: CD’s: 2% with an average $4,000 initial depositChecking: 4% with an average $2,000 initial depositMutual Funds: 1% with an average $8,000 initial depositIRA’s: 2% with an average $4,000 initial deposit.

Market Entry

C: Well, it looks like that works out to $80 profit per product. So imagine we can pay out a portion of that as commissions.

I: What forms can the commission take? For the candidates answer again use the “What else” format and push for at least four answers.

C: A fixed fee per product, a percentage of the profits, a fixed fee for a certain number of products sold that would decline after a threshold, or a variable commission depending based on products and spreads.

I: So what information would you need to determine which form to take?

C: The ease of sale of the products, if all tellers are equally as effective at selling the products, the possibility of tracking the profits on a per teller or per customer basis, what type of an increase in the salaries would the commission’s mean, and what type of costs would that mean to the bank?

I: You can assume that all the tellers are equally as effective and that all the products can be sold with roughly the same effort. The other parts of your answer we’ll tackle further down the road. So what would you base the commission on then? The point of giving him some information but denying another piece would be to throw the candidate off balance a little bit to see if he can maintain his composure.

C: Then I’d like to use the fixed fee option, which means I’d need to understand how much the tellers make so I can tell what would be a reasonable incentive or increase to their pay. Perhaps 10% of their salary would be a big enough bonus if it is reasonable to achieve. How many products per year can they sell?

I: That’s two questions you just asked. Let’s start with salary: they make between $18,000 and $32,000 per year, and as I said there’s no difference in how well they sell based on experience. Secondly, the bank thinks the tellers can sell 5 products per week.

C: OK, so I’ll take an average teller salary of $25,000 per year from that range. And 5 products per week * 50 weeks per year = 250 products per year. Therefore, if we want to give the tellers an average 10% bonus, we can pay them $10 per product. That would still leave a $70 profit for the bank.

I: What does the bank need to do to make this program happen?

C: They still need to track in their accounting systems a field that shows who sold the product to make sure they receive credit. Changes in payroll systems may need to be made. Also, tellers would have to be trained on how to sell the products.

Market Entry

Case #14: Schwarzenegger Defense-Accenture, Round 1

Scenario: Arnold, the CEO of your client [Schwarzenegger Defense Inc (SDI)], thinks he has found new opportunity in his industry, where they currently work mostly through cost plus contracts. There are six players in his industry. The government (a big user of your products and services) has a unique proposition to reduce project costs. For an upcoming project each company is requested to submit a bid stating the amount it would require to help the government in this cost reduction program.

The CEO has slotted 30 minutes to meet with you, and has three questions.Question: Where do we get the benefit in winning these deals?Question: What will happen to the Return on Assets (ROA) for our plating business?Question: Should the SDI bid for this contract?

This is a case about cost-plus contracts. A cost-plus contract is where a firm (usually the government) agrees to pay for the cost of production and then a margin atop that for the manufacturer.

Assumptions (to be provided upon request):1) Size of Business: Your business is a $1B revenue business that makes parts for

submarines, ships, and infantry divisions. The firm has a metal plating application, which can be used by other divisions of the armed forces as well.

2) Company’s Customer Base and Market Share: (Show Exhibit 1)3) Capital Investment needed: Company needs to spend $30 million to fund badly

needed capital investments to improve efficiency.4) Details on the new government contract: Let’s structure the new cost-plus

plating contract as followsa. Cost of the contract = $100 millionb. Government to buy at a markup of 10% (Note: this means $10 million

profits, given the $100 million scenario)c. Project cost reduction to be achieved via CapEx = $10 milliond. Government markup of 10% remains unchanged

5) Additional plating contract: There is one additional commercial plating contract

available for bid. It costs $20 million to produce, but you can charge $22 million.

Think about the dynamics of winning the bid—making cost-control improvements will lower the overall cost of the project, and hence lower the company’s profits. The margin remains the same, but we now receive 10% of a lower overall cost figure. The overall project cost is now $90 million and the company’s net is 10% * 90 million = $9 million)

Solution: a) What are our benefits should we win the contract? First, we can lower production costs. Second, by showing goodwill throughout the bidding process the Company will put itself in a position to secure current and future business (Otherwise what’s the point for the government to invest big bucks in a

Market Entry

particular contractor?). Lastly from an investment perspective this makes good sense. We would have incurred the $30 million capital investment cost anyway in order to stay competitive and bring our costs down to increase margins. The industry term for this is ‘capital avoidance.’

b) Return on Assets: (Net Income / Total Assets)ROA = 10 / 100 = 10%. The fixed assets of our facility are $100 million before the government funding (prior to the 30 million investment).

After potential capital investment using our own $30 MM, the ROA = 9 / 130 = 7%.However, we should consider the commercial opportunity, too, where the cost was $20 million and the selling price $22 million. With the new machinery, the cost drops to $18 million while the price stays fixed at $22 million. Profits will increase by $2 million.

Therefore, incremental profit will be $1million. (-$1 million in Government and + $2 million in commercial).

c) Should we bid then? Regardless of the source of money, we need to make the changes to lower costs and stay competitive. We could also use this capitalization to become competitive in new markets.

Conclusion: Schwarzenegger Defense Inc should bid!

Exhibit 1

Company’s Customer Base and Market Share:

Market Entry

Customer % of SDI’s Revenue Market ShareArmy 30% 20%Navy 20% 10%Other (Commercial) 50% 15%

Case #15: Napoleon’s Pizza Pies

Question: Napoleon’s Pizza Pies (“Pizza fit for an Emperor”) has recently tried to establish the best home pizza delivery business in Paris. Pizza Hut, however, has a virtual monopoly on the pizza home delivery market. Napoleon’s has asked your consulting firm to analyze issues that will determine the likelihood of successful entry in the Parisian pizza market. What information would you need and how would you analyze the pizza delivery market?

Candidates should be excited to do a case about pizza in Paris. Make sure they are on the right track—estimate the market size, do an industry analysis for market attractiveness and segmentation, then examine the cost structure to look for a sustainable competitive advantage.

Estimate the market size: The candidate needs to estimate of the size of the Parisian home pizza delivery market. If the candidate asks for market information, introduce Exhibit 1 and Exhibit 2.

Information available on request: He/She may ask what percentage of Pizza Hut’s business is delivery (~50%). Almost 90% of deliveries take place outside the city centre. City centre Pizza Hut stores offer predominantly restaurant service. The market for pizza is growing at 5% annually. The submarket for delivery is

growing at 8%

Good candidates will remember that Pizza Hut has a virtual monopoly position in home delivery. The market for the city centre, however, seems underserved. Keep in mind that the barrier to entry for Pizza Hut to set up a delivery service there is low, but doing it well in the city centre might be a different issue.

Question: Napoleon launches his pizza delivery business and wins a customer service award. Pizza Hut responds (Show Exhibit 3). What should Napoleon do?

Frankly speaking, Pizza Hut seems to be overreacting by starting a price war with a fledgling competitor. They are killing margins and profits. More information on Pizza Hut’s delivery service should be considered. Are there substantial differences between the Pizza Hut delivery and quality model versus Napoleon’s? If there are (“pizza fit for an emperor”, “top-notch delivery”), then perhaps Parisians would be willing to pay the premium. The city centre tends to be more expensive, on average. Napoleon should maintain its focus on the premium market and execute on points of differentiation (customer service). Plus, Napoleon’s market share is probably pretty small at this time.P.S. We have no information on how many of the different pizza types are ordered.

Conclusion: Napoleon calls you from his moped for answers. What can you tell him?

Exhibit 1

Exhibit 2Pizza Hut Information Sales in millions (Pizzas) 1.2Stores 95Market Share 85-95%Market Segments, % of sales

Paris City 20%Metropolitan Areas 35%

Paris Suburban Areas 45%

Paris Population By Region

02468

101214161820

Cumulative Population in millions

City CentreUrban AreasSuburban Areas

Exhibit 3

Pizza Prices

$20$22

$20$21

$18$19

$13

$16$17

$15

$22$24

$23$21

$17

$20

$17 $17$17$19

$18 $18

$16$15 $15

$14$12

$21

$13

$10

$14

$18

$22

$26

Pan Pizza Hand-TossedStylePizza

StuffedCrustPizza

Lower FatPizzas

CheeseLover'spizza

MeatLover'spizza

PepperoniLover'spizza

SausageLover'spizza

VeggieLover'spizza

ChickenSupreme

Napoleon'sPrice

Pizza HutBefore Entry

Pizza HutAfter Entry

Case #16: Las Vegas Hoops – Bain, Round 1

Scenario: Your clients are the mayor and city council of the city of Las Vegas. They are involved in negotiations to bring an NBA team to the city. An NBA franchise is looking to relocate. It is a successful team, having finished in the top three in the conference over the past five years. The city is negotiating to put up 50% of the cost of the arena and related facilities. The total cost of the entire deal is $300 million

Question: What are a few things for the mayor to think about?

The candidate should realize that the mayor’s motivations could be financial and non-financial (political). The candidate may take a moment to think, but should be able to generate some ideas within 30 seconds or so. Some potential answers include the revenues that the NBA team will bring the city in the form of taxes. New jobs will be created, increasing income tax. Local growth in the number of hotels and restaurants will correspond to a bump in taxable income, too. There is prestige for the city associated with having an NBA franchise.

Question: What are some other positives for the city?

Push the candidate to be creative. For example, the stadium could be used as a convention center during the off-season. It could potentially be used for other sporting events, too. The youth of the community could benefit from the community service?? and outreach contributed by the players and the organization.

Question: What are some negatives of having an NBA team come to Vegas?

The candidate may mention things like population growth (Vegas is one of the fastest growing cities anyway). More people living in Vegas and working at the stadium could lead to increased levels of pollution, congestion, and crime.

Question: There is some concern about the large initial expense. Who is likely to be concerned?

The stakeholders who would voice concern include those who currently have an interest in the city budget. Tax-paying residents would be very concerned about how their money is being spent.

The mayor is happy with your list of pros and cons. She, however, wants to know more about the payback of the $150 million investment. The city will get a 10% cut on all revenues associated with the stadium. How many games will it take to recoup costs?

Okay. The case has just gotten really serious with a breakeven analysis. The candidate may start to make assumptions about factors that will contribute to revenues. If need be, prompt the candidate:

Question: What are the major sources of revenues?

There are three main revenue sources to discuss: parking, concessions, and tickets. If the candidate asks for data like how many people does the stadium hold, have the candidate make some assumptions. A great candidate will show structure in breaking down the problem. One example follows:

Avg. revenue per game x Number of games in season = Avg. revenue for city per season

Total Revenue = Tickets + Parking + Concessions

Tickets: In stadiums, there are luxury boxes, nosebleeds, and courtside seats, and everything in between. Let’s say that the average ticket price is $50. The average attendance is 15,000 people. Remember, the interviewer should try to choose nice, round numbers. Total ticket revenue: $750,000.

Parking: for a 20,000-person stadium, let’s say that 2,000 cars show up to the parking lot on any given game night. They pay a nice, round $10 parking ticket. Total parking revenue: $20,000

Concessions: $20 in refreshments and $10 in merchandise, on average, for a total of $30 per person. Total concession revenue: $450,000

These revenue estimates generate $1.22 million * 10% = $125,000 (approx) for the city per game. There are roughly 40 home games during the NBA season (if the candidate does not know this, they should at least know enough to ask how many games will be played there). $125,000 * 40 games = $5 million per season.

Therefore, the payback period is 30 seasons. Candidates should comment that this seems like a long time before recouping the money, but may note that there are other revenue benefits like the ones discussed earlier in the case.

Question: The analysis that you have done yields a 30-year payback period. The mayor flatly states that 30 years is too long. How can you shorten the payback period? The terms of the deal (10% cut and $150 million investment) are fixed.

Some suggestions that the candidate may offer include:

Improved external revenues from hotels and restaurants Other stadium uses: Conventions, other sporting events, one-time events like

the circus or the rodeo or Monster Truck show

Mass transit money collection (if a tram is installed connecting the Strip to the stadium, for example)

Question: You mention to the mayor that we could decrease the payback period by increasing attendance at the games. What are levers that could lead to changes in attendance?

Some suggestions: Substitute leisure activities (gambling, entertainment), caliber of overall team play, star power (the LeBron effect), and celebrity appearances at courtside seats.

Question: Your firm is also advising the NBA team owner. What are some issues, both good and bad, regarding the move to Vegas?

The candidate might address the issue of brand. The NBA team is leaving a known market with solid brand recognition for an unknown brand market. How will the image of “Vegas” impact the value of the brand?

Will the team rely on tourists to fill the seats, or will the fan base be people from Vegas? (Many visitors to Vegas come from Los Angeles, for example, where there are already two teams. They come to gamble, not to watch basketball.)

The candidate may address overall market risk: Can Las Vegas handle an NBA team?

What television rights or sponsorships could they hope to attract?

The initial marketing expense to increase fan base awareness.

Conclusion: The mayor and the NBA team owner walk into the room. Should the deal go through?

At this point the candidate should synthesize findings and deliver a recommendation. What is good for the NBA team owner may not be beneficial to the mayor, and so a balanced, win-win solution should be given.

Case #17: Luxury Brand Jewelry – Bain Mock Interview

Scenario: Your client is a luxury brand that is considering extending the brand into the jewelry market. They’ve hired us to answer two questions: (1) Is the jewelry market attractive, and (2) If it is attractive, what are the possible creative means of entry?

This is a market entry case. It’s important that the interviewee keep separate the questions of market attractiveness overall and how we would enter it. Most people will try to mix the two. Hopefully, however, they will quickly try to focus on the luxury segment of the market.

Question: In answering if the jewelry market is attractive, let’s brainstorm as to what are some of the questions you might ask? Good questions to explore: growth, profitability, segmentation, competition (concentration, number of, profitability, competitive barriers), barriers to entry, customers, value-chain position (where is value created?). Interviewer can prompt candidate for more topics by asking, “What else?”

