whu case book
TRANSCRIPT
Das Consulting Case-Boook
Initiiert durch das WHU 2000 Career-Management-Team
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Die meisten Beratungsunternehmen benutzen „Cases―
im Rekrutierungs-Prozeß. Die Interviewer erhoffen sich
davon Informationen über die Fähigkeit der
Kandidaten, ihre eigenen Gedanken zu strukturieren,
sinnvolle Fragen zu stellen und zu plausiblen Lösungen
zu gelangen. Dabei ist die Vorgehensweise mindestens
so wichtig wie die Antwort selbst.
Dieses WHU-Consulting-Case-Buch soll Euch bei der
Vorbereitung auf solche Case-Interviews helfen. Ihr
findet eine kurze Einführung in die Beratungsbranche
(aus einer US-amerikanischen Perspektive);
grundlegende Konzepte werden im Ansatz wiederholt
und einige allgemeine Interview-Ratschläge sind
aufgeführt. Den Kern bilden jedoch rund 75
beispielhafte Cases, die am besten in Probe-Interviews
zu zweit geübt werden können.
Grundlage für dieses Buch waren die von den
Consulting-Clubs der J.L. Kellogg Graduate School of
Mangement und der University of Michigan
herausgegebenen Case-Sammlungen. Aufbereitet und
zusammengestellt wurde es vom WHU 2000 Team
Career-Management.
Wir wünschen Euch viel Spaß bei der Vorbereitung und
viel Erfolg in den Interviews!
Wolfram Gerlof
Carolin Torner
Bernd Trautwein
Robert Vollrath
Malte Wulfetange
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Inhaltsverzeichnis
1 OVERVIEW OF THE CONSULTING INDUSTRY ............................................................ 5
1.1 WHAT IS CONSULTING? .............................................................................................................. 5
2 CONSULTING ARTICLES .................................................................................................. 11
2.1 THE MANAGEMENT CONSULTING INDUSTRY ............................................................................ 11
2.2 REFLECTIONS ON FIRST-YEAR RECRUITING .............................................................................. 15
2.3 IS CONSULTING THE RIGHT FIELD FOR YOU? ............................................................................ 23
3 OVERVIEW OF CASES ....................................................................................................... 29
4 DIFFERENT TYPES OF CASES ........................................................................................ 32
5 FRAMEWORKS FOR CASES ............................................................................................ 33
5.1 GENERAL MODELS ................................................................................................................... 33
5.2 ADDITIONAL MODELS ............................................................................................................... 35
6 DOS AND DON’TS ................................................................................................................ 46
7 HOW TO PREPARE FOR THE CONSULTING INTERVIEWS? .................................. 48
8 GENERAL INTERVIEW QUESTIONS ............................................................................. 49
9 SAMPLE CASES ................................................................................................................... 50
9.1 CHINA PRODUCTS DIVISION ...................................................................................................... 50
9.2 HEALTHCARE COMPANY........................................................................................................... 52
9.3 ELECTRONIC JOINT VENTURE ................................................................................................... 53
9.4 TELEVISION CABLE COMPANY .................................................................................................. 54
9.5 MAGAZINE SUNDAY SUPPLEMENT ............................................................................................ 56
9.6 AMERICAN EXPRESS CHARGE CARD ......................................................................................... 57
9.7 TELEVISION CABLE COMPANY .................................................................................................. 58
9.8 CREDIT CARD DIVISION OF BANK ............................................................................................. 60
9.9 MOVIE RENTAL BUSINESS ........................................................................................................ 61
9.10 AUTO SERVICE STORES ............................................................................................................ 63
9.11 SPORTS FRANCHISE .................................................................................................................. 64
9.12 DURABLE GOODS DISTRIBUTION CASE ..................................................................................... 65
9.13 BUSINESS FORMS CASE ............................................................................................................ 67
9.14 ―HIGH-END‖ POTS & PANS COMPANY CASE ............................................................................ 68
9.15 PAPER PRODUCTS MANUFACTURER CASE ................................................................................ 69
9.16 PIANOS ..................................................................................................................................... 71
9.17 COKE VS. RC VALUE CHAIN ..................................................................................................... 72
9.18 FERTILIZER ............................................................................................................................... 74
9.19 AIRPLANE MANUFACTURER ...................................................................................................... 75
9.20 MYSTERIOUS AUDIOCASSETTE MARKET................................................................................... 75
9.21 WINDMILL ................................................................................................................................ 76
9.22 BANK OF LUKE ......................................................................................................................... 77
9.23 CANDY COMPANY .................................................................................................................... 79
9.24 SKYSCRAPER ............................................................................................................................ 80
9.25 CONSULTING FIRM (I) ............................................................................................................... 81
9.26 COSMETIC COMPANY IN EUROPE .............................................................................................. 82
9.27 SEMICONDUCTORS .................................................................................................................... 84
9.28 AIRLINE INDUSTRY ................................................................................................................... 85
9.29 OIL TANKER ............................................................................................................................. 86
9.30 FERTILIZER ............................................................................................................................... 86
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9.31 RETAIL ADVERTISING PRICING .................................................................................................. 87
9.32 AUTOMOBILE INDUSTRY ........................................................................................................... 87
9.33 SCIENTIFIC INDUSTRY ............................................................................................................... 89
9.34 ALUMINUM INDUSTRY .............................................................................................................. 91
9.35 MEAT PACKING INDUSTRY ....................................................................................................... 92
9.36 PIANO TUNERS.......................................................................................................................... 93
9.37 CONSULTING FIRM STRATEGY .................................................................................................. 95
9.38 CORN FEED COMPANY .............................................................................................................. 97
9.39 SELECTIVE BINDING CASE ........................................................................................................ 99
9.40 VIDEO GAMES ........................................................................................................................ 102
9.41 STEAM BOILER HOSES ............................................................................................................ 105
9.42 MERGER CANDIDATE IN CHEMICAL INDUSTRY ....................................................................... 106
9.43 MACHINE-LOADING CASE....................................................................................................... 108
9.44 OIL REFINING INDUSTRY ......................................................................................................... 110
9.45 AGRICULTURAL EQUIPMENT MANUFACTURER ....................................................................... 111
9.46 INSURANCE COMPANY ............................................................................................................ 113
9.47 CONSULTING FIRM (2) ............................................................................................................ 113
9.48 POTS & PANS (2) .................................................................................................................... 114
9.49 DIAPERS .................................................................................................................................. 114
9.50 CABLE TELEVISION COMPANY (2) .......................................................................................... 115
9.51 CHILLED BEVERAGES ............................................................................................................. 116
9.52 DISTILLED SPIRITS .................................................................................................................. 117
9.53 CHEWING GUM MARKET ........................................................................................................ 118
9.54 FRENCH PIZZA MARKET ......................................................................................................... 118
9.55 GOLFBALL MARKET ENTRY .................................................................................................... 119
9.56 OVERSEAS CONSTRUCTION ..................................................................................................... 119
9.57 PACKAGING MATERIAL MANUFACTURER ............................................................................... 120
9.58 AIRLINE EXPANSION ............................................................................................................... 120
9.59 HEALTH CARE COSTS ............................................................................................................. 121
9.60 LOCAL BANKING DEMAND ..................................................................................................... 122
9.61 FROZEN DESSERTS .................................................................................................................. 123
9.62 DIRECT MAIL RETAILER ......................................................................................................... 123
9.63 CHEMICAL SWEETENER MANUFACTURER ............................................................................... 124
9.64 TELECOMMUNICATIONS DIVERSIFICATION .............................................................................. 125
9.65 ALUMINIUM CAN MANUFACTURER ........................................................................................ 126
9.66 FILM PROCESSING ................................................................................................................... 127
9.67 CONCRETE MANUFACTURER .................................................................................................. 127
9.68 SHIPPING CONTAINER MANUFACTURER .................................................................................. 128
9.69 HEALTHCARE COMPANY GROWTH ......................................................................................... 129
9.70 REGIONAL GROCERY STORE CHAIN ........................................................................................ 130
9.71 MAGAZINE DISTRIBUTION ....................................................................................................... 131
9.72 KNITTING MACHINE DEMAND ................................................................................................ 132
9.73 CEMENT MANUFACTURER CAPACITY ADDITION .................................................................... 132
9.74 SNACK FOOD COMPANY ......................................................................................................... 134
9.75 BEVERAGE COMPANY COST STRUCTURE................................................................................ 135
9.76 PERMANENT LIGHT BULBS ..................................................................................................... 136
9.77 SUPER REGIONAL BANK ......................................................................................................... 136
9.78 CIGAR BAR ............................................................................................................................. 138
9.79 NEW MAGAZINE ..................................................................................................................... 139
9.80 CASTOR MANUFACTURER ....................................................................................................... 140
9.81 LOGGING COMPANY ............................................................................................................... 141
9.82 INFORMATION SERVICES COMPANY ........................................................................................ 142
9.83 PIPELINE COMPANY ................................................................................................................ 144
9.84 AUTO MANUFACTURER .......................................................................................................... 146
9.85 DELI MEAT PRODUCER ........................................................................................................... 147
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1 Overview of the Consulting Industry
1.1 What is Consulting?
By the University of Chicago Graduate School of Business Management Consulting
Group:1
In this section, we will provide an overview of the profession, the types of
consulting, projects, and how consulting firms are structured.
Understanding each firm's approach to consulting services is extremely important to
landing a job – that is why corporate presentations can be so valuable, provided that
you come with specific questions you would like answered.
1.1.1 Why Do Companies Hire Consultants?
There are several reasons that firms hire consultants:
1. To obtain an objective viewpoint regarding a given business problem or
issue. Consultants are relatively unaffected by a company's politics or the way in
which business was conducted in the past, so the consulting firm delivers what is
perceived as an objective analysis. This perspective can be important for
motivating employees to change.
2. To utilize the specific expertise of the consulting firm. For example, the
consulting firm may offer an industry authority to which the client would like
access. Additionally, the consulting firm may have done similar projects in the
past for comparable companies.
3. To obtain information about where the company stands in an industry.
Consulting firms often develop benchmark data on the performance of industry
average and best-in-class companies in order to provide expert advice regarding
performance improvements.
4. To provide resources to address a specific problem. Often, clients simply do
not have enough time or resources to devise solutions to certain problems.
Consulting firms can avoid the day-to-day distractions that the clients' managers
cannot. Further, consultants may offer labor power to coordinate and execute an
implementation.
1.1.2 Consulting Project Types
Generally, consulting firms classify their services into of three categories: Strategy,
Business Process Reengineering (or simply "Reengineering") and Specific Services.
These categories are not mutually exclusive and the distinctions can easily blur. In
effect, there are as many different types of consulting projects as there are business
1 This article was obtained from the 1997-1998 Resource Guide prepared by the Management
Consulting Group of the University of Chicago. Please note that portions of the article that were
only applicable to the Graduate School of Business (at the University of Chicago) have not been
included for the convenience of the reader.
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problems. We will try to explain each of these types in some detail, but keep in mind
that it is impossible to describe the full spectrum of consulting services in this Guide.
Regardless of project type, client involvement is extremely important to the eventual
success of any project. Firms follow very different approaches to involving client
personnel. For example, some firms require a certain amount of full-time client
resources dedicated to the project. Others require only sporadic assistance for
portions of the project, such as financial analysis or engineering problems. In extreme
cases, client personnel become an integral part of the consulting project.
1.1.2.1 Strategy Consulting
Strategy is the most difficult type of project to explain, because it means different
things to different firms. Generally, a strategy project involves a "life cycle
crossroads" for the client. For example, determining if the client should expand its
product line or focus on existing products, or deciding what services the company
should provide ten years from now are examples of strategic projects. A strategy
consulting engagement will typically involve the highest levels of the client's
organization, since responsibility for the direction of the company lies there.
Most consulting firms will perform a "Five Forces"-style or value chain analysis
(both from Michael Porter's book Competitive Strategy) to evaluate all strategic
options available to a firm and determine a suggested or potential course of action.
This would include a detailed financial projection of the different scenarios. After
recommending a given strategy, the project would either conclude or lead to an
implementation phase.
Implementation is a major issue among consultants today. Consultants who permit
the client to implement a solution believe that success will be realized when the
client is forced to take ownership of the solution. On the other hand, other
consultants argue that, because their firm was instrumental in developing the
solution, they ought to assist the client in implementing the solution. There is a
definite trend in the consulting industry toward having consultants assist in
implementation. In fact, more often than ever, consultants are being judged by clients
on their ability to implement change.
1.1.2.2 Business Process Reengineering
The term reengineering has been popular since Hammer and Champy's book
Reengineering the Corporation became a best seller. There is nothing mystical about
the term - it simply means taking an objective look at the way in which a business is
run. For example, through benchmarking against similar companies, a firm may
decide that it takes too long to fill customers' orders. A consultant would then analyze
the individual steps of the order fulfillment process and determine ways to cut time,
increase quality, enhance customer satisfaction, etc. A revised process is determined
and then proposed to the client. Reengineering engagements more often include an
implementation phase in a project than do strategy engagements. Some recent
literature suggests that reengineering is losing favor and that certain firms are
distancing themselves from the term, if not the practice.
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1.1.2.3 Specific Services
Another component of the consulting industry concerns itself with specific tasks and
expertise needed by clients. Although the various issues relevant to this type of
consulting are innumerable, a few specific areas are currently prominent:
1.1.2.4 Technology and Systems Consulting
Systems consulting is chiefly concerned with giving clients advice about the ideal
configuration of their information systems, the introduction of client-server
computing, and software and hardware purchases.
1.1.2.5 Human Resources Consulting
Human resources (HR) consultants help firms make compensation decisions and
offer insights on benefit packages, pension funding, workplace diversity, and
employee development. Executive compensation is a hot topic in HR consulting.
1.1.2.6 Litigation Consulting
These consultants work with law firms to plan case strategies, provide economic
analysis, and develop courtroom tactics and/or evidentiary presentations.
1.1.2.7 Financial Consulting
Finance consultants provide guidance to corporations and money managers in the
areas of securities pricing, economic forecasts, and strategies for creating shareholder
value.
1.1.2.8 Other Industry-Specific Services
Many niche firms fall into this category. For example, in the healthcare consulting
field, consultants are often asked to justify the need to build a new hospital (a
"feasibility study"). The financial backers of the new hospital would rely on the
consultant's findings before proceeding with construction.
1.1.3 Trends
Growth - Major consulting firms have been boasting double-digit rates of growth.
Overseas Expansion - Much of the growth in the consulting industry has been
international, with firms competing to build a client base in various countries.
Range of Services - Many firms have moved toward offering a broader range of
services (e.g., strategy through implementation). Mergers and expansions are fueling
this trend.
Decreasing Growth of Strategy Consulting – After the restructuring, downsizing,
and reengineering phase of the 80's and early 90's, strategic projects have developed
around continued growth and expansion overseas.
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1.1.4 The Structure of Consulting Firms
Most firms will have very few job classifications. Titles vary by firm, but the
responsibilities are generally similar. The following are the basic classifications and
job descriptions:
1.1.4.1 Business Analyst I Analyst
These positions are not held by MBAs, but rather by the most capable individuals
right out of top undergraduate programs. The business analyst position is typically
held for 1-3 years between undergraduate and graduate school. The analyst's
responsibilities range from research and data gathering to functioning on a level
equal to post-MBA consultants.
1.1.4.2 Associate / Senior Consultant
Entry-level for MBAs. The associate is usually given the role of information gatherer.
This will typically involve research, obtaining information from clients via
interviews and/or financial data, and analyzing the information to draw conclusions.
These conclusions must usually be presented to the rest of the project team in the
format of a presentation. In projects where there is a client team, the associate may
manage a subgroup of client team members. Associates are often asked to present
part of the project team's findings to the client because associates are typically most
familiar with the data collected. The associate is typically given very broad directions
and is expected to be creative and thorough in collecting relevant information.
1.1.4.3 Senior Associate / Engagement Manager
The senior associate or manager classification implies day-to-day supervisory
responsibility on engagements. The senior associate will manage client team
members (if applicable), consultants, and business analysts on the project. At the
senior associate level, the project budget becomes a concern.
1.1.4.4 Principal /Associate Partner / Senior Manager
Those at the principal level are required either to manage several projects
simultaneously or one large project full-time. Client relationships are critical at all
job classification levels, but particularly in this case because the principal typically
has the most frequent contact with upper level management. Frequent contact helps
to ensure additional projects in the future. The principal is responsible for setting the
direction for a project, with approval from the managing partner on the engagement.
In many cases, the principal also begins to take on administrative duties within the
firm.
1.1.4.5 Partner/ Director/ Vice President
Partners are responsible both for negotiating engagements and for reviewing the work
generated by those engagements. The ultimate responsibility for a project's success
falls on the partner's shoulders. With several projects to oversee at once in addition to
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their marketing duties, partners are often the hardest-working consultants in the
office. A partner's travel schedule is generally more hectic than that of the more
junior consultants. As the partner juggles several projects at one time, the partner
may only periodically visit each client site. The partner attends important meetings
with senior client managers.
1.1.5 Compensation
The median salary for full-time consulting positions was $85,000 in the most recent
recruiting year. For internships, consulting firms usually pay the monthly equivalent
of their full-time salaries. Keep in mind, however, that first-year total compensation
is usually much higher. For example, most firms offer a signing bonus of $10,000 to
$25,000. Also, some firms will pay for the second year of business school (and
recently, one firm offered to pay for both years of business school as part of their
full-time offers to summer interns). A new employee is sometimes eligible for a
performance bonus after the first year. In short, compensation is outstanding
compared to what most of us were being paid before business school.
1.1.6 Lifestyle
So far, consulting looks like the ideal job: immediate responsibility, opportunity to
make a difference, excellent pay, etc. For some people it is. These people are known
as partners. Since only about one percent of consultants go on to become partners,
what happens to the other 99 percent? There are two main reasons for the attrition.
First, since consultants are in such high profile positions, they typically receive job
offers from clients and frequent contacts from corporate recruiters. Second, being in a
position of responsibility usually translates into long hours in the office and frequent
travel. This does not leave much time for a personal life. In addition, if a spouse or
children are in the picture, it may not be possible to ―have it all.‖ The greatest amount
of attrition occurs around the three- to four-year mark, when consultants have gained
enough experience to be offered positions involving a better balance of work and
personal life at the same or higher compensation.
Given the high investment made by consulting firms in developing personnel,
reducing attrition can save a lot of money. Lately, firms have implemented programs
designed to lessen the burden on consultants and, theoretically, prevent valued
employees from wanting to look elsewhere. To reduce the out-of-town burden, many
firms have institutionalized Fridays in the office or allow consultants to work from
home on Fridays. This limits their being away from family and friends only three
nights per week. Other firms have a more office-intensive style that involves going to
the client site only when necessary. To address concerns about raising a family, some
firms have recently instituted part-time programs. Most of these programs only
require three days of work per week.
If you have lifestyle concerns, the best time to ask these questions of firms is during
the recruiting receptions. These receptions are extremely low-risk, so do not be shy
about asking tough questions concerning the amount and frequency of travel and
other lifestyle concerns. Contrary to popular belief, it is very hard to be rejected
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because of one's performance at a reception. It is also possible to ask lifestyle
questions of recent alumni or second-years that interned at the firm in question.
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2 Consulting Articles
2.1 The Management Consulting Industry
By David J. Collis
David J. Collis is an assistant professor of business administration at the Harvard
Business School and faculty adviser to the Management Consulting Club. Professor
Collis has extensive experience with consulting firms.
Approximately 100,000 people worldwide work full-time in the management
consulting industry,2 generating about $25 billion in annual revenues.
3 Just over half
of these consultants come from the United States; another quarter come from Europe.
While management consulting fluctuates with the business cycle, the industry has
nevertheless grown more than twice as fast as GNP for the last decade. Such a large,
dynamic industry is by no means homogeneous, however. This article describes how
the management consulting industry can be segmented and identifies some important
trends in the industry with attendant implications for those intending to pursue a
career in management consulting.
2.1.1 Segmentation
The first, and probably most significant, way to segment the consulting industry is to
compare large and small firms. Most consulting firms are small, often one-person,
operations: half of all consulting firms generate less than $500,000 in annual billings,
and one-third employ fewer than four people. If the typical consulting firm is small,
however, the typical consultant works for a large firm: the fifty largest consulting
firms in the United States account for approximately three-quarters of domestic
revenue, while an estimated three-quarters of all consultants work in firms employing
more than 100 professionals. This skewed size distribution reflects the low barriers to
entry to this industry: anyone can hang out a shingle bearing the title "Consultant,"
and many former executives do just that. Corporate policies of early retirement,
downsizing, and outsourcing have created both the supply and the demand for
independent consultants, and, many of these small shops exist, often serving a single
client. Whether these firms are attractive starting points for new consultants is
debatable, since they lack both the breadth of clients and depth of support of the big
firms. However, veteran consultants often end their careers in their own consulting
firms.
A second and often overlooked distinction in consulting is between in-house and
external consultants. While the industry definition, strictly speaking, covers only
outside consultants, many large corporations have their own internal consulting arms,
usually affiliated with a planning department. Internal consultants perform essentially
the same functions as external consultants, while enjoying a more direct career path
into line management. Contrary to the prevailing belief, only I in 1000 consultants
makes a direct transfer to a top executive position in a client organization and only
2 Economist survey, February 13, 1988, p. 7.
3 Data estimates are from Consultants News, June 1992, and various earlier issues.
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then after many years in the consulting firm. Transfers at junior levels are common,
but most of the 20% annual rate of turnover among consultants is not due to
consultants being hired by clients. For those who are not convinced that consulting is
a lifetime career but who want a variety of experiences and exposure to senior
management problems at an early stage in their careers, albeit in a more limited
number of settings-there are five times as many external consultants as internal
consultants.4 Internal consulting can be an attractive option.
The third important basis for segmentation in the consulting industry is degree of
specialization. While all firms provide a variety of services, most consulting firms
generate the majority of their revenue from one type of work. The two main
dimensions of specialization are function-for example, logistics, organization design,
management information systems (MIS), or management education - and customer
group or industry, for example, health care, financial services, or government.
Of these specializations, the largest is MIS consulting, which is, for the most part, the
domain of the accounting firms: six of the ten largest consulting firms in the world
are the consulting arms of the big six accounting firms. In the United States alone,
these firms generate over $3 billion in billings annually. The second largest
specialization is compensation and benefits consulting. Four of the top twelve U.S.
consulting firms fall into this category, with annual billings exceeding $1.5 billion. In
third place as a specialization is management/strategy consulting. This area includes
the generalist management consultants, such as McKinsey, Booz Allen, and their
newer first cousins, the strategy consultants, such as BCG and Bain. Although these
firms are ostensibly full-line consultants, clients often find their cost structure
uneconomic for consulting on functional activities such as logistics. Instead, the
generalist consultants concentrate on higher value-added consulting for senior
management. The other functional or industry specialists in consulting tend to be
small, reflecting their origins as one-person shops run by an executive with a
particular skill or industry knowledge. Understanding how each consulting firm
specializes, and ensuring that it matches your interests, is therefore a vital first step in
considering which firms to approach for a position.
The consulting industry no longer draws a distinction between formulation and
implementation. All firms in all categories of consulting recognize that their role
must involve effecting change in the client organization, and differences between
them are now of degree, not of substance. Some specialists in "change management"
exist, but even they would like to be involved in developing the direction of change.