The following information should be given if requested:1. Market size: Plenty big. There’s no need to get into an exact market size with numbers.2. Market segmentation: Two segments. Luxury—Tiffany, Cartier, high-end mom and pops selling designer jewelry. Mass market—Zales, Shane Co., trinket jewelry (lower-end).3. Growth forecasts and profit margins for our segment: 3-5% growth in our segment (luxury), and strong profits. For the sake of conversation one might say that the mass market is not doing quite as well for the obvious reasons (more fragmentation, commoditization, harder to differentiate, customers shop on price, not quality).4. Target customers in our segment: Rich people, high-end, brand-conscious5. Are customers brand loyal? No, they’re just brand conscious. 6. Competitors in our segment: Tiffany, Cartier, mom and pop locally known as high-end. They are profitable.7. Barriers to entry for the jewelry market: Not many - you need a strong brand and a designer. High end is brand-driven. Your client can get supplies (diamonds) and it believes it has access to a designer with a good name (think of Paloma Picasso’s work with Tiffany’s—brilliant)8. Current product: Luxury hotels. Think “W” or a larger Rosewood hotel.

Based on this, the interviewee should conclude the market is attractive. If the candidate can drive to the next question, that’s excellent, otherwise, look for them to conclude question 1 and then push the next question.

Question: How should we test market our product?

The following information should be given if requested:1. Where do people buy (distribution channels): Catalogue, Internet, retail stores in high-end malls or on main streets, either selling your brand directly (GAP or Tiffany) or through retailers (although Tiffany co-brands Paloma Picasso, etc.).

Our customer would like to consider creative options of entry.

Question: How can the client leverage its existing portfolio of assets to test market jewelry?

The client could test a small storefront inside an existing hotel in Las Vegas.

Question: Based on the storefront idea inside an existing hotel in Las Vegas, what do you think are the basic costs involved in running a jewelry store?

Let the candidate brainstorm and guide them toward these four basic costs:Rent (allocated): 200sqft @ $10/month = $2,000/month (It’s cheap, just go with it.)Utilities: 20% of rent (x $2,000 = $400/month)Employees: 2 employees @ $20/hour x 10 hour shifts = $400/day x 30 days = $12,000/monthMarketing, all other promotions, miscellaneous items: $600/month

This means that total fixed costs = $2,000 rent + $400 utilities + $12,000 labor + $600 misc. = $15,000 in costs. Notice that given the assumptions we make, there are now variable costs except for cost of goods (which we only know in terms of gross margin). Don’t let the interview bog down in terms of fixed vs. variable costs. Just get right to the breakeven.

Question: What is your breakeven number of customer sales per month?Average selling price (ticket): $1000Gross margin: 20% so gross margin in dollar terms = $200

This means that the breakeven customer traffic = $15,000 costs/$200 profit per customer = 75 customers per month. Candidate should not only arrive at the number, but good candidates will not have to be prompted to analyze if this number is reasonable. A focus on reasonableness:

~2.5 sales per day, but—how many customers are browsing (conversion rate)?How big is the hotel? How many browsers do our competitors get? Does our casino attract non-guest traffic? Vegas, baby, Vegas!

Thank you for your time.

Case #18: Nextel Cup Racing Team UPS #88- Accenture

Scenario: Your client is the owner of UPS #88, a racecar on the NASCAR tour. It races in the Nextel Cup, a points-based championship where the season winner has accumulated the most points over the course of the racing season. There are 36 races in total, running from February to November. Dale Jarrett, a well-known celebrity driver, races for the team. Dale helped win the Nextel Cup three years ago, and so far this year is eighth in a field of 43 drivers.

A close friend who is the VP of marketing at Home Depot recently contacted the client. She inquired about sponsoring a second racing team with the client. She recognizes that NASCAR is the fastest growing segment among males ages 18-45. She also has talked to a successful driver from a regional drag racing circuit to try out as the driver of the team.

Your client wants to know what to do about this opportunity.

The candidate should take some time to draw a framework and walk through the framework for the interviewer. This case is a market extension case with a go/no go decision. A profitability analysis should follow, with the candidate requesting revenue and cost information. When the candidate asks for revenue information, do not just give him/her the information. It is more beneficial to inquire, “what kinds of revenues do you think the team currently has,” or something to that effect. If the candidate does not name them all, or names some that are not in Exhibit A, do not worry. This exercise is designed to see how the candidate thinks about an industry about which he/she may not be too familiar.

The candidate should continue within the profitability analysis, now looking at costs. Better-prepared candidates may dissect the discussion into fixed and variable costs. Again, let the candidate name some cost categories and ask for additional information, as opposed to just giving away the cost structure. Before revealing the total cost percentages below, explain to the candidate that Total Costs are $20 million.

Revenue Sources, UPS #88 % of Revs Notes for casegiver to shareSponsorships 60% UPS dominates; other sponsors include Ford,

Outback Steakhouse, and 3MNextel Cup Race Winnings 25% One can win from $50K--$1.5MM depending on

how one finishes and the significance of the particular race.

Selling Engines 10% We have strong R&D shop. Engines are sold to professional drivers domestically.

Merchandising 5% License out production to a third-party. The t-shirts, and cap revenue provide a small incremental source of revenue.

At this point a solid candidate will drive the conversation forward in order to answer the initial question. To do so, the candidate needs to understand the incremental costs associated with adding another team to the fold. If the candidate is unsure of where to go, one potential question to get him/her back on track could be to ask: “What is the minimum amount of money that the client should ask for from Home Depot?” This should spark a discussion of what expenses the new team is expected to incur.

The costs that will be impacted by adding a new team are Salaries, Equipment, and Travel. The other two cost components are associated with the engine shop.

How will Salaries be impacted? Race-Facing costs will double. (Since race-facing costs represent half the salary costs, Home Depot would have to pay $4 million.)

How will Equipment be impacted? Equipment costs will double. (Home Depot would have to pay an additional $5 million.)

How will Travel be impacted? Travel costs will double. (Home Depot would have to pay an additional $1 million.)

Next question: You have calculated that your client needs to ask Home Depot for $10 million ($4 million + $5 million + $1 million). Can we get a premium from them? Can we ask them for more than just $10 million?

The candidate may say yes or no—listen to his/her rationale. Multiple answers are acceptable here. This answer key is not exhaustive. Yes, we could charge a premium—Home Depot came to us. Also, having already talked to a driver, the company seems highly interested. Therefore we have bargaining power. Yes, we could charge a premium if we show Home Depot an acceptable Return on Investment analysis.No, we could not charge a premium—there are many alternatives for Home Depot as a sponsor, including 1) another race team, 2) another sport (e.g., baseball), 3) another racing circuit (e.g., Formula One)

Conclusion: The owner of the UPS #88 racing team calls you for an update. Please inform him of your findings.

Cost Sources, UPS #88 % of Costs Notes for casegiver to shareSalaries 40% "Race-Facing" costs make up 50% (mechanics and Dale

Jarrett) and "Non-Race-Facing" costs make up the other 50% (engine shop technicians, accounting, HR)

Equipment 25% Race cars, engines, parts (sheet metal)Travel 5% Getting to and from racesLease, Engine Shop 10% Leasing of land in rural North CarolinaR&D 20% Engine shop technology improvements

Interviewer notes: The candidate may take this case in several different directions, including questions about the Nextel Cup season, driver eligibility, and if points are tallied based on team or individual driver performance (individual driver). Some candidates might recommend waiting until the beginning of the next racing season in order to spread costs across more races.

Other potential points include the natural tension between adding a new team and the allocation of resources (e.g., high quality mechanics from Dale’s team may work with the Home Depot car, thus diluting the quality of performance of Dale).

Potential risks certainly include adding a new driver who has only drag racing experience. This driver would probably not contribute to merchandising revenue, due to his relative anonymity. There is some validity, however, to the point that salaries for the new team may be lower because the new driver lacks the name recognition of Dale Jarrett.

Finally, the total cost of equipment may be lower than average due to the ability to leverage the engine shop technology. Some candidates might recommend closing the engine shop, but we have no margin information to substantiate this.

Case #19: Eagle Eye Drops

Scenario: Eagle Eye is a small start-up company that wants to sell its new and revolutionary product to consumers over-the-counter through drug stores chains and pharmacies across America. The revolutionary product is eye drops to correct near-sightedness. The CEO of Eagle Eye would like to know how many customers she can get over the next 12 months, and how to price this product.

If candidate requests product-related information, here is more data about the product. One single drop needs to be applied per eye every 24 hours; it lasts for 24 hours It is only for nearsighted people. The company has a 20-year patent.

The candidate will hopefully ask some market-related questions. Have them size the market. Here is a potential solution:

The population of US is 300 million, ½ below 40 years old and ½ above 40 years old. 0-40 years old: assume 1/3 use eyeglasses or contacts. One-half of those people are nearsighted, and one half are farsighted. Thus, 300*.5*.33*.5 = 25 million are nearsighted. 41-80 years old: assume 2/3 use eyeglasses or contacts. One-half of those people is nearsighted, and one half is farsighted. Thus, 300*.5*.67*.5 = 50 million are nearsighted. So, 25 + 50 = 75 million are nearsighted

Out of this, assume that 30% wear glasses and 70% wear contacts. The people wearing contacts might be more likely to adopt the product (many of them already use drops), so assume that 50% of the people wearing glasses will adopt the product, and 75% of the people wearing contacts will adopt the product. Also, presume that people who opt for laser surgery offset the new people who enter the eyewear market.

People wearing glasses that will adopt the product: 75*30%*50% = 11.25 millionPeople wearing contacts that will adopt the product: 75*70%*75%= ~39 millionTotal people as potential market: 11.25 million + 39.4 million = ~50 million

Great. The candidate arrived at some final answer. Did he/she come up with a market penetration of the potential market? Market penetration could be 5% in the first year. In this case, the potential market penetration might be higher because one does not have to radically adapt to the substitute product (eye drops). Market share is largely determined by marketing expenditures early on, especially for a revolutionary product introduction, where questions might revolve around health concerns and whether the medical community is endorsing this product. Candidate estimates over 20% should be considered aggressive.

Question: Great. Let’s say the CEO could expect up to 3 million customers in the first year (this represents 6% of the market). How much should the product cost the consumer?

Compare the substitutes and evaluate the cost to consumers. If candidate fumbles here, ask if we should be concerned with competing strategies.

Glasses – assume $100 per year (one pair per year) Disposable Contacts – assume $30 per box; one box has 3 pairs that last one

month apiece. (Note: total cost to customer would be $120 per year) Laser Surgery – $2,400 upfront and lasts 30 years, on average ($80 per year) Our product – lasts 24 hours, can be used throughout lifetime. There are 60 drops

in one bottle – lasts one month.

(Note: The suggested retail price is not given—the candidate should put a stake in the ground, and substantiate his/ her point. There is no one right answer. The candidate should also realize that the retail price is not the price the company is charging—the price the company is charging is to the retailer (drugstores). In relation to laser surgery, consumers may see the drops as cheaper than a one-time upfront cost of $2,400 and the hesitancy of undergoing a surgery of that type. Second, one does not need to see the doctor for a prescription. Third, the biggest market segment that we will attract is the contact lens market, which is conditioned to using eye drops already (an incremental cost we did not include). Fourth, our product provides benefits: no surgery, no contacts popping out of one’s eye, no inconvenient glasses.

Calculate the cost to the customer (we assume $10/month retail price for Eagle Eye):Economic Value to the Customer

Glasses Contacts Laser Eagle EyeCost per year 130 150 80 120Prescription 20 20 0 0Total 150 170 80 120

Question: The CEO decided to charge the drugstores a price of $7.50 per bottle, with a suggested retail price of $10. How many of these little guys must we sell to break even?Amazing candidates may have already suggested the breakeven approach.

Information to Provide: Fixed Cost: Facility-related = 150 millionVariable Cost: $5/bottle

Calculate the Breakeven Volume:Breakeven Volume = Fixed/(Price – VC)Breakeven Volume = 150 million/(7.50-5.00) = ~60 million bottles

If we sell to three million people, we will sell (3 million*12 months*1 bottle), or 36 million bottles in the first year. At this rate, we break even in just under two years..A great answer will also state whether or not this timeframe is reasonable.

Conclusion: The founder of Eagle Eye calls your secretary, who patches him through on line #4. What do you have to say?

The candidate should synthesize the findings and make a recommendation. Solid candidates will mention alternative distribution channels, competitive response, negotiating power vs. drug stores, and fixed-asset management as capacity utilization and consumer adoption rates increase.

Case #20: Portuguese Cement

Question: You are consulting for the number one producer of cement in Portugal. This company currently has 45% of the market. You 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.

Have the candidate draw a framework. He/she should explore each element of the revenue-cost equation and find differences if any, between the two options.

This information should be given if asked for: Cost structure for cement production: Raw materials: 28% Sales and overhead: 18% Labor and allocated fixed costs: 16% Pre-tax profit: 12% Distribution: 26% Price: Company's selling prices are set by prevailing market prices in Portugal. Land available for expansion: There is a suitable site near Porto, the second-largest city

in Portugal, about 200 miles to the north. Location of customers: 80% of the customers are within 100 miles of the current plant. Raw materials supplier: Supplier is a government-owned company; prices are set by a

yearly contract with the government. Potential for extra shifts in current plant: The plant is unionized. Extra shifts are not

possible. Distribution: The company owns the trucks, and all products are directly transported to

the customers throughout the country. Customers pay for trucking by the mile. Fixed costs of adding capacity vs. building: The fixed cost of plant additions is roughly

the same as the cost of a new plant of the same capacity. Solution: Distribution is the second-largest cost item, so 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 higher trucking costs. Therefore, location of the plant in the north may increase sales in the north by reducing delivery costs to these customers. We can check the macroeconomic data to see the economic growth of the city (cement ties closely to construction, which is a bellwether for economic vibrancy.

Question: Can you graph the fixed costs at 100% utilization for the company?

Hopefully, the candidate draws a straight line on a graph, where the y-axis represents utilization, and the x-axis represents time. It should look like the solution in Exhibit 1 through 5 periods. Don’t give the candidate Exhibit 1.

Question: Now please draw the fixed costs if the client wants to go to 110% of current capacity.

Some candidates will mark the y-axis at 110% and draw a straight line. Other candidates may do wacky things that are ignored here. Quality candidates will build a

new plant—we cannot simply increase capacity by 10%. We must double capacity. This means that capacity will jump from 100% to 200% of current capacity.

Exhibit 1 – Do not Show Candidate

Fixed Costs jump due to Capacity Expansion

0%

50%

100%

150%

200%

250%

1 2 3 4 5 6 7 8 9 10 11 12

Case #21: Life Science Technology Startup

Scenario: A small life science technology startup, One for the Road, Inc., (ORI), has invested a huge amount of money in R&D and was recently granted a patent for a new breakthrough product. The client wants to know what approach it should take to commercialize the product. What questions would you pose to start the process?

This is a “Go to Market” combined with an M&A case. ORI is trying to launch a product from the R&D lab into a new market. A good candidate will identify it and use a 3C’s approach combined with the following two questions in his/her framework: What are the core competencies of this company? Do they have the funds to develop the capacity in-house, or should they be looking

for a partner or buyer for the patent?

The following information should be given if requested: How long is the patent protection? 10 years Are there any competitors? No. This product would create a new market Market potential: The client expects sizable immediate demand How much money has been invested in R&D? Substantial amounts The candidate may discuss the following broad strategies:

Market Strategyo Hypergrowth—must manageo Acquire new customers: how to best market the producto Determine the appropriate pricing via EVC analysis

Operations Strategyo Costs: fixed and variable o Existing Resources/Strengths: R&Do Required Capabilities: Buy, Build, or Partner?

Manufacturing: in house vs. outsourcing Marketing & Sales Distribution Channels

Finance Strategyo Debt vs. Equity to finance growtho Timeline to break even

External Factors o Legislationo Suppliers of raw materials

Be sure that the candidate has come up with a healthy list of questions before proceeding.

Question: How will you assess whether client should go on its own or find a partner? ORI has several options:

Acquire a company that provides manufacturing and marketing capabilities Joint venture with another company

Outsource manufacturing, marketing and distribution channels Grow skill sets organically, ergo more slowly

Question: What are some pros and cons of the different strategies?

Given that ORI is a small R&D lab, it is probably not in ORI’s core competencies to move into manufacturing, marketing, and sales. ORI should certainly pay attention to the profitability of these strategies, but also bear in mind the risk (while going alone may allow ORI to keep all the profits, it has many more pitfalls than teaming with an established player in the industry.) The candidate might run the following comparison matrix to demonstrate a comprehensive knowledge of the pros and cons: Criterion Develop capability internally Get external partnersSpeed Slow FastCost Benefits Expensive CheapGrowth / Future capabilities Fast and sustainable growth Slow growth Question: ORI has decided to sell the patent to an established pharmaceutical firm. How could the pharmaceutical company come up with an acceptable price for the product?

The candidate might come up with the following answers: Conduct Economic Value to the Customer (EVC) analysis Surveys to potential customers in order to conduct a conjoint analysis Chance to price discriminate among segments (if it can tweak product attributes) Analyze past introductions of new products for historical sales trends Focus group experiments in separate, comparable regions (to find price elasticity)

- Lower the price in one and raise the price in the other- Compare the sales volume over a period of time

Question: The new market has two segments, healthcare providers and home users. How might their needs differ?

The candidate might come up with following matrix: Criterion Healthcare Provider Home UserUser’s preferences Cost, Maintenance Easy to use, Is cost

reimbursable?Who is making decisions? Doctor / Procurement Manager User / Parent / SpouseHow to get to the segment? Trade shows, Direct marketing Doctor(push) / TV, or print

ads (pull) What are the required resources such as sales forces?

Experienced sales force to convince doctors or procurement manager

Convenience, ease of use

Case #22: Hospital Chain - McKinsey

Scenario: Your client is a large hospital chain. There have been proposed legislation

changes to Medicare that will affect your client. Some surgeries will no longer be reimbursable at the same rate. In addition, this has caused the hospital to consider a strategy to shift its response toward less profitable surgeries by using alternative therapies. The client is concerned about the decreased revenue potential. Currently the client has a $4 billion top line. Surgeries represent half of this total. Half of the hospitals in the chain perform all of these surgeries. For this case, let’s say that all patients are on Medicare (private insurance is not a factor). Should we close part of the chain? All of the chain? None of the chain? What drivers will help us arrive at a cogent close / no close decision?

Okay, smile if you think your interviewee asked you to tackle this case because it says McKinsey on the top of the page. Allow the candidate some time (~1.5 min) to create a structured framework. Some issues to discuss could be the profitability (revenues and costs) of the surgeries. Let’s see a revenue breakdown into prices and quantities. Let’s see a cost structure with fixed and variable costs. What percentage of surgeries is actually impacted? How are our capabilities in providing alternative therapies—could we make money there? Let’s see external things, too, like the ability to influence the regulatory environment, the needs and preferences of our end users (would they pay out-of-pocket?). What strategies are competitors adopting?

Steer the candidate toward profitability information. What does he/she want to know?

Typical impacted hospital (annual):Patients: 1,000Price (revenue) per patient: $1,000Cost per patient: $800Fixed Cost of facility: $100,000

The hospital must serve at least 500 patients to remain open. Each patient delivers a $200 contribution margin.

Question: How many patients would you have to lose below breakeven (500) to close the hospital?

The candidate needs information: the cost of exiting the business. Let them ask for it.

The exit cost is $50,000.

The profitability over time, discounted back to today, minus the PV of the exit costs, should equal zero to breakeven.

Q*$200 – $100,000 = -$50,000. Q = 25

Another way to look at this is the value of lost customers to the business over time, taken as a perpetuity.

Or, loss / hurdle rate = exit cost. Assume a discount rate of 10%.Loss / .10 = 50,000. Loss = $5,000, which equals 25 patients that you would have to lose below breakeven to close the hospital. 500-25 = 475 patients to remain open.

Question: If fixed costs change to $150,000, how many patients will you need to break even? How many patients would you have to lose to close the hospital?

$150,000 / $200 = 750 patients to stay open

Loss / .10 = $50,000. The loss of future value that one gives up by incurring the exit costs equals 25 patients. Below 725 patients, the facility should close.

Question: The hospital does some research and finds that 3/8 of its surgeries will not be reimbursable. A government report says it will save 6-9% by passing the new legislation. You know that someone has botched the research. How is the information contradictory?

The candidate should ask for the national market share of the company. Otherwise, the data above is like comparing apples to oranges. The market share for your client is 20%. This means that, according to your client, 7.5% (.375 * .20 = .075) of the government savings will come from its surgeries, which represent only 20% of the total national market.

Case #23: Hotel Development – AT Kearney 1st Round

Scenario: Costa Rica has a beautiful beach—almost like paradise—which has historically been difficult to access. The nearest airport was over six hours away. Within the past year, however, a new airport was constructed only a half an hour away. There has been an investment boom in the region due to the increasing number of tourists (popular with Americans and Asians). The Mandarin Oriental and The Four Seasons, two prominent luxury hotel chains, were the first to enter this market with a 250-room hotel each.

Question: Your client is a real estate developer that wishes to cash in on the momentum created by this airport. Would you recommend that he enter the market?

Note: This case actually focuses on two key issues: a) The attractiveness of the market [Market sizing and five forces]; b) Long term profits [Sustainability, barriers to entry, core competencies and signaling].

This case allows you to handle various issues at different points, so ask the candidate to choose a starting point, but force him to give you a strong reason to validate his choice. An example would be: “I’d like to start by reviewing the company’s core competencies because I want to see if this fits into their development model…”

Provide the following information upon request:Current real estate interests:

The client has focused on hi-rise apartments (50%) and luxury condominiums (50%) in the past but wants to enter the hotel arena. (Note: The insight is that the company has done buildings of similar construction, but has no direct experience in the hotel industry or service operations.)

They have focused on world-class beaches, such as Playa del Carmen, Marbella, Coral Beach, Tahiti, Fiji, Maldives, Mikonos, etc. They know what is hot. (Note: The insight here is that this company can probably spot good locations, knows the right price for construction, land, etc. and can probably access the necessary pools of capital)

Market Attractiveness: The government estimates the market to be 875,000 tourists per year

(assuming 350 days in a calendar year), and the average stay per tourist is 4 nights. Average hotel check is $2,000. In terms of tourists, you depend on government spend on advertising, on travel agents, and on the network effect of the existing hotels in the area.

Basic Math: 3.5 million tourist nights / 350 days = 10,000 tourists / night$2,000 average check/ 4 days average stay = $500/night

Competitiveness: Other hotels chains that are thinking of entering the market are Starwood, Peninsula, and Imperial Hotels.

Supplier power: The local labor market offers a huge supplier of workers (very positive).

Substitutes: You are fighting with every other “paradise-type” destination, from Disneyland to Vegas to Bermuda. Interest in this area, however, is sky high.

Barriers to Entry: Prompt the candidate to list several: government regulations, high capital requirements, unavailable beachfront property.

The insights that the candidate should have drawn from this analysis are that the market is large enough, and while competitive, we apparently have the resources to enter it. The level of resources required would be a barrier to entry and maybe there are others that need to be investigated--such as government permits, access to sewage, water, etc. Have a good discussion!

Question: The client has already looked at some possible options and has found the following three available lots. Which one should he consider to maximize Return on Investment? (show Exhibit 1)

Here is some more information: Occupancy will be 50%, assume 350 nights/year Operating expenses are completely variable The company requires investments to be above break even within a year

and with a ROI of at least 10%

Note: ROI = Profit/Investment. Give the candidate several minutes to generate these numbers. A solid candidate will be vocal during the calculations, and may even introduce a written version of the math---Hey, what does that mean? That means that instead of just writing numbers, the candidate will write out formulas, such as…

Revenue = Revs per night * number of nights * number of rooms * nights per year * occupancy rate

By doing this, the candidate demonstrates knowledge of the situation. If a math error comes about, it is much easier to correct and the interviewer recognizes that the candidate has already shown a strong grasp of the problem.

Option A—Lover’s Lair: Operating Profits: (((($450 revenue – 250 operating costs) * 500 rooms)* 350 nights/year) * 50% occupancy rate) = $17.5 million operating profits/year (a)

Initial Investment: 30,000 cost/room * 500 rooms + $2,000,000 land = $17 million (b)

Net Profit: (a)-(b) = $500,000 (c)

ROI: (c) / (b) = $500,000/17 million = 2.9%

Option B—Paradise Lost: Operating Profits: (((($400-200) * 1000) * 350) * 50%) = $35 million

Initial Investment: 28,000 cost/room * 1000 rooms + $4 million land = $32 million

ROI: $3,000,000 / $32 million = 9.4%

Option C—Fookwah Heights: Operating Profits: (((($350-150) * 1500) * 350) * 50%) = $52.5 million

Initial Investment: $25,000 * 1,500 rooms + $6 million land = 43.5 million

ROI: 9 million / 43.5 million = 20.7%

Question: What would you focus on to determine the feasibility of the project and why?

After the candidate offers his/her insights, tell him/her to focus on ROI, first with the room prices specified in Exhibit 1 and then with the market room price ($500).

Conclusion: At this point you can ask the candidate to wrap up the case. Here the candidate needs to give a “go/no go” decision, supporting it with the insights drawn through out the case, and if he doesn’t mention it, ask him to specify some additional concerns the client needs to focus on. Good Concerns:

- Competition (what are they focusing on, will it flood the market)- Strategy (Where will you compete--low cost, high service, best in class,

packages?)- How should the developer finance the building? Since the hotel will bring jobs

maybe the government can help with some tax deductions, free services, etc…

Great Concerns:- How can they leverage their experience, what values from their other business can

they leverage? Would they manage the hotel or build it and then find an operating partner like Starwood or Hilton?

- What are the existing barriers to entry, how would you change them to insure a greater degree of success?

Exhibit 1:

Land Cost Cost / Room Op Cost Rooms Price / NightLover's Lair 2,000,000 30,000 250 500 450Paradise Lost 4,000,000 28,000 200 1,000 400Fookwah Heights 6,000,000 25,000 150 1,500 350

Notes:Occupancy will be 50%, assume 350 nights/yearOperating expenses are completely variableThe company is looking to flip these investments at the end of one year, and requires a 10% ROI

Possible deals:

Case #24: Shaky Construction Firm

Scenario: Your client is Shaky Construction, a major construction firm in Europe. They specialize in commercial and industrial construction. It wants to diversify revenues strategically and geographically. Should the firm enter the U.S. market?

Since this case centers on market entry and industry attractiveness, the candidate should consider using Porter’s Five Forces. The candidate should consider the capabilities of the firm (both strengths and weaknesses), the market potential (size and growth rates), the number of major competitors, and industry trends. A thoughtful candidate should also consider the opportunity cost. What other market expansion or investment opportunities are available to the firm? Most of these elements should be integrated into the candidate’s framework. This case is long, so buckle up!

Only provide the information below if the candidate asks for it.

Information Available Upon Request: Competitors – Four major national competitors in the U.S. market, along with a

high number of small players (typically regional/local).

Market Size/Trends - The commercial and industrial construction market is a $200 billion cyclical industry. It is projected to grow 5% a year (on average) for the next three years. This is primarily due to projections of robust growth for the U.S. economy.

Strengths – Reputable firm in terms of industrial construction (75% of revenues), strong management team, strong technology infrastructure, deep pockets

Weaknesses – commercial business is fairly small and growing very slowly; unlike major competitors in Europe, lacks an international presence to hedge business risk

Rivalry – competition within the industry is strong, but prices have held up relatively well. In addition to price, firms typically compete on quality of construction and timeliness (ability to meet deadlines).

Barriers to entry – It is a difficult industry to enter because initial capital investment is very high. Also, it takes a substantial amount of time to build relationships with customers, sub-contractors, and local suppliers.