Similarly, although some firms may be known for a particular technique tool, such as
BCG and the experience curve in the 1970s, these reputations are usually more a
reflection of marketing than of a fundamentally different approach to consulting.
When the publicity for a firm surrounds a particular solution to a general problem,
like time-based competition for strategy, it is usually not representative of a profound
difference in the type of work the firm undertakes.
A last distinction among consulting firms is their degree of internationalization. Most
firms now have offices or affiliations outside their home country, but the extent of
non-domestic business varies substantially. Among the world's top twenty
4 Journal of Management Consulting, Vol. 3. Summer 1984.
13
consultants, for example, one firm, Hewitt Associates, does only 7% of its work
outside the United States, compared with McKinsey's 60% and the U.K. firm did
94%. However, even those firms with extensive overseas networks tend to have
independent offices, so they can be responsive to local needs. This implies that
working for an international consulting firm will not necessarily allow you to work
overseas. You usually have to ask explicitly for an overseas assignment and often
have to recruit with the overseas office in addition to the domestic office.
2.1.2 Trends
Management consulting will continue to grow, more cyclically than in the past, but
still faster than GNP. The rationale for hiring consultants-to access the specific
expertise needed to quickly solve a current problem-will remain and will, if anything,
cover more tasks in the future as firms reconsider the costs of all their internal
functions. In fact, predicting which corporate activities will be outsourced could give
you a head start in identifying the next growth specialty in consulting.
The industry will also continue to move to an hourglass shape: increasingly, there is a
bimodal distribution of firms into the large (annual billings in excess of $100
million) and the small (less than $5 million in annual billings). This structure results
both from the ease of entry for newcomers, and from the competitive advantages of
larger firms-reputation, diversified client base, and broader geographic base. While a
few firms are able to break through the mid-size plateau to become recognized large
players - or are acquired by other firms looking for broader scope-many bump along
unsteadily at $ 10 million to $20 million in billings before falling back as the initial
momentum subsides. For the potential consultant, this suggests that the key question
to be answered before committing to the attractions of fast promotion at a newer
rapidly growing consulting firm is, "Does it have the capability to break through to
the first tier?" This question is particularly important if you anticipate a lifetime
career in consulting: more than half of the consulting firms currently operating did
not exist fifteen years ago, and only I% of consulting firms are more than fifty years
old.
Other industry trends are the acquisitions by outsiders of consulting firms and the
move toward broad scope consulting firms, under which single ownership provides a
variety of consulting specialties. At least half of the top twenty firms have made
recent acquisitions-three of which propelled the acquiring parties into the top
twenty-and there have been more than fifty substantial acquisitions since the
mid-1980s. The rationale for these acquisitions lies in the economies of scope that a
broad line competitor can exploit, particularly in marketing. It has been estimated
that only a third of a consultant's business comes from repeat clients, while new
business, increasingly, is won in competitive bids against comparable consulting
firms. As a result, about 20% of a consulting firm's costs lie in acquiring clients. If an
accounting firm can leverage its audit relationship into MIS consulting, or if a
strategy consulting report can recommend hiring the sister benefits consulting firm
for the follow-on organization study, this expense could be substantially reduced.
Unfortunately, the success of broad scope consulting firms and of outside ownership
remains doubtful. Saatchi & Saatchi is the most obvious example of the failure of an
14
outsider to build a broad scope consulting business, but even those companies like
Mercer, which are still operating successfully, have yet to demonstrate the value of
broad scope. Citibank tried and exited consulting, and the accounting firms are still
struggling to establish a relationship with their consulting arms that peaceably
compensates consultants more than auditors, maintains a wall between consulting
and auditing, and yet leverages the audit relationship into consulting work.
The issue really relates to the clients' decision-making process. The purchaser of the
audit - the CFO or controller - is, for example, usually not the purchaser of strategy
consulting; nor is the ease of buying a range of consulting services from a single
source of much value to a client when compared to the ability to choose the best
specialist for a given type of work. As a result, most of the broad scope firms are
essentially umbrella-holding companies for a set of independent specialists having
little interaction with one another. One reason is the difficulty inherent in merging
cultures. There have been, for example, few acquisitions of one strategy consulting
firm by another, partly because the problems resulting from merging cultures cause
the firms' major asset-people-to leave. In considering a career in consulting, I would
therefore suggest that the ultimate ownership of the firm you might work for is not of
great importance. Although it is true that these acquisitions are occurring, their
impact on your daily activities, particularly in the junior positions, will be relatively
limited. Working at Braxton (now owned by Deloitte & Touche), for example, would
not be dissimilar to working at Monitor or at Braxton when each was independent.
There is, however one industry trend that will affect you: globalization. To serve the
increasing global needs of clients effectively, any large consulting firm today needs a
global network of offices. This network can be created by establishing alliances with
overseas affiliates but is now more often achieved by setting up foreign offices. This
is an expensive process that has been one reason why medium-sized consulting firms
have willingly sold to outsiders prepared to make the necessary investments. Most
foreign offices are currently operated with a great deal of autonomy. However, to
match the globalization of clients in the future, consulting firms are themselves likely
to further integrate their worldwide operations.
As consulting firms increase their geographic scope, global competition is likely to
increase. Today, U.S. firms dominate the U.S. market, European firms the European
market, and Asia is undeveloped both as a market for and a source of consultants.
Twenty years from now there will be far more interaction among geographic markets
and, I suspect, a larger Asian presence. As future management consultants, you must
be prepared to learn a foreign language and to travel overseas, both to serve your
clients effectively and to learn from best practice in other countries. Although this
prescription is true for all executives, it is doubly true for management consultants,
who must be leaders in the development of skills if they are to continue to provide
value to clients.
The final trend with implications for management consultants is the continuing
pressure that increased rivalry places on consulting firms to truly provide value to
clients. In practical terms this will mean that consultants will have to be less
formulaic than in the past. The rapid diffusion of information and techniques within
the industry prevents anyone from monopolizing a concept for any length of time and
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means that clients are often familiar with the new frameworks themselves. The value
provided by consulting firms will have to come from their ability to apply concepts
and to customize them for particular client needs, not simply from their possession of
a particular technology.
To meet these sort of demands, it is likely that the employee profile of consulting
firms will alter somewhat. No longer will a 24-year-old MBA be able to add value
simply by applying a concept the client has not seen before. Instead, consulting firms
will work more closely with client management in defining and analyzing problems
and in formulating and implementing solutions. This will require a more experienced
consultant, more capable of understanding the manager's role, and more versed in
people skills than the functional expert of the past. These senior consultants will be
supported by junior "para-consultants" who can perform the mechanistic, repetitive
tasks more cost effectively. Thus the pyramid structure inside consulting firms will
change-on average in the large firms, one partner supports eleven consultants-as the
number of very senior and very junior employee swells.
Finally, the good news is that to truly meet client demands for value for money,
consulting will have to become an even more exciting, challenging, and ultimately
rewarding career than ever before.
2.2 Reflections on First-Year Recruiting
By Phil Collins
Class of 1993, Harvard Business School
If investment banking was the career of choice in the 1980s, one could argue that
management consulting has replaced it as the most sought-after business profession
in the 1990s. As a result, obtaining summer positions in the consulting industry has
become increasingly competitive.
2.2.1 Why consulting?
Perhaps the first and most important step in first-year recruiting is deciding what type
of summer position is right for you, based on your interests and long-term career
plans. Your time and energy will be limited, and effective recruiting will by necessity
require significant focus. Don't let the herd set your priorities: make sure you
understand and can explain clearly why you are interested in consulting for the
summer. Otherwise, you may end up with a great summer position for all the wrong
reasons-a choice you may regret in the long run as you begin planning for your
full-time career. Once you decide that pursuing a job in the consulting field is a
productive way for you to spend your recruiting effort, your focus will shift to the
most critical step: getting an offer. As competitiveness for summer positions in
consulting has intensified, it has become increasingly important for prospective
candidates to expend considerable effort in preparing for the recruiting process in
order to ensure that their skills are appropriately highlighted and communicated,
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2.2.2 Knowing the firms
One of the most difficult aspects of preparing for a consulting job search is that there
are many types of consulting firms, each with its own selection criteria. An effective
job search will require you to assemble a considerable amount of information about
each for the firms, which will be useful in two ways: this information will assist you
in determining which firms you would be interested in working for, and it will be
crucial in preparing for interviews. While preparing materials and attending
recruiting briefings and career fairs will be helpful, you should also take advantage of
any opportunity to learn about the firms from the consultants themselves, who will
give you a more detailed and realistic understanding of the firms' focuses and values.
Another valuable resource not to be overlooked is your classmates who worked at
particular firms before business school or who went through summer consulting
programs with firms. Generally, firms differ along a few important dimensions, and it
is important to understand how each firm differentiates itself Consider the following
issues:
Type of work: Does the firm specialize along functional, industry or geographic
lines? Are new consultants encouraged to be specialists or generalists? At what
level of the client's organization does the firm work? Does it have a very strong
practice in certain specialties, or does it attempt to be strong across a number of
areas? What kinds of problems has the firm worked on before, and do these
engagements sound interesting?
Focus on implementation: After developing a set of recommendations, does the
firm ctively participate in implementation?
Practice development: Does the firm have a strong commitment to developing
competencies in its practice and to disseminating its expertise throughout the
firm?
Focus on professional development: What kind of resources does the firm bring
to bear on problems? What is the role of a new consultant on a project? What
kind of training programs does the firm have, and how does it support the
professional development of its consultants?
2.2.2.1 Getting an offer Once you have a good understanding of the various consulting firms, you should be
able to identify those in which you have a sincere interest, and will therefore be ready
to begin pursuing a summer position in earnest. Here are some tips:
1. Understand what consulting firms are looking for. While understanding the
characteristics of each firm will be helpful, most firms are looking for the same
kind of people: smart, creative problem solvers whose interpersonal skills will
allow them to work well in a team environment. Given the nature of the work,
consulting firms are also looking for people who are energetic and have an
appetite for new challenges, traits often demonstrated by a record of past
achievement. Given that most students at top business schools possess all of these
requirements to some degree, successful candidates must communicate their
unique strengths clearly and convincingly.
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2. Understand clearly why you want a job in consulting. There are no experience
prerequisites for getting a summer job in consulting, other than knowing why
you. want it and being able to clearly communicate your conviction. Consulting
firms hire people from a wide variety of backgrounds, but a major career change
may require some explanation.
3. Frame your skills and experience in terms of how you can add value to the firm
and its clients. Provide concrete examples from your previous experience which
demonstrate that you have been a creative problem solver, that you are successful
working in teams, and that you have demonstrated leadership abilities.
4. Identify your weaknesses. Look carefully at your resume and identify your weak
spots. What are the one or two questions that you hope they will not ask? They
will, so prepare clear and convincing answers.
5. Be yourself and be honest. While it is important to be at your best in framing and
communicating your skills, it is also important to be honest and to be yourself.
Getting a job at a firm full of people with whom you would not get along, or
where you would not enjoy the type of work being done, is not in the best interest
of either you or the firm. A couple of bad interview experiences with a particular
firm should indicate that this is not a place where you would be happy spending
your summer-let alone your career. Be grateful that you figured this out early, and
move on with enthusiasm to the next interview.
6. Save the best interview for last. There is a learning curve in this process, and you
should schedule your interviews accordingly. Experience will allow you to
become more relaxed, confident and convincing.
7. Ask insightful questions. Firms will inevitably ask you at the end of the interview
if you have any questions. You should have. Good questions are firm-specific and
thoughtful. They should be designed to demonstrate a strong understanding of the
firm and to help you gain further insight into whether the firm is a top choice for
you.