Substitutes – Large corporations need to contract with major construction firms to handle large-scale commercial and industrial projects. They will typically work with a major construction firm with a domestic presence. The alternative is to buy / lease a pre-existing facility.

Powers of Suppliers – Since a few major buyers that purchase in volume versus a large number of suppliers (both labor and materials), the largest commercial and industrial construction firms have significant bargaining power.

Power of Buyers – This industry is essentially an oligopoly (handful of major players and a large number of small players). The builders have significant power. However, large corporations have deep pockets and can be quite demanding, giving them the ability to extract concessions. They usually submit their projects to the major builders for bid.

Government Regulation – Initially, regulators might scrutinize the entry of a large foreign firm into such a key industry in the U.S. market. Ultimately, however, no significant opposition or excessive regulation is expected.

Opportunity Cost – Shaky has evaluated other investment opportunities in its home market and elsewhere. Given the analysis, entry into the U.S. represents the best investment opportunity for the firm.

Through asking the right questions and receiving the responses given above, the candidate should reasonably conclude that entering the U.S. market is a promising course of action.

Question: Shaky decides to enter the market. What are the entry options, which one is the best, and why?

At this point, the candidate should think about strategic options:

1) Go it alone – Enter the market and build up scale and capacity through steady capital investment.

2) Acquisition – buy a major player in the U.S. market

3) Partner – enter into a joint venture with one or more players in the industry

Once the candidate has identified these options, prompt him/her to evaluate these options from a financial perspective. This discussion should center on financing, costs, and future profits. Ultimately, Shaky wants to obtain 10% of the market in two years. Guide the candidate to analyze the “Go it alone” option first. Inquire:

Question: Shaky decides to go it alone. Management wants a 10% market share in two years, regardless of the strategy. How much is that?

After Year 1, the market size is $200 B x .05 = $210 B. After Year 2, the market size is $210 B x .05 = $220.5 B (the candidate should round this to $220 B. Shaky needs to obtain $22 B in revenue.

Question: Shaky requires a 10% operating margin by year 2, regardless of the strategy. Can they achieve this?

The candidate should now inquire about fixed and variable costs. Present the candidate with Exhibit 1. Upon evaluation, the candidate should inquire about the estimated number of projects in Year 2 and the average expected contract price.

Estimated # of projects: 220 Average expected contract price: $100 million

The candidate should perform the following calculations:Revenue = 220 x $100 M = $22 BVariable Costs = (40 + 60) * 100 = $10 BFixed Costs = 9,000 + 1,000 = 10,000 M = $10 B

Therefore, the profit = 22 – (10 + 10) = $2BThe profit margin = 2/22 = 9.09% < 10%

Question: Shaky is not sold on the margins it can achieve, and so it is considering acquiring an existing major player in the U.S. market. Assuming that Shaky can obtain $50 billion to finance an acquisition, which firm is the most attractive acquisition target? Shaky expects to pay a 20% premium.

At this point, the candidate should ask for data on the major U.S. firms. The interviewer should now present Exhibit 2. If the candidate inquires about free cash flow, tell him/her that net income (profits) can be considered a reasonable proxy. The candidate should also inquire about the required rate of return (15%) and an expected growth rate (5%). Assume that the expected growth rate is uniform for all firms. For simplicity, tell the candidate that the valuation should be treated as a perpetuity.

Given the previous discussion about market share and profitability targets (both 10%), the candidate should immediately focus on Bidwell and Crayton.

The perpetuity formula is C/(r-g), where C = cash flow, r = required rate of return, and g = the expected growth rate.

The calculations for all four potential targets are as follows:

Since Shaky can only obtain $50 B in financing, it would make sense to target Bidwell.

Question: Let’s think about how possible joint ventures would work. What should Shaky look for in a partner?

The candidate should ask about Shaky’s area of expertise and how it compares to the major players in the U.S. market. For Shaky’s skills, capabilities, and area of expertise, see the “Strengths” section above. The interviewer should present Exhibit 3 for the candidate to analyze.

The candidate can take this discussion in a number of directions, but the interviewer should get the candidate to review the exhibit and explain his/her thought process as to who is the best partner. There is really no clear right answer, but the candidate should use the data from the exhibit to craft a logical, well-reasoned response. Shaky may be best served, however, finding a U.S. partner with complementary skills, expertise, and capabilities—the two partners should be able to leverage one another for mutual benefit. Of course, revenue, profit potential, and market share would also serve as considerations.

One possible answer:

Firm Revs Margin Profits Discount Rate ValuationPurchase Price (w/ premium)

A $40 8% $3.2 10% $32.00 $38.40B $30 13% $3.9 10% $39.00 $46.80C $60 11% $6.6 10% $66.00 $79.20D $16 15% $2.4 10% $24.00 $28.80

Conclusion: Given your analyses, please provide a recommendation to Shaky’s executive team.

Interviewer notes: The candidate should take a clear position: enter alone, acquisition, JV, or do not enter. Next, the candidate should briefly summarize the evidence to support that position, and briefly state other considerations. Naturally, there are a number of different directions that the candidate could explore. Regardless of the final recommendation, the candidate should supply convincing arguments to support that position, and demonstrate a strong understanding of issues. The conclusion should not exceed 1 minute.

Various things the candidate may mention: Shaky’s investment criteria and metrics for success The firm’s core competency Fit with firm’s overall strategy Ability to compete in the U.S. market (distinct competitive advantage, ability to

form business relationships, access to suppliers/customers, etc) Time to market Cost Risk tolerance Desire for control of venture

Exhibit 1

Exhibit 2

Exhibit 3Partnership Candidates

Firm Rev - % Industrial Rev - % Commercial Profit Margin ReputationAlpha Construction 20% 80% 8% Low PriceBidwell Construction 65% 35% 13% Hits DeadlinesCrayton Partners 30% 70% 11% Strong RelationshipsDevlin-Wilson Company 75% 25% 15% Premium Quality

Shaky's Cost Structure Year 1 Year 2Fixed Costs (M) PP&E $12,000 $9,000 SG&A $700 $1,000Variable Costs (M - per project) Labor $40 $40 Materials $60 $60

Major U.S. Construction FirmsFirm Market Share Annual Revenues (B) Profit Margin

Alpha Construction 20% $40 8%Bidwell Construction 15% $30 13%Crayton Partners 30% $60 11%Devlin-Wilson Company 6% $12 15%

Strategy and Valuation

Case #25: Scotch Bar

Scenario: You are sitting in one of Chicago's oldest scotch bars with a fellow intern. It is a Friday night after a busy week at your summer internship. The weather is mild—a perfect summer evening. While enjoying one of the bar's finest stogies and sipping an 18-year old McCallen single malt, your friend asks you how much you think the bar is worth. Using a back-of-the-envelope calculation, how would you go about determining the value of this bar?

This is an estimation case. Because the candidate does not know much about the bar he/she should ask for details. To estimate cash flow, a “Revenue – Cost” framework is useful. The value of the bar is the present value of future cash flows.

The following information should be given if requested:1. Product Mix and Pricing: The bar sells two things, liquor and cigars. The average cost

of a cigar is $9 and the average cost of a drink is $12. (Note: these average cost numbers will prove irrelevant, but in cases one is sometimes given irrelevant info.)

2. Capacity: The maximum capacity is 100 people.3. Location: The bar is located on one of Chicago's busier streets for foot traffic.4. Hours: The bar is open Tuesday thru Sunday from 5 pm until 2 am.5. Staff: A bartender, a waiter, and a waitress. All three were there the entire evening.6. Tax Rate: 40%7. Discount Rate: 13%8. Annual Growth Rate of Cash Flows: 3%

The candidate will most likely not ask for all of this information upfront. Allow the candidate to make some assumptions about revenues. One way to project revenues is to estimate the number of customers per day or per week and multiply that by the average expenditure of each customer. Watch for realistic assumptions and logical thought progression.

Ask the candidate what might drive variation in these numbers. The answer is days of the week (Fridays and Saturdays are typically busier than other days) and seasonality (people tend to be out more during summer than winter).

While the candidate talks you through his/her approach, but before the candidate does a substantial amount of calculation, hand the candidate Exhibit 1. If the candidate does the math correctly, the numbers should add up to approximately $900,000.

The candidate should then proceed to costs. There are two components: fixed costs and variable costs. Under fixed costs the candidate might consider rent, general maintenance, management, insurance, liquor license, and possibly employees. The only real variable cost is the cost of goods sold. Allow the candidate to brainstorm fixed and variable costs,

Strategy and Valuation

before revealing the following data:

Variable costs are 20% of total revenues, and fixed costs are $120,000.

After the candidate has subtracted costs from revenues, he/she should generate a number around $600,000. Do not forget that we need the after-tax cash flow number (approximately $600,000 * (1-40%) = $360,000. You now have the annual cash flows generated by the bar.

At this point a great candidate will drive the process forward and recognize that they need to figure out a stream of cash flows going forward. The interviewer may have to nudge less-savvy candidates toward the next step (discounted cash flow analysis).

How does one perform a valuation of the business? To perform a valuation in this case, the candidate must estimate the cash flows from the business and discount them back using a perpetuity formula. The discount rate typically used for bars of this genre is 13%. When the candidate inquires about growth rates, say the bar’s cash flow is growing at 3%--the rate of inflation. Thus, whatever numerator the candidate arrives at should be divided by .13 - .03 = .10, an easy calculation. Use the CF / (r – g) formula for a perpetuity.

In this case, the answer is around $360,000 / .10, or $3.6 million.

Exhibit 1: Daily Average SalesFridays and Saturdays Rest of Week

Spring and Summer $4,800 16 2/3% of Fri and Sat, (Spring and Summer)

Fall and Winter3/4 of Spring and Summer,

(Fridays and Saturdays)85% of Spring and Summer

(Rest of week)

Case #26: Yahoo, Google & YouTube - Katzenbach Partners, Final Round

Scenario: You have been hired by the internal strategy group at Yahoo. You are asked to analyze the recent acquisition of YouTube, an online video community, by Google for $1.6 billion. Is it a competitive threat?

Wow! There is a case in this book with real-life companies! The candidate should think about the acquisition against the backdrop of the core competencies that each firm brings to the table. A quality candidate will imbue the discussion with structure, add thought-provoking comments, and demonstrate knowledge of current business landscape.

There is not necessarily a right answer, but here are some ideas. Yahoo has positioned itself as a destination site. It wants consumers to go to Yahoo! and explore all of its wonderful services, spending time and money there. Time means that advertisers’ ads are more likely to be clicked. Money means that Yahoo! is making e-commerce transactions, or selling subscriptions to premium online services. It tries to promote a sense of community among its users.

Google has spent its early years as a search engine. To ‘google’ has become synonymous with search. To take advantage of this brand-name recognition, Google pioneered advances in ad-based software that allowed businesses to better target consumers segments based on the particulars of the search. Google has the “eyeballs” of the consumers, but it doesn’t have the wallet of consumers. It wants to monetize all this traffic.

The acquisition of YouTube by Google is a competitive threat. You Tube is a move toward creating a community. The company spent $1.6 billion because it believes it will be able to monetize this traffic somehow.

Question: Yahoo wants to counter this threat. Let’s suspend feasibility and cost concerns for this question. What can our competitive response be? Be as creative as possible.

The candidate should ask for a moment to collect his/her thoughts, and then be creative.

Some ideas (from most boring to most creative) Create an offering to counter YouTube for the Yahoo community Buy Google Find a way to share real-time videos among friends from mobile devices or

wristwatches. This would involve a cross-selling strategy with a partner Create backdrops (or allow open source coders to create them) from

historical events or sporting arenas or famous movies, and enable people to be able to re-enact scenes or create new ones (An example of this might be a

rock stadium backdrop and you and your friends can jam on instruments and make a rock video

Question: Google decides to use your brilliant ideas. The ideas are so brilliant that the company believes that it can charge $150 per user annually and make 67% margins. How long will it take to recoup customer acquisition costs?

The candidate should realize that he/she doesn’t know how many customers were acquired in the deal. Tell the candidate ‘40 million users’ when he/she inquires. If necessary, ask, “What do we need to know in order to do this calculation?” Discount rates should be ignored. Assume no user base growth or attrition.

Each customer will net Google $100 per year, using the above numbers. With 40 million users, each user must contribute $400 ($400*40 million = $1.6 billion) to recoup customer acquisition costs. This will take four years.

Case #27: Sgt. Slaughter’s Construction Co – Accenture

Scenario: Sergeant Slaughter’s Construction Company is a leading provider of construction and infrastructure materials. It has two divisions: Oil & Gas and Government. The government division’s main customer is the US Military. Your client is offering construction services to help the US military to build bases. Construction includes dining facilities, dorms, and infrastructure projects for troops around the world. Each division has its own procurement department. The procurement for the government division spends $6 billion on the items they purchase. They resell those items for a profit to the Government. The Vice President of procurement for the government division called your consulting firm to advise them on how to spend less money on the purchased items and operate more efficiently.

The candidate should take some time (~1 min) to draw a framework and walk through the framework for the interviewer. Sgt. Slaughter’s Construction Company needs to make its procurement more efficient and determine how to reduce procurement costs. Address the problem as an operations/value chain problem and try to identify the links and levers that could influence the efficiency. The candidate should generate themes within the company to potentially explore. Here are four killer ideas.

1. The contractual relationship with the suppliers and the government.2. The efficiency of the workers3. The synergies within the company – the collaboration with the Oil & Gas division4. The efficiency of the information flow - technology

Question: First we need to understand the nature of the business relationship between the suppliers and the Government. What information do we need to accomplish this?

Possible questions and analysis: What kind of contracts do they have, long-term or short-term? What are the advantages/disadvantages of being in long-term contracts or short-

term? How constant is the demand? Does the government always spend $6 billion on

this contract or is it expected to grow or decline? How many suppliers? Is there volatility in the demand or supply? What is Sergeant’s competitive advantage? Is there competition for the contract?

Give the candidate the relevant information below.

Contracts between suppliers and the Government division are short-term in nature.The company has only one supplier. The supplier offers the best cost/quality ratio and Sgt. Slaughter would like to keep it, if possible. The client is not the only customer for the supplier but is one of the largest. The company is the main supplier for the Government. They are the best at what they do. They do not need to worry about the competition as long as they maintain the present prices and quality.

Note: The interviewee should ask about the volatility of demand and infer that a long-term contract with the supplier will be less beneficial if Government spending on military bases is volatile (for example, if the Iraq war ends tomorrow, demand will drop). Also, a single supplier could be grounds for diversification to improve negotiating power.

See what ideas the candidate can generate. Remember that Sergeant Slaughter cannot negotiate a better price from Uncle Sam. The proposed solutions should not dwell on competitive issues.

Possible proposals:1. Try to identify multiple suppliers or negotiate a better deal with the current one

using this possibility as bargaining power.2. Create long-term contracts that should offer better pricing, but negotiate a “call

clause” if the Government drops the demand.3. Try to identify synergies with the Oil & Gas division (see #3 above)

Question: What organizational questions should we ask about the people?

Possible questions and analysis: Are the people that deal with the suppliers experienced enough? Are there incentives in place? What can be changed? Is their staffing model efficient? Do they work enough? Are they efficient?

What is their level of productivity? Can/should we lay off workers? Do they have enough training?

Here is some information to relay to the candidate. Consider it to be like a data dump—see how well the candidate can drink from the fire hose.

The staff is not necessarily the most experienced in the field. They are not very good at negotiating with the supplier, due primarily to lack of experience. The VP of Procurement is actually a newly hired, former lawyer. The workers do not focus on negotiating with the supplier, as they spend most of the work on troubleshooting the contracts and enforcing them (have the items delivered on time, ordering the supplies ahead of time, forecasting demand etc). The productivity of the workers is an issue. They have a target of 88% productivity time for the workers (88% of the time they are paid, they should work productively for the company) but the workers are productive only 80% of their time billed. There are no training and learning processes in place for the workforce. Also, the bonus structure is fixed. They receive a 10% undifferentiated bonus at the end of the year if the company makes a profit.

Possible proposals:1. Try to hire more experienced workers2. Offer training 3. Incentivize them with bonuses connected to the money they save from the

supplier

4. Reduce the workforce; put a productivity check in place to raise it to the 88% mark.

5. Have the Procurement manager get an MBA!

Question: Let’s address bargaining power and find synergies with the Oil & Gas division. What can we ask Sergeant Slaughter?

Possible questions and analysis: Do they have the same supplier? How much is the Oil & Gas ordering comparing with the $6 billion for

Government. Are the divisions interacting? Do they collaborate to have a stronger bargaining power? Do they share information and data about their supplier’s contracts and demand

forecast? Can they combine the procurement departments for the two divisions and have

one larger for the entire company?

Here is some background information for the candidate: The Government division does not communicate efficiently with the Oil & Gas division. They use the same supplier but they have issues integrating data therefore one of the recommendations should address technology and information sharing issues. They do not have a common database with prices across the globe and former experiences. The Oil & Gas division accounts for $2 billion in orders from suppliers.

Possible proposals:1. Coordinate better with the Oil & Gas division and try to integrate orders to obtain

stronger bargaining power over the supplier2. Try to institute a common system to communicate future orders/demand and try to

negotiate them together3. Build a database accessible to both divisions with prices negotiated with multiple

suppliers in time to have a common negotiating basis4. Organize meetings with the procurement teams of both divisions to share best

practices and negotiating tips5. Unite the two procurement departments into one larger, company-wide solution

Conclusion: The VP calls you for an update. Please inform him of your findings.The student should wrap up the case in 3-4 sentences (30-60 sec) such as: 1. State a position2. Give evidence based on case3. Other considerations and/or creative aspects

To reduce cost, the VP could combine the two divisions from a technology, procurement, and workforce perspective. Additionally, the productivity of the workers needs to be

increased through training and new hires. Last, the company should try to negotiate long-term contracts with the government and aim to obtain lower prices from suppliers.

Case #28: DMB Satellite, Inc.

Scenario: Stefan Lessard, the CEO of a large conglomerate, finds a once-in-a-lifetime deal and has bought a satellite at a heavily discounted price. He can keep it or sell it today for a profit. What questions could you ask to gain critical information?

The candidate should take some time to think and then come up with some basic questions. Candidates should recognize this case as a profitability / market extension case. The candidate should request revenue and cost information and then calculate the profit for each situation. Later, the candidate should consider market dynamics, and the risks associated with having a single customer versus a diversified portfolio.

This information should be given if asked for: Cost of satellite acquisition: $10 million Market value of satellite today: $35 million Repair/maintenance cost: Negligible. The satellite is in good condition. Launch status of satellite: Satellite is still in the box and needs to be launched if

the company decides to keep it. DMB can use it for 3 years after which it becomes obsolete ($0 resale value and non-functional).

Costs associated with launch: Launch costs are $10 million for high orbit launch and $8 million for low orbit launch.

Life expectancy: 5 years (needs to be replaced in 5 years, as it becomes obsolete) Potential customers for satellite services: There are two customer segments based

on use: data transmission and voice/video transmission. Large corporations use satellites to batch transfer information periodically during the day. The use is short and intermittent, allowing for multiple clients. News broadcasters and telecommunications companies use the satellites for voice/ video transmission. They require 24-hour, global coverage limiting the satellite to only one client.

Potential to lease satellite capacity: Leasing satellite capacity is a good option but not available in this case (nice try).

Question: What is the best road to profits for DMB Satellite? You head down to the technician’s office to talk with Steve Lillywhite. He clues you in on the difference between low orbit and high orbit satellite communication abilities. As Steve explains:

Low orbit satellites are used to transmit data between two points where the distance between them is on the order of 3,000 to 5,000 miles (e.g. from one coast to another). These satellites are primarily used by corporations to transmit data in batches. Low orbit signal is subject to high interference, thus it is not used when continuous transmission quality is critical. (solution for multiple clients option)

High orbit satellites are primarily used for continuous transmission (i.e. in real time) where signal quality is critical. Live global television broadcasting is the primary application. (solution for news, broadcasters, etc. - single client option)

The candidate should conduct a profitability analysis, and request the following info:

Low Orbit Revenues Each Year 1 customer pays $50,000 per month Each Year 2 customer pays $30,000 per month Each Year 3 customer pays $20,000 per month There is some competition entering the market and you can assume that you will

need to reduce the prices for the multiple customer solution every year to attract incremental revenues. Prices for the contract you sign in year 1, however, fall to new rates in year 2.

80% of customers generated in a given year will remain the following year.Note: Data has been intentionally left out. The candidate should ask for the expected number of customers in each of the 3 years (see solution Exhibit 1).

High Orbit Revenues The high orbit customer pays 2,500,000 per month This is a specialized market, where we have found only one potential customer

who is ready to sign up The candidate should continue with the profitability analysis and cash flow calculations comparing the three options: sell now, low orbit, and high orbit. If the candidate asks, the discount rate is negligible.

Summary of profitability calculations: Option #1 - Sell today for a $35 million dollar pre-tax profit. Strong candidates

will recognize that the $10 million acquisition cost is a sunk cost. Option #2* - Operate single satellite offering data transmission service to

multiple clients: $80,000,000 profit (pre-tax). One key trick is that in year one you’ll have 50 clients, in year two those 50 clients become 50*80% = 40 clients. In year three those 40 clients have been reduced again to 40*80% = 32 clients.

Option #3* - Operate single satellite system to offer voice and video transmission. Requires increased upfront investment: $85,000,000 profit (pre-tax).

* Candidate should verify that company has access to capital for purchase and launch.

Conclusion: Carter Beauford, DMB Satellites’ President, wants some answers during your morning elevator ride. What do you say?

Ruminations Option 3 generates the highest profits. However, Option 3 has highest initial cost and

offers strong bargaining power for the single client. Also, what if we lose the client somehow to bankruptcy? There are also few available customers. The risk is high.

Option 1 gives us a nice chunk of change. But, do we have other viable investment opportunities for the cash generated in that sale? If the market value of the satellite is $45 million, it’s doubtful we can find another for only $10 million.

Option 2 offers a diversified client portfolio, and seems to be the optimal choice

EXHIBIT 1: CALCULATION PAGE (Do not give to candidate)

New Customers Months Cost Y1 total revenue Y2 total revenue Y3 total revenue Revenue Totals50 12 50,000 30,000,000 14,400,000 7,680,000 52,080,000

40 12 30,000 14,400,000 11,520,000 25,920,000

30 12 20,000 7,200,000 7,200,000Total Revenue: 85,200,000

Rule: lose 20% of existing customer base in following year Cost: 8,000,000Profit rounded: 77,200,000

New Customers Months Cost Y1 total revenue Y2 total revenue Y3 total revenue Revenue Totals1 12 2,500,000 30,000,000 30,000,000 30,000,000 90,000,000

Total Revenue: 90,000,000Launch Cost: 10,000,000

The high orbit customer pays 2.5 million monthly Profit: 80,000,000

Calculations: Low orbit

Calculations: High orbit

Case #29: Tipsy’s Distillery

Scenario: Your client is Tipsy’s Distillery, a major producer of distilled spirits in the U.S. They have two products: a brand of mid-priced Vodka and a brand of mid-priced rum. Over the past two years, the company has experienced a decline in profitability. Your client wants to know what is causing the decline in profits, and what can be done to increase profitability in the future.

The candidate should take some time to draw a framework and walk through the framework for the interviewer. Variations of different frameworks could be employed, including 3 C’s, 4 P’s, and Porter’s Five Forces. Ultimately, however, the candidate should recognize this as a profitability case that will require an analysis of revenues and costs. The aforementioned frameworks could play a role in revealing the primary revenue and cost drivers.

A good place to start is to examine the situation from a macroeconomic and industry perspective, before assuming that the problem in particular to this firm. The candidate could inquire about the general health of the economy and the industry as a whole. When prompted, the interviewer should reveal that the macroeconomic situation is healthy, and industry sales growth is positive, and overall profitability is positive, but has slightly declined over the past two years.

If the candidate asks for specific data or inquires about competitors, the interviewer should display Exhibit 1. This exhibit reveals the sales and profit growth of Tipsy’s Distillery and its two primary competitors in the industry. The candidate should draw two major conclusions from Exhibit 1: 1) Profits have declined for every player in the industry due to increased costs, and 2) Tipsy has not performed as well as its competitors in terms of both sales and profit growth.

Given that costs have increased—and negatively impact everyone in the industry-- the candidate should probe further to discover the cause. If the candidate asks for the elements of cost, the interviewer should turn the question around on the candidate: “So what do you think are the various components of cost? ” The candidate should be able to name many of the cost components listed below:

Question: What do you think are the main costs? (The above is a generic list)At this point, the candidate should ask about specific cost components and how the industry or Tipsy’s has changed.

COGS, R&D, SG&A, PP&E, are unchanged Overall, Distribution and Advertising Costs have sharply increased

The candidate should first draw the value chain to identify the various parties involved and the costs in distribution. He/she should also ask if there has been any change from the past to the present.

A structured approach is encouraged: what are the components of distribution? What are the various forms of advertising? Also, consider price, quantity, channels, and other key variables.

The interview should ask the candidate to form a hypothesis. Several possibilities might be mentioned:

Distribution Have third-parties handling shipment increased their rates? No. Have our employees unionized? No. Has the government recently levied fees on distribution? No. Has the frequency of deliveries increased? Yes.

Advertising Have media outlets (TV, Internet, etc) increased their fees? No. Are companies moving to new, more costly ad channels? No. Have trade promotions for the stores dramatically increased? Yes.

At this point, read the following to the candidate: There are two general market categories: privatized and state-owned. In 23 states, liquor is only sold through state-regulated liquor stores. In the other 27 states, liquor is sold in privately managed supermarkets and liquor stores. In the privatized market segment, stores have become less willing to hold inventory, requiring firms to deliver smaller batches of product more frequently. Also, shelf space in the privatized market is very expensive. Liquor companies must compete vigorously for shelf space through costly trade promotions. In the other 23 states, liquor is only sold through state regulated liquor stores (i.e. in North Carolina ABC Stores). Distribution costs in these states are much lower, as there are fewer outlets to service and there are central warehouses for the state-run stores. Also, since alcohol is more tightly regulated, advertising costs are lower.

Question: What conclusions can you draw from this information?

It is now apparent to the candidate that there are two different market segments, and that the higher advertising and distribution costs in the privatized segment are hurting everyone in the industry. The candidate now understands the cost picture; he/she should now focus on the revenue side. In terms of volume, sales in the privatized markets are outpacing sales in state-owned markets.

Though volume sales are higher in the privatized market, it is a much more costly market to serve—overall, margins are getting squeezed.

A natural next step for the candidate is to inquire about the shares that each firm has in these two segments. Refer the candidate to Exhibit 2. As he/she assimilates the information, the candidate should show insight and conclude the following: Tipsy’s is the top player in the privatized market, so it is realizing solid sales growth. But, margins are slim. As the number three player in the “state-owned” market—which is more profitable—Tipsy’s is gaining less than its competitors.

Question: What strategic options are available to the client in order to increase profits?

The candidate should think about a number of possibilities:

Decrease Distribution and Trade Promotion Costs

1) Investigate ways to decrease distribution costs in the privatized market. Outsource distribution (if not done already) and/or find less expensive distribution partners.

2) Access the profitability of various relationships with retailers in the privatized market. Though the overall picture is negative, some relationships are probably more profitable than others. Shift resources depending upon market share of retailer and profitability to the client.

3) Consider other distribution channels in the privatized market, including superstores and large discounters (e.g. Costco, Beverage and More, etc). These outlets can handle more inventory, and thus require fewer deliveries.