2.2.3 Preparing for the case interview
Nothing causes more anxiety in first-year students trying to land a summer job in
consulting than the prospect of interview cases. For most firms, interviews and cases
will make or break your candidacy. While they are clearly a crucial element in
evaluating prospective employees, they are not nearly as frightening as one might
expect. A good case interview is no more than a discussion about an interesting and
challenging business problem, and provides an opportunity to showcase your
knowledge and skills. Viewed in this way, the case interview can become
considerably less daunting. Firms use cases to evaluate your analytic abilities and
problem-solving skills. Keep in mind that they are not looking for a "correct" answer,
but instead are trying to understand how you think and how you approach problems.
This is an important distinction with implications for how you should respond to case
situations. I suggest keeping the following points in mind:
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1. Stay calm. Listen carefully and take time to think clearly about the problem
before formulating a response. This is especially important because it is difficult
to recover from a hasty start.
2. Take notes. The last thing you should have to worry about is remembering case
facts and numbers, so feel free to take notes during the case portion of the
interview. This often helps you to concentrate on the problem-solving aspect of
the case.
3. Ask questions. The questions you ask are often as important as your answers in
helping the interviewer understand how you think and what issues you believe
are important for further clarification and consideration. If you make
assumptions, state them clearly.
4. Identify the most important issues in the case up front. Try to determine what is
critical, as opposed to what is merely interesting, and develop hypotheses to
explain what is driving the important issues. If you are on the wrong track, the
interviewer will often interrupt you and provide additional data.
5. Develop a framework for approaching the problem. Break the problem down
into its constituent parts, and approach them in a logical way rather than
generating random thoughts. Give the interviewer a road map of where you are
going to take the discussion: the framework is a key to understanding how you
think and approach problems and illustrates your ability to think about problems
in a systematic way.
6. Be flexible. Adapt your analysis to the problem, and develop a framework that is
appropriate. Don't try to force every problem to conform to a generic,
prefabricated and inflexible analytical framework. Each problem is unique and
will require a unique approach.
7. Think causally and logically. What are the underlying causes of the case
situation, and what impact have they had? Develop a clear and logical chain of
reasoning and understand the linkages between key elements of the problem.
8. Drive to action. Given an understanding of the key issues, causes, and linkages,
what opportunities does the client have to take actions that will improve their
performance?
Keep in mind that each firm approaches cases in a different way. Some cases are long
and complex, encompassing a number of issues and presenting a lot of data, while
others may be much shorter or less quantitative. You may be handed pages of data
and asked for your impressions, or you may have a situation described to you in a
qualitative way. Some firms may ask you to analyze an industry you have worked in,
while other firms will deliberately ask you about industries with which you are
unfamiliar. Some cases might require microeconomic analysis, while others may rely
on knowledge of first-year marketing. Most often, the cases will require integration
of knowledge of a number of subjects and functional areas.
The bottom line is that case interviews have been designed so that you cannot study
for them, so don't bother. Review the major frameworks developed in first-year
courses, brush up on your microeconomics, and then concentrate on ways of
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enhancing and demonstrating your problem solving skills. One good way to do this is
to practice a few mock cases with another student.
While a consulting job search will require a great deal of time and effort, it can also
be a challenging, rewarding, and even fun experience. You will meet a wide variety
of intelligent and interesting people, you will be challenged to think on your feet to
work through complex business problems, and you will gain a broader understanding
of the different firms and of consulting as a career.
2.2.4 Second-Year Recruiting: Looking for the Long-Term
By Jim McManus:
Class of 1990, Harvard Business School
First-year interviewing for summer jobs in management consulting can be
characterized as an exciting, head-spinning whirlwind of back-to-back meetings,
whether you are successful or unsuccessful. For many, the process consists of five or
so days crammed with as many as 20 interviews. The resounding line eloquently
uttered by every recruiter that becomes particularly meaningful as the second-year
process draws near is, "Don't be discouraged if things don't work out for the summer.
We extend more offers for permanent positions, so your chances of receiving an offer
second year increase."
Fortunately, the recruiters speak the truth. In addition, the interviewing process for
second-year candidates is refreshingly slower paced and more manageable than the
first-year cyclone. Overall, the process of pursuing a permanent position can be
broken down into three broad components: investigating consulting firms, recruiting,
and decision making.
2.2.5 Investigating Consulting Firms
We often under-utilize the vast career resources provided by our schools to assist us
in identifying the right career "fit" after graduation. School career centers/placement
offices offer a variety of tools, including career counseling services, interview skills
and resume workshops, and company-specific literature that enable us to build a
knowledge base on potential employers in a matter of days. Spend some time early in
the process getting familiar with the workings of your career center. When you are
planning your post-graduation career, to overlook the recruiting expertise and
insights that your schools have amassed over the years clearly would be to forego one
of the greatest benefit of business school.
Though the information available through formal school channels provides valuable
background on particular consulting firms, the second-year recruit's most important
resource, by far, are classmates and friends. Speak to as many people as possible
about their summer job experiences; these discussions will provide you with the most
pertinent, nitty-gritty details of what life is really like at Firm X or Y. If you are
particularly attracted to a certain firm, seek the perspectives of many people who
have experience at that firm. You will often find that one friend's views of a summer
or pre-business school experience at a firm differ considerably from someone else's at
the same firm. Given the variables of personality, office location, lifestyle preference,
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and the nature of the projects worked on, you are sure to pick up important new
insights with each informal conversation with classmates.
The focus of your information search will also differ in the second year. When
interviewing with consulting firms for summer positions, the primary goal of most
first-years is simply to land a job at the firm of choice, with less emphasis placed on
such "details" as location, lifestyle and culture. The summer experience is a relatively
risk-free way to figure out whether or not consulting in general and a firm in
particular will make sense for the long-term. Second- year recruiting is for the longer
term. The "details" that you were willing to live without for an 8- to 10-week summer
will become critical second year, which will help you to differentiate between the
many opportunities you are likely to have.
You may find it helpful to evaluate consulting firms on three broad criteria: 1) the
nature of the work they do; 2) the characteristics and cultures of the firms; and 3) the
nature of the career opportunities offered. In terms of their consulting work, firms
(and even different offices within the same firm) differ markedly in their degree of
emphasis on the following dimensions: implementation vs. strategy; industry focus;
revenue- generation or cost focus, and functional specializations. Issues such as the
size of a typical case team and the role of the new consultant on a team should be
considered. Though every firm will highlight the collaborative nature of its client
relationships, there are significant differences in policies relating to the amount of
time spent at clients' offices that will have a direct effect on the amount of travel and
often the level of client impact you can expect.
In assessing the characteristics of each firm, one of the most critical attributes to
consider is the culture of the firm, as reflected by its employees. This is also
important when looking into various office alternatives within a firm. Can you see
yourself working well with the people you have met before and during the recruiting
process? It is important to be honest with yourself here! You will be spending a lot of
time with these folks, both in the office and traveling, and an otherwise great project
can quickly become a negative experience if you do not get along well with the other
team members. Besides understanding the firm's personality and values, you should
get a feel for other important attributes of each firm, including the availability of
international opportunities and the number (and size) of offices, and weigh these
factors against your particular preferences. In addition, you should consider the size
and stability of the firm's client base and its vulnerability to a downturn. What is the
firm's long-term strategy, and how well positioned is it to achieve that strategy?
As a prospective candidate, you can gain tremendous insight into a firm's
commitment to its people and into the career opportunities available by evaluating
the critical policies of training/skills development, performance evaluations,
promotion, compensation, and assistance in outplacement. Although the high starting
salaries in consulting are undoubtedly attractive, especially given our high debt
levels, compensation should be just one of many criteria you use in deciding which
firms to pursue.
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2.2.6 The Recruiting Process
Management consulting firms do not wait long after the beginning of the school year
before kicking off their recruiting campaigns. Though the interview season does not
officially begin until later in the school year, many firms invite students to
information sessions and dinners throughout the fall to introduce prospective
candidates to the firms' people and practices. These "informal" get-togethers give
students the opportunity to evaluate firms before getting into the more time-intensive
interview process. (As a practical matter, dress codes tend to be casual for on-campus
presentations and professional for off-campus events.) If you are particularly attracted
to a certain firm but have not been invited to attend their fall functions, take the
initiative to call one of their recruiting coordinators to express an interest in
attending. You certainly have nothing to lose!
Arrangements for interviews differ by school and by firm, so it is a good idea to
understanding detail your school's policies at the start of the second year. Some
schools have very strict schedules, while others are more relaxed. Depending on the
firm, you may need to send a cover letter requesting an interview. However, many
consulting firms have "open schedules" that allow you to arrange an on-campus
interview directly through your school's career services office. Again, the best advice
here is to know the policies of recruiters and of your school and to work within those
policies.
Like the first-year process, the second-year interviewing normally consists of three or
four rounds of interviews, with the final rounds taking place at the firms' offices.
Unlike the first-year schedule, however, the second-year process takes place over a
period of several weeks rather than several days. In general, recruiters use the first
and second rounds to evaluate a candidate's problem-solving prowess and the final
rounds to determine the personality "fit" between the candidate and the firm.
Although a case should be expected in most interviews, the use of cases varies
widely from firm to firm and even from interviewer to interviewer within the same
firm. Since many consulting companies give strategy cases, it is a pretty good idea to
review the various strategy frameworks before beginning the interview season. When
going through case interviews, remember one important word of advice-relax!
2.2.7 The Decision-Making Process
Most people feel that the challenge in the recruiting process is actually landing a
great job at the firm of first choice, but the real fun begins if you have the good
fortune of having to decide between two or more firms of similar caliber. If you do
receive offers from more than one firm, refer to the selection criteria you established
at the outset of the entire recruiting process, taking into account differences between
the work the firms do, the characteristics of the firms, and the long-term career
opportunities. If other variables are relatively equal, the issue that should weigh most
heavily in the decision should be the people with whom you will be working. Make
sure that you have met and are comfortable with enough people at all tenure levels of
the organization, paying particularly close attention to what the junior people are
saying. Professor Collis's article provides more detailed advice about how to make
choices between firms.
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One final word of advice: make sure that there is clear agreement between you and
the firms from which you have offers as to their deadlines for accepting or rejecting
offers. Receipt of an offer does not allow you to extend your job search indefinitely;
after all, recruiters are under pressure to firm the size of the incoming class in a
reasonable period of time. Furthermore, being considerate throughout the recruiting
process can only enhance your image in the eyes of the recruiting firm, and such
consideration is not likely to be forgotten by employees. These firms recognize that
many of the brightest MBAs do want to have happy and fulfilled personal lives
outside the office and do not want to sacrifice everything for their careers.
However, you should be aware that in almost any consulting firm, if the client phones
your partner and says that he or she wants to see you in Timbuktu by 8:30 am the
following morning, and if you happen to have plans that evening, you are going to
find it very hard to avoid canceling your plans and going to Timbuktu!
My advice about lifestyle is, then, to make sure that you understand fully what kinds
of lifestyles people in your prospective consulting firm really do lead and to be sure
that you would find a similar lifestyle rewarding.
2.2.8 Career Paths
Career paths in consulting and industry differ considerably. In industry, a traditional
career path might be to start fairly low down in the organization and to work one's
way up the corporate ladder, step by step. Though increasingly, there are firms that
have job rotation schemes and fast tracks to allow them to identify and promote their
best people quickly, it is still true that, in industry generally, the commitment to the
firm and time scale of your progress is still fairly long term.
In consulting, the time frame can often be shorter. Promotion decisions tend to be
made in the two- to three-year time frame, and many companies employ so-called
"up-or-out" policies. These policies require that you develop certain skills within a
defined time frame in order to be allowed to continue with the organization. If you
are unable to develop these skills, you may find that the opportunities presented to
you by the firm diminish somewhat rapidly!