4) Investigate a merger with another player in the industry. This would give Tipsy’s a greater share of the more profitable “state-owned” market, and increase negotiating power with retailers in the “privatized” market. Note: candidates should be cautious with this suggestion. Mergers are seldom easy, and could potentially create more problems than they solve.

5) Investigate possibility of forward integration into the privatized market. Tipsy’s could establish its own retail outlets and bypass retailers. Though very costly in terms of capital investment, it could pay off in the long term.

Other

6) Compete more effectively in the “state-owned” market. Establish a sustainable competitive advantage.

7) Investigate expansion into new geographical markets (international) where the industry dynamics may be more favorable.

8) Investigate expansion into new product categories (e.g. gin, tequila, other liquors) to drive profits in the “state-owned” market. The states might be more inclined to partner with a firm that offers products that cover a wider spectrum. Achieve economies of scope and increase bargaining power.

Conclusion: The CEO of Tipsy’s Distillery has just walked into the room. Please offer a final recommendation.

Interviewer notes: The candidate should take a clear position, summarize the evidence to support that position, and briefly state other considerations. Naturally, there are a number of different directions that the candidate could explore. Regardless of the final recommendation, the candidate should supply convincing arguments to support that position, and demonstrate a strong understanding of the current market dynamics. The conclusion should not exceed 1 minute.

Exhibit 1

Exhibit 2

Firm Market Share - Privatized Market Share - State-OwnedTipsy's Distillery 45% 20%United Spirits 20% 40%Jake's Distillery 35% 40%

FirmSales Growth (2004 - 2005)

Profit Growth (2004 - 2005)

Sales Growth (2005 - 2006)

Profit Growth (2005 - 2006)

Tipsy's Distillery 5% 4% 7% 2%United Spirits 4% 4% 5% 3%Jake's Distillery 6% 5% 7% 4%

Case #30: Chemical Brothers International

Scenario: A major chemical producer, Chemical Brothers International (CHEMBRO), has retained your firm’s services to evaluate the feasibility of acquiring another major participant in the industry, Plastics of America (POA). Both companies are bulk commodity chemical producers. Your firm has been asked to analyze the future prospects of POA’s major product line, a chemical used in the production of plastics.

Question: What could be the purpose of this acquisition?

Don’t give the candidate a chance to “collect his/her thoughts.” You don’t always have that luxury in the real world, and you don’t always have that luxury in a case setting. Trust us. Potential answers here could include

Achieve greater economies of scale Complementary assets/products Preemptive acquisition ahead of competitor Increase negotiating power with suppliers and customers Tax Purposes (tax-loss carry forwards)

After a brief discussion, have them generate a short framework. A strong candidate will recognize that this case deals with internal factors (synergies and economies of scale) as well as some external factors (opportunity costs and industry attractiveness). The candidate should include some of the following elements in his framework:

Market Attractiveness / Industry Potential Operational Analysis (Synergies/Economies of Scale/ Network Externalities) Organizational and cultural compatibility Capability to enact acquisition: Financial, legal, and perceptual barriers

Question: What do you want to know to make a decision on the acquisition?

The following information may be given upon specific request:

Market Analysis: o End-users come primarily from the automotive industryo Market size has been slowly declining over the last five years o Within the last couple of years, prices have declined rapidly

Competition / Industry Analysis: o There are 10 major producers; the largest one with a 35% share; number

two has 25%, and POA is third with 20%; the remaining share is divided amongst others

o The two largest competitors earn a small return; POA is slightly above break-even; the rest are operating at break-even or at a loss

o Relative capacity utilization in the industry is 60 to 70 % and has been so

for the last 3 years. POA is also currently working at 75% of capacityo The two largest competitors are highly diversified with this particular

product line representing no more than 20% of their revenueso Highly regulated industry with expensive pollution control equipmento High barriers to entry because of the low profits and high investments

required

Product value proposition / brand portfolio:o The price has been driven by self-destructive cuts from the leaders to gain

temporary share pointso We do not foresee the development of any significant byproducts.o Other possible uses: None.o Complementary Assets: 50% of POA’s sales are to the automobile

industry

Finance and Operations:o Cost is based on size/efficiency/age of plant, etc. Within the industry,

POA is in an above-average position.o There are several operational improvements that could be implemented,

and management has not been aggressive in its pursuit of quality and cost controls.

o Great economies of scale exist in marketing and transportation. (Not quantifiable)

o Operational synergies could represent an additional $30 million in profits

Note: When the candidate brings up value, hand out Exhibit 1. However, make sure the candidate discusses the qualitative aspects. Skillfully manage the conversation. When looking at Exhibit 1, the candidate may whine about how the discount rate minus the growth rate is 9%, and not 10%. Let them use 10%. Don’t let them calculate the discount rate at 9%. This is a waste of time, because real consultants use calculators and Excel. Ask them instead if the NPV will be higher or lower if we do our calculations using 10%, instead of 12%-3% = 9%. The NPV will be lower. Ask them by how much. Now, the math is easy in this case because the discount rate is .09 and the revenues are 90. 90/.09 = 1,000. The difference is $100 million.

a) Basic: NPV analysis: Based on the information from Exhibit A, the net present value of

the target company is = $90M / (10%) = $900 million (assume perpetuity), which is less than the purchase price tag of $950 million.

Industry Attractiveness: not particularly attractive, unless the larger competitor can use economies of scale and dominant position for economic gain.

Additional qualitative insights from the information given above such as the fact that since this is a small part of conglomerates for the profitable large ones, there are great synergies to be achieved.

b) Good: A more comprehensive NPV would include the new cash flow from synergies, as

well as the previously calculated NPV. Therefore the $900 million + [Synergies 30M/(12%-3%) = 333M] = $1,233M value of target > 950 price tag

The additional cash flows are coming only from synergies but there could be additional cash flows from economies of scale, as well as tax advantages of paying for the acquisition with debt that would further improve the deal.

The competitors and regulators might not be too keen on the level of concentration in the industry and some reactions should be expected.

At what multiple of operating profits have other acquisitions been valued?

Conclusion: Once the candidate has concluded the major calculations ask him to wrap up. Any logical conclusion should include a “go / no go” decision followed by quantitative (valuation) and qualitative (industry and compatibility analysis) facts. Other ideas might include the evaluation of the competitors, for if they are also in the same markets as the Chemical Brothers, this might be a good defensive move.

Exhibit 1

Purchase price $950Yearly operating income before tax $90Cash $20Employees 2,000Return on capital 12%Market risk premium 7%Growth rate 3%Tax rate 40%

Information (POA)

Case #31: NoPerx Consulting Company

Scenario: You are the newest member on the management committee of a well-known top-tier management consulting firm. Eager to be accepted by your more senior peers, you volunteer to study the industry and propose a firm strategy, 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.

This is one of the most difficult types of cases because the answers are completely unknown and will vary substantially depending upon your knowledge of the industry. This is also an interesting case since it is highly salient. When information isn't available, the candidate should develop his/her own hypotheses. What matters here is the thought process, not necessarily the answers.

Question: How do you evaluate the consulting environment and determine likely future scenarios?

Answer: 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 a relatively small concentration of the 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 that new firms would enter if the firms in the industry were earning positive economic profits and if they were imitable (i.e. new firms could recreate what the top tier firms do).

Substitutes (moderate): Companies can move the consulting process in-house by hiring former consultants and bright MBAs. This occurrence is more likely during downturns.

Buyer Bargaining Power (moderate-high): In the last couple of years, the consulting market has suffered, with supply exceeding demand, which should have increased buyer power and driven prices down.

Supplier Bargaining Power (low-moderate): Major suppliers are the intellectual capital employed by the firm (e.g. experienced consultants who bring in sales; new consultants who provide analytic abilities). Must pay market price or risk losing suppliers, but current economic conditions have caused a reduction in supplier power, due to decreased demand from consulting companies and fewer outside options.

Other interesting points might explore the key success factors in the consulting industry. What differentiates top tier firms from middle ones? Do any firms have specific sustainable competitive advantages? How does the marketing mix differ among firms? Does your firm have any specific advantages that set it apart from other companies?

Determining likely future scenarios is more ambiguous. There are at least several key points: how soon and to what degree will demand for consulting services bounce back? Will top tier firms be affected differently than others? How has the mix of products demanded changed and what will it be after the economy recovers (e.g. cost-cutting studies vs. market expansion studies)? Will the consulting market expand evenly or will certain geographical areas expand (Pacific Rim, Eastern Europe) faster than others? Again, the thought process is more important here than actual answers.

Question: What information do you use in this process? How is this information obtained?

Answer: Information gathering is a key reason companies use consultants. You should have a decent knowledge of business information sources and how to gather information.

Information can be broken into two groups: secondary and primary. Usually one begins with secondary material, specifically, a complete review of published literature (a ''lit search") pertaining to the study (e.g. journal and newspaper articles, investment bank research, specialized studies, books, etc). This often points toward other good sources (e.g. industry experts, associations, major competitor's, government sources, etc.). Hypotheses are often created from the secondary information. Primary research is then used to focus in on the key issues. This research includes telephone interviews, in-person interviews, mailed questionnaires, focus groups, laboratory experiments, etc.

Question: What do you believe is most likely to happen in the consulting industry given your present knowledge? How did you arrive at this conclusion?

Answer: This answer will depend upon the material covered in the first two. Ask the questions: What trends are likely? What is a positive scenario? A negative one? If you had any information at your disposal, how could you get a better handle on this issue?

Question: What strategy do you propose to the management committee?

Answer: There is no right answer here. However, you can provide some structure. What are the key factors for success in the industry? Is there any way to achieve sustainable advantage (cannot be duplicated by competitors)? Can non-traditional methods be used to achieve competitive advantage, such as leveraging through technology? Given your firm's competitive strengths and core competencies, what is the best strategic route?

Appendix: Cases from Company

Websites

Company Website Cases

McKinsey: Health Care

Our client is Magna Health, a health care company in the Midwest. It both insures patients and provides health care services. Employers pay a fixed premium to Magna for each of their employees in return for which Magna covers all necessary health services of the employee (ranging from physician care and medications to hospitalization). Magna currently has 300,000 patients enrolled in its plan. It has 300 salaried physician employees who provide a broad range of services to patients in six centers. These physicians represent a wide range of specialty areas, but not all areas. When a patient needs medical treatment in a specialty area not covered by a Magna physician, they are referred outside of the Magna network for care, and Magna pays all referral costs on a fee-for-service basis. Magna does not own any hospitals itself, instead contracting services from several local hospitals.

Magna's CEO has retained McKinsey to help determine what is causing the declining profitability and how Magna might fix it.

What key areas would you want to explore in order to understand Magna's decline in profitability?

Some possible areas are given below. Great job if you identified several of these and perhaps some others.

Magna's revenues o Price paid by employer for employee health coverage. o Number of employees covered by Magna.

Magna's costs (or fixed and variable costs) o Magna's main cost components consist of administrative

(non-medical) and medical costs (e.g., hospital, drugs, outpatient care)

o Outpatient costs can be split into internal physician costs versus external referral costs

Magna's patient base demographics/overall risk profile which may affect medical costs

The team discovers that the demographics of Magna's subscribers have changed significantly in the past 5 years, from majority industrial workers/laborers to majority office employees. Knowing this, are there any specific areas you would investigate first?

We are looking for a few responses, similar to the ones below: Claim costs, as the change in the subscriber base will change the


profile of diseases (e.g., more heart disease/stress and less work related injury)

External referral costs, due to the change in the disease profile for which they have in-house competency

After reviewing the basics of Magna's business, your team believes that one of the root causes of Magna's financial problems is how it manages medical costs, particularly the cost of referrals to specialists outside of its physician network. Your team has gathered the following information on Magna and its primary competitor, Sunshine HMO:

Number of patients

Average cost of referral(per member per month)

Magna Health 300,000 $20

Sunshine HMO 500,000 $15

What are the most likely reasons that the average cost of referral at Magna is higher than at Sunshine? (At this point you should feel free to offer hypotheses, and you could ask your interviewer questions to clarify the information)

Although there are a number of possible responses, you might have the following suggestions:

Referral pricing: Magna might be paying more than Sunshine for specialist services (e.g., its outside contracts with oncologists might be at higher rates than Sunshine's contracts).

Number of referrals: Magna's physicians might have different practice patterns than Sunshine physicians, i.e., they may be less comfortable treating heart disease patients or have different training/protocols.

Mix of specialties: Magna's mix of specialties that requires referrals (cardiology and neurosurgery) are probably more expensive specialties (than cardiology and psychiatry, Sunshine's referral specialties).

Mix of patients: Magna has sicker or older (>65) patients (individuals over 65 are more likely to need medical care in the specialty areas outside of Magna's network, particularly cardiology).

What analyses would you do if the things you suggest were contributing to this problem?


You might take the following approach, where we’ve outlined different areas of analysis:

Referral pricing: o Gain data on prices currently being paid by Magna for a

sample of common specialties o Gain similar data for a competitor if possible for an industry

average (perhaps through interviews with non-Magna specialists)

Number of referrals: o Interview Magna physicians and non-Magna physicians to

see if any obvious behavioral differences exist o Consult industry publications on this issue

Mix of specialties: o Check number of referrals by specialty for Magna and

estimate similar for Sunshine o Interviews with external specialties used by Sunshine may

help again here

Mix of patients: o Compare demographic data for Magna and Sunshine: should

be easy to obtain from Magna; a scan of the employee schemes covered by Sunshine should give a good general picture of their demographic profile

o See if Magna's referral cost has increased in line with the change in demographics of the subscribers

Helpful Tip - In giving the answer, it's useful if you are clear about how the analysis you are proposing would help to answer the question posed.