Although an up-or-out policy may at first sound rather brutal, in practice it is not
always so. From the firm's point of view, such a policy makes a lot of sense, as it
allows fresh ideas to be constantly brought into the firm by new recruits. The survival
of a professional service firm is quite dependent on its ability to remain at the
forefront of its field, and an up-or-out is one way in which a firm ensures its ability to
regenerate itself. From the employee's point of view, the policy ensures that the
environment will be dynamic and that the organization will provide a constant stream
of new and challenging opportunities. In most firms that have such a policy, the
policy is very sensitively administered, and employees very rarely get kicked out
unexpectedly. Rather, frequent feedback allows employees to judge their own
position within the firm accurately. Many firms have excellent out-placement
services, usually administered unofficially through contacts with alumni, and moving
out is not considered failure by any stretch of the imagination.
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In practice, the number of people who want to continue in consulting, who feel they
are at the right firm, and who are not able to do so because of the up-or-out policy is
actually quite small. Most people who leave consulting firms do so of their own will,
either because they decide consulting is not for them or because another
tremendously exciting opportunity presents itself to them.
As a potential employee, you should inquire about the consulting firm's promotion
policies. This can often be a difficult subject to raise, but my experience is that most
firms are very happy to explain how their promotion policies work and would much
rather you understand these up front.
2.2.9 Remuneration
Until relatively recently, consulting firms were very much the leaders in MBA
remuneration. While it is still true that on average most larger firms in industry pay
less than most consulting firms, the number of exceptions to this particular rule is
increasing every year. Small, high technology companies are increasingly recognizing
the value that MBA students can add within their firms. Even some large traditional
Midwest manufacturing corporations are responding to increasing competitive
pressures by becoming more aggressive in recruiting bright young management
talent. In this process, some industry salaries are rapidly approaching those offered by
consulting firms. Certainly, even if your objective is to pay back your MBA debt in
as few years as possible, you should not rule out a career in industry.
However, if you really do want to work in industry, and if remuneration is
particularly important to you (and there is every reason that it should be, given that in
the words of a classmate of mine, we are all "mini-LBOs" by the time we finish our
MBAs), you will have to spend more time and effort searching out the best
opportunities. Another classmate of mine, who was being recruited by a major
manufacturing firm, found that when she asked about the possibility of a signing
bonus, she received a blank look and the reply, "What's that?" It is by no means all
industrial firms that are approaching remuneration parity with consulting firms!
Moreover, consulting companies tend on the whole to have very well-oiled, effective
recruiting machines, so getting a high-paying job tends to be less work for the recruit.
These, then, are some of the issues involved in making the consulting versus industry
decision. It is a tough choice, and in each individual situation there will be many
other personal factors involved, too. Whatever decision you come to, you can be
assured of an exciting, challenging experience. Good luck, and have fun!
2.3 Is Consulting the Right Field for You?
By Tim Opler
Consulting is hot! Salaries are up. And more MBA students have entered the field
within the last few years than any other area. These placement numbers have caught
many business schools by surprise and, today, deans and administrators are
scrambling to ensure that their MBA programs offer the right type of courses for
prospective consultants. At the same time, many of you are giving management
consulting a hard look. I understand why! Work in consulting is stimulating and the
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pay can be excellent. Salary offers at top MBA schools in 1996 for consultants
averaged $80,000 per year, often with significant signing bonuses or tuition relief. As
of December 1996, offers have been continuing to increase (several firms are offering
packages well into six figure territory after a few investment banks upped their ante).
But is consulting really the right field for you? And, if so, how should you conduct
your job search? A careful examination of your own skills, values and interests is an
excellent idea, particularly given the wide range of available career options.
I recommend that you commit to an ongoing and serious process of introspection and
skill inventorying before marching into your next job interview. The more
convincingly and honestly you can answer questions about why you are across the
table from the interviewer, the better you will do. To say nothing of long-term
personal happiness. After all, making a difference in a career that you enjoy is an
important part of life. Doing a good job today in finding a career that matches your
values and skill set is an investment that will pay off for many years to come. It's very
easy to see the time you're planning to spend exploring careers get taken up with
other more immediate priorities. It's absolutely vital that you not let this happen.
2.3.1 The Options
There are basically two career options in consulting. Generalist or specialist. Not
surprisingly, specialists apply specialized process and functional knowledge to real
organizations with real problems. It's great work that offers clear value to many
organizations. Without doubt, the hottest area in consulting today is informational
technology. This is technical stuff that offers strong productivity improvements to
countless businesses in areas like client/server, sales force automation,
CICS/VBASIC/UNIX. And, its why the big IT consulting shops, like Andersen
Consulting, will continue to experience meteoric growth. More people work for
Andersen today than do for the top five generalist firms combined. Speaking of
generalist, the other option available is to work for a firm which provides a wide
variety of advice designed to make enterprises run faster, better, cheaper, meaner and
more efficiently. Generalist firms include well-known names such as Bain &
Company, BCG, Booz Alien & Hamilton, McKinsey, Mercer and Monitor plus a
growing list of mid-sized consultancies and smaller boutiques. At the same time,
some of the Big Six accounting firms have made tremendous inroads into the strategy
consulting business. Coopers and Lybrand, for example, has a very high quality
strategic consulting unit and is managing to attract some of the very brightest
students from institutions like NYU and Wharton.
In all, over 300,000 people work full-time in the management consulting industry,
generating more than $30 billion in annual revenues. Just over half of these
consultants come from the United States; another quarter come from Europe. The
most rapid growth is currently being seen in developing economies such as Brazil
and Indonesia. There can be no doubt that this industry will continue to expand
rapidly over the long-run although short-run retrenchments can and will happen.
Given the scope and size of this career opportunity, it is well-worth asking where you
might fit into the industry. And, of course, whether you want to fit in. Let's start by
asking what skills are in demand among consulting organizations.
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2.3.2 The Skills in Demand
Consulting firm interviews typically involve a combination of general background
questions, a case question and questions about your past behavior (the much dreaded
behavioral interview approach). There are, of course, many different approaches to
interviewing and, for that matter, to being interviewed. But the bottom line is that
firms are screening for skills that match their needs. It is vitally important that you
make every effort to understand what these skills are before you step into the
interview room.
Common skills on interviewer check lists include...
Skill #1: A Passion for Ideas. You can't eat what a consulting firm makes. You can't
drive it. You can't smell it. The product is an idea, an insight, a suggestion, a way of
thinking. Ultimately, consulting firms are nothing more than repositories of pure
human capital. This means that their most important asset has to be the ability to
generate relevant ideas through rigorous thinking and careful research. Hence the
frenzy to hire the best and the brightest of America's business schools. This
intellectual focus of consulting is clearly important in deciding whether you would do
well in the field. A good consultant has to be a great thinker with a passion for ideas.
You need to be the type that does well in school and likes it. You need to enjoy
problem -diagnosis, problem-framing and problem-solving.
If you find yourself struggling with the academic-side of business school, getting
stuck on cases, disliking writing, but excelling along other dimensions (e.g. human
interaction or entrepreneurialism) you probably should not be a consultant. You may
very well get a job offer anyway. Firms may hire you opportunistically, knowing that
they you can generate more value for them than you are being paid. But advancing
and leading may be a different matter altogether.
I would add that firms aren't nearly as pedigree-sensitive as some seem to think.
Leaders of some of the most prominent firms in the consulting profession have made
it with degrees from institutions far below the top-ranked schools. Pedigree can
neither guarantee one success nor condemn one to failure. For that matter, the MBA
degree itself need not be necessary. A number of firms are hiring persons with other
degree backgrounds (e.g. law, engineering, public administration, medicine).
McKinsey, in particular, has recently been aggressive in its pursuit of attorneys, PhDs
and the like. I guess sheepskin is sheepskin... And, of course, many undergraduate
students enter consulting, often in two or three year programs which are expected to
be followed by a stint at business school.
Skill #2: A Passion for Client Service. With all of the money being thrown around
by the consulting firms these days, it can be easy to get into the profession for the
wrong reason. After all is said and done, consulting is a service profession and most
firms screen carefully for commitment to others and ability to excel in meeting client
needs. As a consultant you will always be working to help others. Your ability to
serve clients will determine your success and the prospects of your employer. While
intangible, a personal commitment to excel in meeting the needs of your clients is
vital to enjoying the profession. In a recent letter published by Mitchell Madison
Group, a seasoned ex-McKinsey consultant put it this way: "It is only through
personal excellence that this profession becomes truly enjoyable. Those who
26
demonstrate superior skills gain personal control early in their careers. These
individuals are in such demand that, at any point in time, they have numerous options
to choose from. They typically become engagement managers sooner, and tend to set
the pace for their teams. Through their intellectual leadership they gain respect from
the clients, the partners and their teammates. In a business world where institutional
loyalty is rare, the individual needs to excel and generate his or her own
marketability. The result is that the institution needs the individual, not the reverse.
Over the years, I have observed that unfriendly clients become attentive when
listening to people of excellence because their contribution is unique. Those who
achieve excellence feel great about themselves and are more likely to find the
consulting experience a path to fulfillment. The financial rewards become window
dressing and the high of the experience becomes the drug of first choice."
Skill #3: A Passion for People. A consultant once told me that some of the most
fulfilling relationships of his life were with clients. Not because he didn't cherish his
spouse and family, but instead because he had built life-long, lasting partnerships
with a number of clients through repeated contact and hard work. These relationships
are what can make the long hours, stressful travel and corporate frustrations
encountered by consultants worthwhile. Consultants who enjoy talking to people do
well. It's a field where the gregarious do well with their teammates and their clients.
This isn't to say that you must be the ultimate extrovert, but you do have to connect.
However you accomplish this, whether it be by charm, humor, listening or
hard-work, it's vital that you enjoy, understand and communicate with clients.
Consulting firm interviewers are looking for people that they'd like to work with
themselves. It's only human.
So, it's an odd admixture in demand at the consulting firms. Smart, likable people
who are good at helping others. Not necessarily a natural combination of abilities you
might say. The screening process, of course, can vary widely and many firms are
looking for a unique traits. Other characteristics in demand including understanding
of specific business issues, a tolerance for ambiguity, tolerance for absolutely abusive
hours, superb IT skills, personal appearance, the ability to work quickly in
spreadsheets, logical thinking skills, writing skills, willingness to travel and facility
with languages.
2.3.3 Landing the Job You Want
Let's suppose for the moment that you've decided that you would like to pursue a
position in consulting. Moreover, let's assume that you don't yet have offers from the
three firms that you truly want to work for. What then is your next step? This all
depends on where you are going to school. At some institutions, all the big firms
show up and will talk to you. You pick them and they pick you. But this practice is
the exception, not the rule. Most students who land positions in the consulting
profession do so by scrambling, hustling and working hard in the job search process.
Anne Harris, Head of MBA Career Services, at the University of Virginia's Darden
School argues that the most important aspects of conducting a consulting firm career
search involve preparing the right resume, networking in the profession and getting
"face time".
27
The Resume: The resume is a necessary evil in your job search. Consulting firms
are looking for organized resumes that convey the skills they are looking for, solid
schooling, some relevant functional expertise (e.g. engineering or finance) and a
track record of successful experience. The firms are typically tolerant of "career
changers" but will be looking for you to provide a coherent story about why you are
changing. It's not particularly important to worry about font choice and paragraph
formatting. A good interviewer is looking for experience, enthusiasm and skill.
Networking: The key to landing a consulting position is to network. Not bad since a
consultant has to be a natural networker. It really helps to have others batting for you
and educating you about the profession. If you indicate in an interview that you
already know someone at a firm your chances of landing a position will go up
dramatically. There are lots of good ways to network. It's not as hard as many seem to
think. Most people will be willing to help you if you give them the chance.
Sometimes the firm you want is right on campus and provides an opportunity to get
acquainted at a cocktail party or other so-called "cultivation event." More likely, you
will need to strike out on your own. You should contact people at the firm you are
interested in who come from the same school you attended or who you are linked to
in some other way. The best way to get acquainted is over the telephone.
Making The Phone Call: The networking phone call is the single most valuable
weapon in your job search arsenal. You can overcome the "intimidation factor" by
practicing this technique with a colleague or your friendly career services director.
You want to call a consultant and let them know that you are a student with a specific
interest in their work or firm. It's important to be sincere, polite, friendly and very
interested in the person you are calling on. If you are on the job market now, be direct
and ask for help with your job search. "Can I send you my resume?" "What are you
looking for?" You might ask a series of questions about the pros and cons of the firm,
the work and the life. Or, alternatively, you might ask for help with an upcoming
interview. Better yet, ask for a meeting, even if only for ten minutes or so. "I'll be in
New York (or wherever) next week and would love to ask you a few questions over
breakfast."
Unfortunately, many networking phone calls end up with one of two negative
outcomes: (1) "the person is not available", or (2) "sorry but we are not looking." If
your contact is not available, ask for voice mail and leave a voice mail introducing
yourself and explaining why you are calling. This is a great opportunity to get a
conversation started. If you don't hear back, keep trying. A dirty, but effective trick, is
to call the office in the evening. This is when the real work gets done and you'll be
often surprised to hear the person you are calling pick up the phone and be willing to
talk. Now, what if your contact indicates that they are the wrong person to call or that
they are not looking? This is the time to ask for help networking with other people.
Instead of being pushy or hanging up, what you should do is ask for names of others
that you might contact in your efforts to learn about the field and locate a position.
Face Time: Ultimately, there is no good substitute for meeting someone. One of the
most helpful things you can do is to get personally acquainted with consultants at
firms that interest you. This may be costly, but it's almost always worth it. If you go
to school outside of a major metropolitan area, you will need to visit people at the
28
firms that interest you. It's human nature to favor those whom we know and like in
the hiring process.
2.3.4 Recommended Resources
A big part of getting started on a consulting career is to survey the profession. It is
very helpful to know the histories of the various firms, the values that they hold and
the practices they are in. On a more practical level, it's vital to have access to current
contact information and to be able to locate the firms. Below, I have listed a number
of resources that might be helpful in this regard.
Ace Your Case! The Essential Management Consulting Case Workbook. From Wet
Feet Press at 1-800-926-4JOB (349 Liberty Street, San Francisco, CA 94114-2953).
Also try their web site at http://www.weffeet.com.
Management Consulting: Exploring the Field, Finding the Right Job and Landing It!
Convergence Multimedia and Harvard Business School Publishing, 1997. On
CD-ROM. Cost $39.95.
Consultants and Consulting Organizations Directory, 1996, Gale Research, Detroit,
MI, (800) 877-GALE
Consultants News, Kennedy Publications, Templeton Road, Fitzwilliam, N. H.
03447, Available from the Consultants Bookstore at 1-800-531-0007 or fax, 603
585-9555.
Directory of Management Consultants. Kennedy Publications, Templeton Road,
Fitzwilliam, N. H. 03447. Available from the Consultants Bookstore at
1-800-531-0007 or 1-603-585-2200.
Harvard Business School Career Guide: Management Consulting 1997. Available
from Harvard Business School Publishing. Try their web site at http.//www. hbsp.
harvard. edu.
So You Want to be a Management Consultant. From Wet Feet Press at
1-800-926-4JOB or 1-415-826-1750 (349 Liberty Street, San Francisco, CA
94114-2953).
29
3 Overview of Cases
1 A case is:
1.1 Description of a business situation
1.2 A problem
1.3 Based on a real situation
2 The purpose of a case is to judge problem-solving abilities, the basis of
consulting.
3 What are consulting companies looking for in a candidate?
3.1 Problem solving skills
3.2 Personal impact
3.3 Leadership
3.4 Drive / Aspirations
4 What are consulting companies looking for in a case answer?
4.1 Ability to think through problems:
4.1.1 Clear, logical reasoning
4.1.2 Curious, probing mind candidate to engage in solving the
problem
4.1.3 Ability to synthesize
4.1.4 Basic numerical agility
4.1.5 Intuitive business sense
4.1.6 Hypothesis generation use hypothesis to drive thinking and
formulate questions
4.2 Ability to quickly build working relationships:
4.2.1 Effective communicator
4.2.2 Tolerance for ambiguity
4.3 There are two parts to a case:
4.3.1 Mechanics - how you structure the case and go through the
analysis. This is akin to creating an outline before writing a
paper.
4.3.2 Analysis - how you think and solve problems
4.4 Both are important.
5 A good approach:
5.1 Listen to introduction carefully
5.2 Carefully think through the problem at hand
30
5.3 Ask one or two clarifying questions, if necessary
5.4 Structure the problem, possibly with a logic tree - enables one to
organize the data presented
5.5 Pick one branch to probe, develop hypotheses, ask for relevant facts,
defend/refine hypotheses, probe further
5.6 Pick the second branch ...
5.7 Put it all together: try to answer the overall question
6 During the case, you want to communicate explicitly what you want to do
with the case. Remember that you are trying to lead the interviewer through
your problem solving approach. Writing a paper is a good analogy to solving
a case. In a paper, you first order your thoughts in an outline, creating a
framework to solve the case. Go over the framework at a high level with the
interviewer and then plunge into one area at a time. Use interim conclusions
to sum up a section of analysis before moving on to another area.
7 Time management during the interview is the interviewee’s responsibility.
Suggested time allocation for a 20-25 minute interview is as follows:
7.1 The time spent structuring the problem should average about five
minutes, but will vary depending on the topic and your level of
comfort with the issue.
7.1.1 Plan to spend at least three minutes thinking about the
problem and framing the top-level issues/questions that will
need to be answered during the course of the analysis. Do not
be afraid to take your time and think about how you plan to
attack the case. Successful interviewees have taken up to 10
minutes to think through the issues as hand. DO NOT BE
AFRAID OF SILENCE!
7.1.2 Plan to spend two minutes discussing the issues, prioritizing
them and possibly eliminating some before you dive into the
rest of your analysis. Remember that time is the most precious
commodity that you have during the interview. Do not
squander time be focusing on issues that will not highlight
your abilities or will not lead to a viable solution.
7.2 Analyze the case: 15 minutes, divide the time by the number of issues
to be explored based on your perception of the importance of each
section.
7.3 Summing up: 5 minutes. In many ways, this can be almost as
important as the time spent up front framing the analysis. This is
where you can gather all of the information gathered during your
analysis and present it in a logical and persuasive fashion. If not all
areas were covered during your interview, you may also chose to
spend a minute or two discussing further areas that you would have
liked to explore and why.
31
7.4 Finally, always provide reasons for the conclusion you are presenting,
both during the analysis and the conclusion. The interviewer is not a
mind reader. You must lead him down the path that you are walking.
8 Assumptions enable one to close quickly an issue. The key to using
assumptions are:
8.1 Timing. Try to state your assumptions up-front. If the assumptions
are invalid, the interviewer will state that they are not correct.
8.2 Delivery. Try to state the assumptions in a non-offensive manner. Bad
phraseology could lead the interviewer to think that you are arrogant.
32
4 Different Types of Cases
1 Classic Cases
1.1 Purpose
Assess broad functional skills
Calibrate big picture perspective
1.2 Types
Impact of a consolidating industry on a client company
Should a company add capacity?
How should a client react to a new competitor?
Should a client enter/exit a new/old market?
2 Special Cases
2.1 Purpose
Assess the comfort level with ambiguous problems
Evaluate creativity
Evaluate raw analytical horsepower
Test poise under pressure
2.2 Types
Why are manhole covers round?
How many golf balls are there in this state?
What do you think interest rates will do next year?
33
5 Frameworks for Cases
5.1 General Models
1 Financial Frameworks - for profitability cases you should explore cost and
revenues
1.1 Income Statement
Net Income
- Cost of Goods Sold (COGS)
Labor
Materials
Overhead
Delivery
Gross Margin
- Depreciation
- Sales General &Administrative (SG&A)
Operating Profit
- Interest Expense
Earnings Before Taxes (EBT)
-Taxes
Net Income
1.2 Balance Sheet
Assets
Cash
Investments
Accounts Receivables
Inventories
Property, plant & equipment
Intangibles
Liabilities
Accounts Payables
Other Short Term Debt
Long-term Debt
Other Liabilities, Reserves
34
Shareholders Equity
- Common Stock
- Retained Earnings
2 Porter’s Five Forces
- Suppliers
- Potential Entrants
- Buyers
- Substitutes
- Industry Competition
- Complements – the forgotten force
3 Business System
3.1 R&D
- Product Development
- Innovation
- Responsiveness
3.2 Manufacturing
- Cost
- Quality
- Speed
- Supply
3.3 Marketing
- Pricing
- Product
- Place
- Promotion
3.4 Distribution
- Cost
- Channel
4 Issue Tree
4.1 Do not use this framework in an interview without practicing it a few
times before hand.
4.2 Top-level identifies the highest level issues that need to be answered
to solve the problem. Use MECE (Mutually Exclusive and
Collectively Exhaustive) to ensure that all issues are covered.
35
4.3 Break each level down into parts that are more manageable.
4.4 Focus on most important branches or components first.
4.5 An example of an issue tree is provided with the China Factory case.
5 Framework for a Zinger case like ―How many golf balls in Albuquerque?‖
5.1 Supply chain
5.1.1 Raw Materials
- Who makes the plastic needed for golf balls?
- Obtain an estimate of quantity of material supplied and work
from there.
5.2 Demand side
- Who purchases golf balls?
- How many golf balls do they need each year?
5.2 Additional Models
5.2.1 The Four C’s
The four C’s stands for customer, competition, cost and capabilities. This model is
intended to ask the critical questions in understanding the core business of an
organization. The model is more of a back-of-the envelope sketch than a detailed
analysis. Filling in these categories can be a first, cursory step in understanding a
given company or industry. Although this model is unlikely to produce revolutionary
insights, it may help in defining a business by breaking it down into very basic
components and looking for conflicting elements. The model is difficult to use with
diversified companies and interests.
5.2.2 Economics
Students should review the basics of economic theory. Many cases, especially the
strategic ones, have a strong backing in basic economics so knowing the
fundamentals will give the student a strong base from which to work. Some of the
more relevant concepts include:
5.2.2.1 Supply & Demand
The Supply Curve -The higher the price of a product or service, the greater the
quantity of the item that will be produced, all other things being equal. Supplier will
be willing to make more available (i.e., supply). Conversely, the lower the price of a
product or service, the smaller the quantity producers will be willing to make
available. Please remember that as the supply of one product increases, the supply of
another product will decrease. (We live in a world with finite resources but infinite
demand.)
36
The Demand Curve - The lower the price of a product or service, the greater that
demand for the quantity consumers will be willing to purchase (i.e., demand), all
other things being equal. Conversely, the higher the price of a product or service, the
smaller the quantity of goods consumers will be willing to purchase.
Price
Quantity
Demand
Supply
5.2.2.2 Law of Diminishing Marginal Utility
This concept or economic "law" states that the level of demand or "satisfaction"
derived from a product or service diminishes with each additional unit consumed
until no further benefit is perceived, within a given time frame.
5.2.2.3 Law of Diminishing Returns
This concept suggests that although additional units of labor may contribute to
increased productivity in absolute numbers, each additional unit contributes relatively
less than the preceding unit to productivity.
Price
Quantity
Cost of
Inputs
Value of
Output
5.2.2.4 Comparative Advantage
Comparative advantage states that it is in the best interest of a nation to import an
item from another nation when it cannot produce the item as inexpensively. The
concept of comparative advantage goes a step farther, contending that it may be to a
country's advantage to import goods from other nations even though they may be able
to produce the goods less expensively at home. This is based upon the premise that
not producing the item in favor of producing another item which offers better
production efficiencies will ultimately benefit both countries (see also economies of
scale).