Magna's CEO has a hypothesis that Magna is paying too much in cardiology referral costs for its patient population. He asks the McKinsey team to look at Magna's cardiac patient population more closely and tell him how many referrals he should expect on an annual basis. Assume the following:

Magna has 300,000 patients in any one year 20 percent of its patients are age 65 or older In the U.S., patients with serious heart disease visit specialists

(cardiologists) on average of five times per year


You should always feel free to ask your interviewer additional questions to help you with your response. In this case, you should recognize the need to know the prevalence rate of serious heart disease to complete this calculation. Once asked, your interviewer would provide you with the following information:

The prevalence rate of serious heart disease in the 65+ population is 30 percent

The prevalence rate of serious heart disease in the under age 65 population is 10 percent

Based on the correct calculations, your response should be as follows: Magna should expect 210,000 cardiac referrals annually based on its patient population. You should have approached the calculations as follows to arrive at that answer:

300,000 total patients 20 percent x 300,000 = 60,000 patients age 65+ 18,000 x 5 = 90,000 referrals per year 240,000 Magna patients under the age of 65 240,000 patients x 10 percent = 24,000 patients under age 65 with

serious heart disease and 24,000 x 5 visits per year = 120,000 visits per year total

90,000 + 120,000 visits per year = 210,000 total Magna patient external cardiology visits

When the team tells Magna's CEO that based on Magna's patient population he should expect about 210,000 cardiology referrals a year he exclaims, "We currently pay for 300,000 annual cardiology referrals for our patient population!"

Why might Magna's annual cardiology referrals be significantly higher than U.S. averages?

What would you do to try to verify if any of these were a key cause of this problem?

There are a number of answers to these questions, and you are on the right track if your responses included some of the ones below:

The prevalence rate of heart disease in Magna's patient population is higher than average. To see if this was a cause of the problem, McKinsey should audit the internal data on heart disease prevalence and compare it to US National data.


Magna's primary care physicians are referring patients who do not have serious heart disease to specialists. The team should interview specialists to get their opinion, or follow through a sample of patients who were referred.

Primary care physicians are not comfortable (e.g., they are poorly trained or inexperienced) treating cardiac patients, even those with minor problems; they want to avoid malpractice suits. McKinsey should interview Magna physicians and institute an external review.

Magna doesn't have clear guidelines on when physicians should be referring patients to specialists (or if guidelines exist, physicians are not complying with them). The team should gain an expert opinion on the current guidelines to see if this was a key cause of the problem.

There are no incentives or penalties to prevent physicians from referring patients with less serious problems to specialists. In order to verify this is a key cause of the problem, the team should review incentive schemes if they exist. They should also compare similar companies/situations (e.g., prescription control mechanisms, etc.).

Helpful Tip

We would not expect you to come up with all of these answers, but we hope some of your answers head in the same direction as ours. Yours may bring some additional insights. In either case, be sure that you can clearly explain how your reasons will bring you closer to why the referrals might be higher.

At this point in the study, you bump into Magna's Head of Health Services in the corridor. He is responsible for all matters related to the provision of services to subscribers, both inside and outside the Magna Network. He asks you if you have made any progress. How would you respond?

The ability to come to a logical, defensible synthesis based on the information available at any point in an engagement is critical to the work we do. Even though we'd consider ourselves to be early in the overall project at this point in the case, we do want to be able to share our current perspective. One ideal answer would include the following points:

Findings We have investigated all the drivers of profit for Magna. Although

there is likely to be room for improvement in a lot of areas, it seems the claims cost is a big area for improvement.

Relative to the market and to competitors, Magna seems to have high claims cost per patient. Our initial indication is that there may be highest room for improvements in the cost of referrals outside


the network. There are a number of reasons as to why this may be happening (list

as in previous question).

Next Steps We are working to pin down the most significant reasons why

Magna has high claims cost per patient.

We are going to be looking into other areas such as reduction potential in other costs, as well as improvement potential in terms of premiums or other sources of revenue.

After some additional investigation, your team decides that changing the behavior of Magna's primary care physicians has potential to reduce cardiac referral costs while maintaining high quality care. The team believes that introducing some sort of incentive plan for physicians might help reduce the referral rate. You propose the following pilot plan:

Magna pays bonuses of $100,000 per year to each of the 10 primary care physicians with the lowest cardiac referral rates consistent with good patient outcomes.

Magna increases overall fees paid to primary care physicians to handle more of their patients’ basic cardiology needs. Overall fee increases would total $1 million.

How many fewer cardiology referrals will Magna need to have in order to recoup the cost of the pilot incentive plan? For simplicity’s sake assume:

The cost of a cardiology referral is $200.

Magna currently has 300,000 cardiology referrals per year.

If the incentive plan reduces cardiology referrals by 3.3 percent or 10,000 referrals, Magna will recoup the cost of the incentive plan. One potential approach to the calculation:

$1 million + (10 * $100,000) = $2 million for incentive plan $2 million/$200 =10,000 referrals

10,000 referrals/300,000 total referrals = 3.3 percent reduction would pay for incentive program

Your team projects that the incentive plan has the potential to reduce referrals by 5 percent in its first year, and an additional 2 percent in its second year. If these projections are correct, by how much would Magna's referral costs be reduced over a two-year period with this program?


Referral costs would be $4.14 million lower in the second year. Over the two years Magna would save $7.14 million. One potential approach to the calculation:

Year 1 Savings with Program 300,000 total referrals 5 percent reduction in referrals = 15,000 referrals 15,000 x $200 = $3.0 million in savings in year 1

Year 2 Savings with Program 285,000 total referrals 2 percent reduction in referrals = 5,700 referrals 5,700 x $200 = $1.14 million in savings $3 + $1.14 = $4.14 million in savings

Therefore, total cumulative savings over the 2 years = Year 1 savings + Year 2 savings = $3.0m + $4.14m = $7.14m.

Your team presents its physician incentive proposal to Magna’s CEO. The CEO, in consultation with his Medical Director, agrees that this is feasible and says that they will pilot it for cardiac referrals.

At the end of the meeting the CEO says, "I like the work you’ve done, but it's not enough to address our current financial situation. Physicians are professionals who care deeply about patient care and I think there's a limit to how much cost we can expect to reduce utilizing financial incentives exclusively. Besides cardiac financial incentive programs, what other ideas should we consider to reduce the cost of Magna's specialist referrals?"

Based on what we have discussed today, and any other ideas you might have, how would you respond to the CEO?

This question is a good one for demonstrating creativity because there's a long list of possible ideas. You might give the following response:

Pursue additional ways to change physician behavior o Provide training on how to treat patients with minor or

stable medical problems o Define and clarify medical guidelines for referrals (e.g.,

establish a medical committee to define the difference between “serious” and "minor" heart disease)

o Institute peer review committee charged with approving a subset of referrals (e.g., those that are considered "high cost")

Spend time investigating "outlier" physicians (i.e., those who


seem to refer patients to specialists at much higher rates than others) to determine how widespread the referral problem is and whether simply focusing on a few physicians will dramatically reduce referral costs

Determine whether Magna can reduce referral costs in the other medical areas where it does not have specialists (i.e., neurosurgery)

Look at the contracts Magna has for specialist services to determine if it is paying too much relative to competitors

Consider whether bringing cardiology, neurosurgery, and oncology specialists in-house (i.e., within Magna) might reduce cost

Helpful Tip - You may have a slightly different list. Whatever your approach, we love to see candidates come at a problem in more than one way, but still address the issue as directly and practically as possible.


Bain: Cost-savings analysis for food services company

In this case, we will provide you with information regarding a client situation and ask you questions regarding the case issues. After you submit your answer, we'll provide a detailed Bain answer that you can compare with your ideas.

Remember, in case interviews there are no "right answers": interviewers look for problem-solving skills, creativity and common sense. You will not be able to skip questions in this online case, so take your time and have fun!

Question 1 The client situation:

A large fast food chain has hired Bain to improve the company’s profitability. You’re about to have an initial brainstorming session with your team around your client’s options, and you want to collect your thoughts first.

How would you begin to tackle your client’s profitability problem?

Bain recommended answer:Your interviewer wants to know that you have a structure in mind. An appropriate structure for this case would be the profit equation. Be sure to state that to your interviewer.

For example:"Profit is: total revenue – total cost.

Where Revenue = Price * Quantity and Costs = Fixed Costs + Quantity * (Variable Costs).

In order for the company to improve its profitability, management needs to increase revenues and/or decrease costs.

So to begin tackling my client’s profit problem I am going to look at these two sides of the equation:

Could the client increase prices? How would customers react? Could the client sell more meals, either at existing branches or through opening

new ones? Are there other creative ways to grow revenue (enter into large-scale catering

contracts, for example)? Could the client decrease our fixed costs by selling some of our branches or real

estate? Could the client reduce the quantity of products they buy, such as ingredients

for their meals? How else could they reduce their costs?"

Question 2


At your case team meeting, your manager informs the team the customer is price sensitive, the market is fairly saturated, and that the fixed costs are pretty stable. Thus Bain and the client agree that the team should focus on lowering variable costs. Specifically the client wants to reduce their spending on purchased items (items the client buys from others and then uses or offers to their customers, like the meat in the hamburgers or the ketchup packets).

Without knowing much more about the situation, what would you suggest are some ways to do so? Which ideas seem the most attractive and why?

Bain recommended answer:Purchased goods in this business fall primarily into 2 categories: food and packaging. Variable costs are a function of: price and volume. Therefore, the client needs to reduce volumes purchased or negotiate lower prices.

Food: We could negotiate lower food prices with our suppliers (consolidate our

purchasing, etc.). We could look for cheaper ingredients. This sounds risky because it could lower

the quality of the food that we sell. We could reduce the volume used. For the same reason, this sounds risky

because it would change our recipes, one of our competitive advantages in producing winning recipes.

Packaging: We could negotiate lower prices with our suppliers or look for cheaper

alternatives. We could reduce the volume used.

Recommendation: Most attractive ideas are: negotiating lower food prices or packaging prices,

looking for cheaper packaging materials, or reducing the volume used.

Question 3At this point in the brainstorming session, the VP adds that two years ago, the company launched a program to centralize purchasing and successfully negotiated much lower prices. Therefore, it is critical to determine if you could reduce the volume of goods that the client purchases. How could you reduce the volume of purchased goods?

Bain recommended answer:Some good creative answers here include (but are in no way limited to):

Can the client change the shape or size of food containers? Can the client packaging for families be consolidated? Can the client reduce the weight of the packaging while still protecting the

food?


Can the client reduce other qualities of the packaging including degree of color or logo prevalence without sacrificing their brand?

Can the client lock bathrooms so that non-customers do not waste toilet paper and towels?

Can the client charge for extra condiments? Can the client reduce the size or number of napkins they purchase?

Question 4Bain focuses on components that make up large portions of a company’s costs: reductions in these areas will have the largest impact on a client’s overall costs. Bain’s philosophy is to always focus on where the value is. At first glance, napkins would not appear to fall within this category because they are so low cost. But there is a new napkin dispensing technology on the market that you have heard about and think could save the client some money. You decide to investigate.

One way to reduce volume is to reduce how many napkins a customer takes. Customers in fast food chains often take many more napkins than are needed for the meal, or actively hoard them to take home. One action some chains have taken to combat this is to switch their napkin dispensers from small metal dispensers (from which you pull napkins out in bunches) to larger plastic dispensers (from which you pull napkins one at a time, like a reverse Kleenex box). These dispensers are produced by major paper manufacturers.

Let’s assume your chain came to you with the following question: How much money could we save per year in the US from using the new type of

napkin dispenser in all restaurants?

What information would you like to know from the company? (Do not take into account the cost of the dispensers for now.)

Bain recommended answer:Key information that would be necessary includes:

Number of restaurants Number of customer visits per store per year Number of napkins used per customer now Number of napkins used per customer after the switch Price per napkin

Question 5As you talk through the data points that you would need to gather with your colleagues, you learn from a fellow AC who worked for a local restaurant that a case of 6000 napkins cost his client $28. Thus, a reasonable price per napkin is about $0.005.

Conduct your estimates as if your client is similar to McDonald's in terms of the


number of outlets.

Your manager calls you for a quick estimation of the market size before getting the actual data from your client. Use creative approaches to hypothesize values for each of the above pieces of information and then calculate the estimated savings.

Bain recommended answer:The interviewer is not looking for you to know the values of each of these buckets, however it is important for you to make reasonable estimates and be able to defend your answer. Were your estimates near these, or did you at least take similar approaches?

Number of restaurants

Actual answer: ~12,000 McDonald's in the US.

One estimation approach:Think of your hometown: How many McDonald's are there for the number of people? Assume there is a McDonald's for every 20-25,000 Americans, with a population of ~275 million people in the US, that would be 11-13,750 McDonald's.

Other approaches: Estimate the entire fast food market and then estimate McDonald's share Estimate the area covered per McDonald's across the United States.

Note: With this approach, be careful to account for population differences between 10 square miles of NYC and 10 square miles of Utah.

Number of customers per restaurant per day

Actual answer: Fast food restaurants expect around 1,500 customers a day.

One estimation approach:Assume the 20,000 people per McDonald's visit an average of twice a month, that's 24 times a year per customer or 480,000 visits / 365 days = 1,315 customers per day.

Other approaches: One might take this a step further during a case interview and attempt to

segment these customers. For example, one might assume 50% of the restaurants customers are drive-through and 25% of the remaining take their food "to go." Drive-through customers do not take, but are given napkins. "To go" customers may be more likely to "hoard napkins" as they can not go back to the counter for more.Note: This would influence potential answers to the next question - but for now, assume you did not take this step and all customers are the same.

Number of napkins used per customer per visit


Actual answer: Five napkins with old dispensers and two napkins with prohibitive dispensers for a savings of three napkins per customer.

One estimation approach:During a case interview you would most likely just use personal experience here - how many napkins do you take or see others take when you're at a fast food restaurant?

Other approaches: Bain would send people to the chain to watch napkin taking behavior or call fast

food restaurants with both kinds of dispensers to find out how many napkins they go through a day.

Calculations$0.005 per napkin * 3 napkins * 1500 customers * 365 days per year * 12,000 restaurants = $98.6M dollars saved in napkin purchases.

Question 6 -- Does this estimate sound reasonable? How would you go about feeling comfortable with this figure and pressure

checking your assumptions? What would you want to flag for your manager as factors that might

significantly alter the answer?