37
5.2.2.5 Elasticity of Demand
The degree to which demand for a product or service can be altered by a change in
price indicates the extent of the elasticity of such demand. For example, a person who
seeks to purchase a particular brand and model of automobile may decide to shop
competitively from dealer to dealer for the lowest price. This would characterize
demand that is elastic in nature. However, there are circumstances where the level of
demand is not altered by a change in price. For example, a diabetic will probably be
willing to pay as much money as he or she has to buy insulin, the medication that
would sustain that individual's life. In this case, the demand is inelastic.
Cross Elasticity: Percentage change in quantity demanded of one good in response to
a 1 percent change in the price of a related good.
QxPy
x
y
x x
y y
y x
x y
EQ
P
Q Q
P PP QQ P
%
%
/
/
EQxPy is positive if the two goods are substitutes
EQxPy is negative if the two goods are complements
Supplier Elasticity: Percentage change in the quantity supplied in response to a 1
percent change in price.
S
S S SEQ Q Q
P P / P
%
%
/
5.2.2.6 Economies of Scale
Economies of scale exist when the average cost (AC) declines as output increases,
over a range of output. If AC declines as output increases, so must the marginal cost
(MC). (Marginal cost is the cost of the last incremental unit of output.)
The relationship between AC and MC can be summarized as follows:
MC<AC = Economies of scale
MC=AC = Constant returns to scale
MC>AC = Diseconomies of scale
The shape of the cost curve is U shaped. The generally accepted explanation for this
is that AC initially declines because fixed costs are being spread over increasing
output and then eventually increase as variable costs increase (see law of diminishing
marginal returns). The minimum efficient scale (MES) is the minimum level on the
average cost curve. Economies of scale are not limited to manufacturing. Marketing,
R&D, and other functions can realize economies of scale.
5.2.2.7 Economies of Scope
Economies of scope exist if the firm reduces total production costs by increasing the
variety of activities it performs. Whereas economies of scale are usually defined in
terms of declining average cost functions. It is more customary to define economies
of scope in terms of the relative total cost of producing a variety of goods together in
38
one firm. Economies of scope may be achieved by "leveraging core competencies"
across multiple business activities. For example, it may make economic sense for a
manufacturer of tape to get into the business of manufacturing note pads with
adhesive backings as there are commonalties in the two businesses at many points
along the value chain.
5.2.2.8 Learning Curve
The learning curve refers to cost advantages that flow from accumulated experience
through lower costs, higher quality and more effective pricing and marketing. The
magnitude of learning benefits is expressed in terms of a "progress ratio." The ratio is
calculated as the unit cost after doubling cumulative production divided by the
previous cost (C2/C1). A ratio of less than one suggests that some cost savings due to
learning is taking place. The median appears to be approximately .80. This implies
that for the typical firm, a doubling of cumulative output is associated with a 20%
reduction in unit costs.
5.2.3 4P's
Kellogg’s Philip Kotler developed this model. It stands for product, price, placement
(i.e., distribution channels), and promotion. These are the four critical dimensions in
marketing any product (or service).
5.2.4 Value Disciplines
Fred Wiersema and Michael Tracy of CSC Index, Inc. have developed a set of
strategic foci called the value disciplines (Harvard Business Review, January-
February 1993, pp. 84-93). The disciplines are:
Operational excellence - Provide customers with reliable products or services at
competitive prices and delivered with minimal difficulty or inconvenience, with the
goal of leading the industry in price and convenience (e.g., Dell Computer).
Customer intimacy - Segment and target markets precisely and then tailor offerings
to match exactly the demands of those niches, combining customer knowledge with
operational flexibility to respond quickly to almost any need (e.g., Home Depot).
Product leadership - Offer customers leading-edge products and services that
consistently enhance the customer's use or application of the product, thereby making
rivals' goods obsolete (e.g., Nike).
Companies which push the boundaries of one value discipline while meeting industry
standards in the other two gain an advantage that other competitors find hard to
match.
5.2.5 Porter’s Five Forces
Michael Porter's Five Forces model analyzes the various competitive pressures at
work in a given industry. The results indicate the overall industry attractiveness (i.e..
ease of making a profit), as well as the strength and influence that each of the
39
competitive pressures have on the firms participating in the industry. The following
is a brief discussion of the five components.
Industry Competitors (Internal Rivalry) - Often, the most powerful of the five forces
is the competitive battle among rival firms which are already present in the industry.
The intensity with which the competitors are jockeying for position and competitive
advantages indicates the strength of the influence of this force.
Potential Entrants – This force measures the ease with which new competitors may
enter the market and disrupt the position of the other firms. The threat that outsiders
will enter a market is stronger when the barriers to entry are low or when incumbents
will not fight to prevent a newcomer from gaining a market foothold. In addition,
when a newcomer can expect to earn an attractive profit, the barriers to entry are
diminished.
Threat of Substitutes - The competitive threat posed by substitute products is strong
when policies of substitutes are attractive, buyers' switching costs are low, and buyers
believe substitutes have equal or better features.
Supplier Power- Suppliers to an industry are a strong competitive force whenever
they have sufficient bargaining power to command a price premium for their
materials or components. Suppliers also have more power whenever they can affect
the competitive well being of industry rivals by the reliability of their deliveries or by
the quality and performance of the items they supply.
Buyer Power - Buyers become a stronger competitive force the more they are able to
exercise bargaining leverage over price, quality, service, or other terms or conditions
of sale. Buyers gain strength through their sheer size and when the purchase is critical
to the seller’s success.
Benefit of Complements – This is considered a sixth force that is not directly
captured in Porter’s model. This force is the opposite of the Threat of Substitutes.
When the economics are promising for a complementary product, there is a spillover
effect on the primary product.
Industry
CompetitorsRivalry among
existing firms
Suppliers
Substitutes
Potential
Entrants
Buyers
Five ForcesComplement
40
5.2.6 "Star" Diagram/Organizational Analysis
In doing an organizational analysis, one should consider all seven components of the
organizational unit. Vision should define Strategy. Strategy determines Structure and
Decision Support Systems that are required to make the organization function. The
Reward Systems must reinforce what you are trying to accomplish strategically and
the Human Resource Systems must select, recruit and develop the personnel the
organization needs to accomplish its objectives. Corporate Culture must reinforce all
seven components.
Strategy
Reward
Systems
Human
Resource
Systems
StructureDecision
Support
Systems
Vision
Organization
Culture
Performance
Problems arise when these seven components do not reinforce one another. For
example, managers will have trouble if they are in a decentralized structure while
information and planning systems are centralized. When considering change, all
seven components must be considered. If one component is changed, it is most likely
that the other components will have to be changed to be consistent with each other.
5.2.7 The BCG Growth-Share Matrix
The BCG Growth-Share Matrix provides a valuable framework that enables us to
identify and evaluate the company's products relative to market share and the extent
to which the market, as a whole, is expanding or contracting. The model can also be
utilized to analyze a portfolio of companies held by a single organization by
classifying them within the matrix; each as independently held businesses.
Products or categories businesses are as follows:
Star — A product with high market share in a high-growth market; every mother's
prayer.
Problem Child (also called "Question Marks") — A product with low market share in
a high-growth market; mother is concerned because her child is not growing as
anticipated. Another perspective is that the manager shouldn't be quite so concerned
if the product has carved out a little niche that is impervious to the competition;
maybe slow yet consistent growth isn't so bad.
Cash Cow — A product with high market share in a low-growth market. Since the
cow is generating milk (i.e., cash), the marketer may elect to "milk the cow dry," so
to speak, accelerating cash flow and, not coincidentally, the product life cycle.
41
Dog — A product with low market share in a low-growth market. In this sense, "dog"
is certainly not "man's best friend." Rather, it is analogous to a "bomb" (i.e.,
something that fails miserably) or to a "lemon" (i.e., something that is defective or
undesirable). Therefore an astute business manager would want to drop a ―dog‖ from
the product line, unless there are some extremely important overriding issues that
outweigh the products market performance.
Cash Cow
StarProblem
Child
Dog
Market
Share
Profitability
Hi
Low
LowHi
5.2.8 Value Chain
A business manager must understand the internal relatedness of the many activities
involved in the production of a product or service. Every business unit is a collection
of discrete activities ranging from sales to accounting that allow it to compete.
Michael Porter calls these activities ―value activities.‖ It is at this level, not the
company as a whole, that the unit achieves competitive advantage.
The value activities are grouped into nine categories, as indicated in the exhibit
below.
Primary activities create the product or service, deliver it to the market, create a
demand for the product, and provide after-sale support. The categories of primary
activities are inbound logistics, operations, outbound logistics, marketing and sales,
and service.
Support activities provide the input and infrastructure that allow the primary
activities to take place. The categories are company infrastructure, human resource
management, information systems, and procurement.
Value chain analysis is useful in discerning possible synergies among various units of
an organization (e.g., shared procurement). Value chain analysis is also helpful in
determining which value activities are best outsourced and which are best developed
internally. Finally, value chain analysis provides a structure that provides great
insight into the flow of activities that lead to the creation and distribution of a
particular product or service. (e.g., What value is added to the manufacture and sale
of gasoline at each point in the value chain, and by whom?).
42
Company Infrasructure
Procurement
Information Systems
Human Resource Management
Inbound
LogisticsOperations
Outbound
Logistics
Marketing
&
Sales
Services
Support
Activities
Primary
Activities
Value Chain
5.2.9 Generic Strategies (Porter)
Michael Porter suggests that business strategies can be classified as pursuing cost
leadership, differentiation, or focus. Each of these strategies is described as follows:
Overall Cost Leadership: Here the business works hard to achieve the lowest
production and distribution costs, so that it can price its products lower than its
competitors and win a large market share. Firms pursuing this strategy must be good
at engineering, purchasing, manufacturing, and physical distribution of the products.
Texas Instruments is an excellent implementer of this strategy. The problem with this
strategy is that other firms will usually emerge with still lower costs (from the Far
East, for example) and hurt the film that rested its whole future on being the lowest
cost producer. The real key in this strategy is for the firm to achieve the lowest costs
among those competitors adopting a similar differentiation or focus strategy, and
remaining so in the long run.
Differentiation: Here the business concentrates on achieving superior performance in
an important customer benefit area valued by a large part of the market. One example
is if the company strives to be the service leader in its industry, the highest quality
producer, the style leader, the technology leader, and so on; but it is hardly possible
to be all of these things. The firm cultivates those strengths that will give it a
competitive advantage in one or more benefits. Thus the firm seeking quality
leadership must make or buy the best components, put them together expertly,
inspect them carefully. This has been Canon's strategy in the copy-machine field.
Focus: Here the business focuses on one or more narrow market segments rather than
going after a large market. The firm gets to know the needs of these segments and
pursues either cost leadership or a form of differentiation within the target segment.
Thus, Annstrollv Rubber has specialized in making superior tires for farm-equipment
vehicles and recreational vehicles and keeps looking for new niches to serve.
According to Porter, those firms pursuing the same strategy directed to the same
market or market segment constitute a strategic group. The firm that carries off that
strategy best will make the most profits. Thus, the lowest-cost firm among those
pursuing a low-cost strategy will do the best. Porter suggests that firms that do not
pursue a clear strategy - ―middle-of-the-roaders" -- do the worst.
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5.2.10Strategic Types (Miles & Snow)
Miles and Snow have divided strategic options into four categories (in contrast to
Porter's three Generic Strategies). A firm can only pursue one of these strategies at a
time, but it is common for a company to shift from one strategy to another as its
situation, and the industry, changes.
Defender—Those firms that have a leadership share of the market will often
concentrate on staving off the competition, moving to erect as many barriers to entry
as possible. They are closely related to Porter's Low Cost Producers, leveraging their
advanced position along the learning curve and their name recognition to maintain a
superior market position.
Reactor— Such companies are second-movers, letting others show them the way to
success. They react to changes in the market and moves of their competitors and so
must maintain flexibility. While this strategy may be profitable in the short run, its
long-term value is questionable.