Bain recommended answer:To check the magnitude of the overall number some options include:

Looking at a comparable company’s operating income to see what percentage of the expense napkins account for.

Find out what your client currently spends per restaurant per year on napkins.

Keep in mind that with a company of this size any small changes in assumptions will significantly alter your answer. Some things to flag for your manager:

The chain you work for probably gets a significantly better deal on napkin pricing due to the magnitude of their orders (in contrast to the single-location restaurant napkin price estimate you received)

Up to 50% of customers are drive-through and their napkin behavior should not change. This would reduce the savings by up to 50%

The three napkin reduction estimate needs refining. Perhaps a pilot program would need to be done to see if the dispensers really have the desired effect

Question 7Assume you would need 10 dispensers per store for a total of 120,000 dispensers. Also note that napkins in these dispensers cost more at a price of $.01 per napkin (remember it is the paper companies that make the new dispensers).


At what price per dispenser would the investment not be worth doing?

Bain recommended answer:120,000 * cost of dispenser + 2 napkins * .$01 per napkin * 1,500 customers * 365 days * 12,000 stores = 5 napkins * .005 per napkin * 1,500 customers * 365 days * 12,000 stores

120,000 * cost of dispenser = $32.85M

The most you would be willing to pay per dispenser would be $273.

Note: In an actual case interview you can use round number estimates so that mental math is easier.

Question 8The actual cost of these dispensers is around $50.

Can you see any other factors your client should consider before making a decision?

What other advantages and disadvantages might there be to this switch? (Impact on costs and customers.)

How might you evaluate the impact of the extraneous factors?

Bain recommended answer:Some potential ideas include:

Advantages: Fewer napkins used per day leads to less restocking which may mean better

customer service or lower labor cost. Better relationship with paper manufacturer (potential for better pricing).

Disadvantages: With the new dispenser locking you into a paper provider you may lose buyer

power. There is the potential for additional napkin price increases in the future. Customer reaction: Will a customer find this to be poor service? What if he or

she needs to grab a handful of napkins after a spill?

Implementation: Management will need to negotiate a contract that includes limits on future

pricing. Bain will need to do customer research and pilot programs to evaluate customer

reaction.

And many, many more! As you can see, the keys to a good case interview are logical assumptions, creative thinking, and basic quantitative ability. Take time to think through problems and share your thought process with your interviewer and you will do


great.


Boston Consulting Group: Sugared Cereal

Actively listen to the case

Your client is the sugar cereal division of Foods Inc., a U.S.-based distributor and manufacturer of packaged foods. According to the division president, Foods Inc.'s traditional strength has been with grocery stores, which still account for the majority of its $1.1 billion in sugar cereal sales. But Big M Mart, a discount chain, has been growing at a healthy rate of almost 15 percent per year and has now become Food Inc.'s largest customer. Your client is not sure how to react, and has asked BCG for assistance with its distribution strategy.

Establish understanding of the case

First, let me make sure I understand the problem. Our client specializes in sugar cereals traditionally distributed through grocery stores. Sales to Big M Mart, a discount chain, have been growing at 15 percent per year, and the chain has recently become the largest distributor of the client's product nationwide. We are here to help evaluate the distribution strategy in light of Big M Mart's growth.

That is correct.

Could you explain to me how grocery stores differ from discount stores?

Sure. Grocery stores generally specialize in food, as well as selling some household goods and over-the-counter pharmaceuticals. Discount stores, on the other hand, offer food alongside a wide variety of merchandise, including clothing, home electronics, and housewares.

Does Big M Mart market its food products differently than do grocery stores?

Discount stores advertise lower prices for a wide variety of foods, particularly staple, nonperishable foods.

Could I take a moment to write a few notes to myself?

Please feel free.

Set up the framework

Before making recommendations, I think we would need to evaluate whether sales growth at Big M Mart is good or bad for Foods, Inc. To do that, I would first look at how its sugar cereal performance at Big M Mart compares with that in other distribution channels. Second, I would look at its performance at Big M Mart in relation to competitors' performance. Next, I would determine what drives customer purchases. Finally, I would want to understand the supply chain.

That certainly sounds like a reasonable approach. Let's proceed.

Evaluate the case using the framework

First, I would like to get a better sense of where Big M Mart stands in relation to our client's other distribution channels by examining the client's sales data and margins, by distributor.

The marketing department does not have margins by channel, but tracks sales and volume for its top five distributors.


Sales ($M) 1997 1999 2001 5-Yr CAGR

Big M Mart 142 162 246 14.7%

R.J.'s 157 185 200 6.2%

Bozo Mart 143 175 189 7.3%

Ace Grocery 101 109 153 11.0%

Shoppers Mart 57 62 67 4.0%

Total Top 5 600 693 856 9.3%

Total All Distributors 1,000 1,079 1,150 3.6%

Volume (M boxes) 1997 1999 2001 5-Yr CAGR

Big M Mart 65 74 113 14.7%

R.J.'s 72 81 85 4.2%

Bozo Mart 65 77 80 5.2%

Ace Grocery 46 47 64 8.8%

Shoppers Mart 26 27 28 2.0%

Total Top 5 274 307 370 7.8%

Total All Distributors 450 468 487 2.0%

What does this imply about Big M Mart as a distribution outlet?

It looks as if the top distributors have been growing more important, but particularly Big M Mart, which is growing faster than all the others. This is particularly true when we look at volume, where Big M Mart's growth is much higher than that of the other four channels.

And how could you interpret what these data says about margins?

While the client's sales through other distribution channels are growing faster than volume, Big M Mart volume and sales growth are the same, so the average price paid by Big M Mart has remained constant. That implies that sales growth at Big M Mart could have negative implications for our client's margins.

Next, I would like to look at how our client is doing in relation to the competition within Big M Mart. Have they been gaining or losing market share?

How might you find that out?

I would try to interview Big M Mart's purchasing personnel, since they would probably track those data for their own purposes.

Why would they want to talk to you? How might you approach such an interview?


I would approach the purchasing personnel and suggest that our client and Big M Mart work together to identify best practices to reduce costs and increase sales of sugar cereals at Big M Mart.

Let's say in a perfect world you could get a breakdown of Big M Mart sales for the four largest competitors (see market shares below).

What can we infer about our client's competitors within this channel? Who should they be worried about?

It looks like our client is losing market share, as is Tasty Breakfast, while Cereal Co. and Private Label are gaining share. Private Label, however, looks to be growing from a very small base.

I would like to explore why our client is losing market share to Cereal Co. at Big M Marts. Are their prices better than those of our client?

After a period of price wars six to seven years ago that lowered industry margins, the cereal companies have refrained from price competition within the same channel.

If prices are not driving the difference, I would look at other factors such as brand selection, percentage of shelf space, product placement, and in-store promotions.

Visits to Big M Marts indicate that each name-brand company holds 30 percent of the shelf space, while private label has 10 percent. Cereal Co. brands, however, tend to be placed lower on the shelf than your client's products.

Well, I suspect that children are a large target market for the sugar cereal manufacturers. The lower shelf placement could be especially important to children who are looking at the different types of cereals. Are there any other promotions?

Some Cereal Co. brands have sales promotion tags, and the team notes that store flyers advertise specials on Cereal Co. brands for Big M Mart customer cardholders.

So, even if all the companies are maintaining product prices, maybe Cereal Co. is strategically discounting prices to gain market share.

It seems as if there is evidence of cooperation between Cereal Co. and Big M Mart. Do we know anything about their relationship?


During earlier discussions with Big M Mart, you discovered that your client's competitors have 50 sales representatives dedicated to the Big M Mart account. Your client has seven.

Cereal Co. appears to be dedicating more resources to its relationship with Big M Mart than our client is. This may explain its better product placement and promotion programs.

I think I have a good sense of distribution and competition. I would now like to look at the customers and understand why they select the products they do. One hypothesis I have is that shifting brand loyalties are hurting our client's market share at Big M Mart.

That's interesting. What do you think might motivate purchases of sugar cereals?

There are lots of factors, such as the games in the boxes, the price of the cereal itself, how it tastes. To better understand consumer behavior, we might conduct market research, possibly through focus groups, customer observation, and price sensitivity studies.

BCG teams often do such research. Let's assume your team conducts some analysis. Your research concludes that most buyers tend to fall into two categories. Approximately 60 percent of buyers go straight to one cereal and grab it. We can call this group the "brand-loyal" shoppers. Another 40 percent of shoppers look at all the cereals and then select one that interests them. Let's call this group the "impulse" buyers.

For the brand-loyal shopper, the priority would be product availability, while product placement would be important for consumers who like to shop around.

Within these groups, are consumers price sensitive such that one brand can lure shoppers loyal to another brand?

In general, your research indicates that consumers are not price sensitive and are extremely loyal to their preferred brand. But when the preferred cereal is unavailable, the brand-loyal customers will purchase discounted cereals approximately 35 percent of the time.

Well, from that information, it appears that price is not a major driver of purchases unless the preferred cereal is out of stock. In these stock-out situations, you said, brand-loyal customers will purchase discounted cereals 35 percent of the time. What happens when the customer does not purchase a discounted cereal?

In approximately 25 percent of cases, the customer walks away without purchasing any cereal at all. In the remaining 40 percent of cases, the brand-loyal customer will act like an impulse shopper and select another brand.

Interesting. It seems as if product availability could be a major driver of total cereal volume for Big M Mart. Of course, we would need to know how often stock-outs occur that cause consumers to walk away without purchasing cereal occur.

Since I have a pretty good understanding of customer motivation, I'd now like to ask a few questions about the client's supply chain. I would want to talk to our client's distribution personnel to understand the distribution process and to determine how often stock-outs occur. Can you describe how our client's cereal is distributed at Big M Mart?

Cereals are distributed from the factory to the distributor's warehouse twice monthly. The retailer then stocks the shelves itself.

Do we have any knowledge about when the individual stores are out of stock?


No, we do not, since our client only delivers to the warehouses and has no direct access to in-store inventory information.

Since we identified product availability as a key success factor earlier on, I would want to make sure that the stores were stocking the product correctly.

Let's say that in your earlier in-store investigations, you found out that Big M Mart stores averaged 15 percent of sugar cereal brands out-of-stock, across all brands.

Stock-outs would be a major problem for our client, since 60 percent of customers look for a specific brand of cereal and 35 percent of them would buy a discounted brand in a stock-out situation. Big M Mart would also have an incentive to reduce out-of-stock incidents, since 25 percent of the time, a brand-loyal customer will walk away without buying anything.

Step 5

Step 5:

Summarize and make recommendations

Big M Mart is our client's leading customer, accounting for more than 20 percent of our client's sugar cereal revenue. Although sales to Big M Mart are increasing on an absolute basis, our client's margins there are lower than in its other channels and its competitive position is eroding in that channel.

At Big M Mart, our client faces competition from both private label and Cereal Co., although the latter appears to be the greater threat. There appears to be a relationship between Big M Mart and Cereal Co. as evidenced by their joint promotions, the superior placement of the Cereal Co. product, and the substantial resources that Cereal Co. has dedicated to the Big M Mart account.

We learned that 60 percent of customers are brand-loyal, implying product availability is most important. However, 40 percent like to try different kinds of cereal, indicating product placement is also important. Purchasers do not appear to be price conscious, unless the type of cereal they are looking for is out of stock, in which case there is a stronger tendency to base purchases on price promotions.

In terms of distribution, our client is making deliveries twice a month to Big M Mart's warehouses. Big M Mart, in turn, is responsible for stocking the shelves. We currently have no direct knowledge of when our client's items are out of stock at the individual stores, but there is evidence that stock-outs do occur with some frequency.

Well, it sounds as if you understand the situation. What would you recommend the client do?

The sales through Big M Mart appear to have a negative impact on the bottom line, as they have lower margins than sales through grocery stores. The client could work with grocery stores to ensure that they are able to compete effectively with Big M Mart in the sugar cereal market. This strategy could be risky, however, since Big M Mart is a large and important customer. Therefore, I would recommend that our client work more collaboratively with Big M Mart.

To defend its current position at Big M Mart stores, the client should move toward a partnership with Big M Mart and dedicate more resources to the relationship. The customer and competitor data indicate that our client's first priority should be to improve distribution to ensure better product availability. In addition, it should push for product placement equal to,


if not better than, that of its competitors.

Why would Big M Mart be willing to enter into a partnership with Foods Inc?

Foods Inc could offer to share its information about customer behavior to help increase revenues for both itself and Big M Mart. Stock-outs hurt Big M Mart in two ways. First, some brand-loyal customers simply walk away without purchasing cereal whenever their preferred brand is unavailable. Second, we know that other brand-loyal customers purchase lower-priced cereal whenever they encounter a stock-out of their preferred brand. Both of these instances lower Big M Mart's revenue.

By eliminating stock-outs, Big M Mart could increase its sales by simply ensuring that customers don't walk away without making a purchase. Converting these purchase occasions to sales would increase Big M Mart's sales of sugar cereals by more than 2 percent(1).

Better availability also helps Big M Mart and our client increase their revenue by deterring the brand-loyal shoppers from trading down to lower-priced cereals. Recall that 35 percent of the brand-loyal shoppers purchase a discounted cereal if their preferred brand is not available. If improved distribution now makes the preferred brands more consistently available, the customers will pay a higher price for these products.

Finally, we could use the information about consumer purchase behavior to help persuade Big M Mart to share information about product availability in its individual stores. We could work with our client and Big M Mart to improve the current distribution system to allow for more economical deliveries, while at the same time ensuring that our client's product is consistently available in the store.

Thank you. Those sound like solid recommendations, but I would suggest that you fully understand the root cause of the stock-out situations and the cost to eliminate them before moving ahead.

(1) 15 percent out of stock x 60 percent brand-loyal customers x 25 percent willing to forgo purchase = 2.25 percent

http://www.bcg.com/careers/interview_prep/Practice_Case/foods_inc.html#footnote

Fuqua 06-07 Case Book

Documents

Transcript of Fuqua 06-07 Case Book