Analyzer— Analyzers pick apart the market very carefully looking for niches and
demand/supply gaps. This strategy is akin to Porter's focused companies. These firms
are not necessarily innovators, but instead concentrate their efforts in very carefully
and narrowly defined efforts.
Prospector— These firms are the first-movers and the innovators. This is a high-risk
strategic avenue to follow, but those who are successful can change the way the game
is played and create very strong competitive advantages.
5.2.11Other Key Concepts
5.2.11.1 Reengineering
Popularized as Business Process Reengineering (BPR), reengineering refers to
breaking down business processes and reinventing them to work more efficiently,
cutting out wasted steps and enhancing communication. Business processes are often
replete with implicit rules that hamper the way in which work should truly be done.
Further, processes are often viewed as discrete tasks, a habit that prevents
management from making frame breaking, cohesive change. Reengineering is
defined by Michael Hammer and James Champy in Reengineering the Corporation
as "the fundamental rethinking and radical redesign of business processes to achieve
dramatic improvements in critical contemporary measures of performance such as
cost, quality, service, and speed."
5.2.11.2 Total Quality Management (TQM)
TQM refers to the practice of placing an overriding management objective on
improving quality. Whereas TQM is more of a philosophy than a specific strategy,
the stated objective is often "zero defects" or ―six Sigmas.‖ A higher level of quality
is linked to increased customer satisfaction and thus leads to the ability to charge a
higher price at what is often a lower cost. It is important to ensure that the added
benefit from incrementally increasing quality outweighs the added cost associated
44
with the quality improvement effort. TQM was initially limited to the manufacturing
sector but has more recently been applied effectively to service businesses as well.
5.2.11.3 Key Success Factors
Essential success factors are those factors that are most critical in determining a
firm's ability to survive and prosper. Attributes of essential success factors are the
following:
- Management can influence them;
- They impact the overall competitive position of the firm in the industry
- They are an interaction of characteristics of an industry and each firm's
strategies.
- A firm must supply what customers want and survive competition from
other firms
Therefore, management should ask:
- What do customers want?
- What does the firm need to do to survive competition?
Essential success factors are those factors that lead to the answers to the above
questions. For example, for wood products, essential success factors are owning large
forests and maximizing the yield of those forests.
5.2.11.4 Core Competencies
A concept popularized by Professors Gary Hamel and C.K. Prahalad, core
competencies provide potential access to a wide variety of markets, make a
significant contribution to the perceived customer benefits, and are difficult for
competitors to imitate. The classic example of a company that has effectively
leveraged its core competencies is Honda, which has gained a competitive advantage
in numerous product markets through its focus on leveraging its skill at making
engines.
5.2.11.5 Vertical Integration
In some industries companies find it advantageous to integrate backward (towards
their suppliers) or forward (towards their customers). Vertical integration makes the
most sense when a company wants greater control of a channel that has major impact
on its product cost or when the existing relationship involves a high level of asset
specificity.
5.2.11.6 Just-in-Time (JIT)
The goal of JIT production is a zero inventory with 100% quality. In other words, the
materials arrive at the customer's factory exactly when needed. JIT calls for
synchronization between suppliers and customer production schedules so that
inventory buffers become unnecessary. Effective implementation of JIT should result
in reduced inventory and increased quality, productivity, and adaptability to changes.
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5.2.11.7 Fixed vs. Variable Costs
Variable Costs (VC): The costs of production that vary directly with the quantity (Q)
produced: these costs generally include direct materials and direct labor cost.
Fixed Costs (VC): The costs of production that do not vary with the quantity (Q)
produced: these costs generally include overhead costs.
Semi-variable Costs: The costs of production that vary with the quantity (Q)
produced, but not directly. (Typically, these are discrete costs, such as the cost of
adding new production capacity when Q reaches certain levels.)
Break-even Point: Break-even analysis is a managerial planning technique using
fixed costs, variable costs, and the price of a product to determine the minimum units
of sales necessary to break even or to pay the total costs involved. The necessary
sales are called the BEQ, or break-even quantity. This technique is also useful to
make go/no-go decisions regarding the purchase of new equipment. The BEQ is
calculated by dividing the fixed costs (FC) by the price minus the variable cost per
unit (P-VC):
BEQ = FC/(P-VC)
The price minus the variable cost per unit is called the contribution margin. The
contribution margin represents the revenue left after the sale of each unit after paying
the variable costs in that unit. In other words, the amount that "contributes" to paying
the fixed cost of production. To determine profits, multiply the quantity sold times
the contribution margin and subtract the total fixed cost.
Profit = Q x (P-VC) - FC
5.2.11.8 Net Present Value (NPV)
The NPV is a project's net contribution to wealth. Net present value is the present
value (PV) of all incremental future cash flow streams minus the initial incremental
investment. The present value is calculated by discounting future cash flows by an
appropriate rate (r), usually called the opportunity cost of capital, or hurdle rate. Ct
represents the cash flow at time t. (Ct can be negative, as in the initial investment,
Co.) The NPV is calculated as follows:
NPV = Co + Cl/(l+r) + C2/(l+r)2 + ... + Ct/(l+r)
t
If the net present value of the project is greater than zero, the firm should invest in
the project. If the net present value is less than zero, the firm should not invest in the
project.
5.2.11.9 Pareto Principle (80/20)
The Pareto Principle refers to the situation in which a large amount of the total output
comes from a small amount of the total input. This phenomenon is typified by the
"80/20 rule" which states that 80% of the output comes from 20% of the input.
Typically, a Pareto analysis is conducted to determine the areas on which
management should focus its efforts. For example, 80% of total downtime on a
production line is attributed to two out of the ten manufacturing steps. Alternatively,
80% of a company's profits may be generated by 20% of its product lines.
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6 Dos and Don’ts
1 Helpful Hints:
1.1 The goal of the case interview is not to crack the case but to
demonstrate ―how you think.‖
1.2 Listen carefully to everything that is said during the interview. Do not
lock yourself into your answers, interviewers will drop hints regarding
the case throughout the interview process. This is an area where one
can demonstrate teamwork. The interviewer will look to see if you
build on the information provided.
1.3 Ensure that you understand the problem at hand. Do not assume
anything! Use questions to clarify issues and to gain a complete
understanding of all the problems that need to be addressed.
1.4 Take your time; do not answer any question unless you have thought
through your answers fully. Once the problem or case is presented to
you, do not feel compelled to answer immediately. Rather, ask for a
few moments and think out your approach. During that time,
brainstorm to get all your thoughts on paper. Then, carefully assess
them and order them into a logical format. This will serve as the
structure of your analysis.
1.5 HAVE FUN WITH THE CASE! Engage yourself and get excited
about the case. The interviewer has probably spent a few months
working on the problem and consulting firms are looking for people
who enjoy solving problems. They also want consultants who are
dedicated to their client and client’s problem. You can demonstrate
this by being engaged.
1.6 Do not ask for every piece of data; the more you prompt for data
without assimilating what you have already been presented with, the
more confused you could become. The interviewer possesses tons of
data or will make it up, if need be. Better to use the bull’s eye
approach to data gathering, as opposed to the shotgun approach.
1.7 Remember that some material may be extraneous.
1.8 Individual pieces of data can often be combined to draw a conclusion
about part of a problem.
1.9 Think then speak. Thinking aloud leads to rambling. Practice
phrasing statements clearly and succinctly. However, do not error on
the side of being silent either. The interviewer is not clairvoyant. He
will not understand your thought process unless you explicitly state to
the interviewer.
1.10 Keep the interviewer informed of where you are going and check to
see if you are on track. For example, one could say: ―I intend to
purse..., do you believe this is worthwhile.‖
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2 Top Ten Things not to say during an interview:
2.1 I need a lot more data.
2.2 What are you looking for?
2.3 Is this a marketing case?
2.4 I cannot believe this is a real case. Are your clients really that stupid?
2.5 This case has no answer.
2.6 There is obviously one answer to this case.
2.7 I do not believe you; you are trying to confuse me.
2.8 I would like to concentrate totally on the political implications of this
situation.
2.9 I cannot solve this case because I have not had Corporate Strategy yet.
2.10 This case sounds exactly like what we did in Managerial Accounting.
3 Don’ts
3.1 If the interviewer suddenly asks you to name the three critical drivers to the
industry, DO NOT ANSWER RIGHT AWAY! Think about it and come up
with five drivers, then order them from the most significant to the least
significant. Then say something like this: ―Well I have thought of five
significant drivers, the three most important are...‖
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7 How to Prepare for the Consulting Interviews?
Step 1 Attend Case Interviewing Workshops by leading Consulting Firms
Step 2 Research the firms and know their differences.
Helpful places to look for info:
Attend Presentations
Quick database search to get any recent news on the company
Use Wet Feet Press Guides
Step 3 Practice the cases with a partner
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8 General Interview Questions
1. Why consulting?
2. Why do you want to work for this firm?
3. Tell us about your skills.
4. Tell us about your resume.
5. Tell us about your weaknesses.
6. Tell us about your previous industries.
7. Describe a problem you encountered in a work environment and how you
handled it.
8. If you do not get into consulting what will you do?
9. Give me an example of where ―you dropped the ball.‖
10. Give me an example of where you did something unpopular and had to stand up
for yourself at work.
11. Where do you see yourself in five years?
12. Describe a situation where you had to present orally to an important group of
people.
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9 Sample Cases
9.1 China Products Division
9.1.1 Issue
The CEO of a large diversified building products company has asked us to help her
examine the operations of her china products division. China products include tubs,
toilets and urinals. Specifically, he wants to know if he should approve a $200
million capital expenditure for new manufacturing facilities.
The company is one of seven producers in the United States; the largest producer has
a 20 percent share; our client is number three with a 15% market share.
Prices for the client’s products have been flat in the recent past.
The two largest competitors appear to earn a small return; our client is
break-even.
The largest competitor has just announced plans for a major modern plant.
What issues must the client consider?
9.1.2 Possible Solutions
Probable points of clarification:
Will the planned investment lower operating costs? (Yes, but not
substantially. The major reason for the investment is that the new process
will result in a better finish.)
Does the company rely on a limited source of raw materials? (No,
materials are easy to obtain.)
―Minimum‖ - level answers
Market size/growth:
What has been the industry’s growth in units?
Is the growth linked to housing starts?
Competitive Position:
How much overcapacity exists in the industry today?
What are the competitor’s relative cost positions?
Market segmentation:
How is the market segmented (e.g., residential vs. industrial vs.
commercial)?
Are there different price points by market or within markets?
―Better answers‖
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Customer-buying factors:
Do customers demand a full-line supplier (e.g., with other building
products)?
Is any significant portion of sales to centralized customers (e.g.,
Sears)?
Barriers to entry/exit:
What is the minimum-size for a new plant?
Are most plants fully depreciated?
Generally, how expensive is entry/exit? Has there been a history of
change in the industry players
Manufacturing:
Do the plants produce other products that contribute to overhead?
Are there ways in which costs can be substantially lowered?
―Outstanding answers‖
Marketing:
How rational has pricing been in the industry?
Have competitors ever announced capacity expansions before and
then not implemented them?
Are there opportunities to rationalize the product line in order to
increase revenue?
Does the new finish that will result from the investment ―pay for
itself‖ with higher prices?
Competitive Position:
How important is the product line to each competitor?
Are the products sold in combination (with each other, or with other
products such as fittings)?
Would exiting the business affect the sales, profits or costs of other
business units?
Are there advantages to plants being located in specific places due to
high transportation costs?
If the competitor’s new plant is built, will other manufacturers drop
out of the market?
External environment:
Is the regulation of the market significant?
Are there changing demographics that will affect demand?
Logic Tree Approach
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Level One Question: Should I invest in $200 million plant?
Level Two Questions: Is there a sizable profitable market?
Is there a better use for funds other than the current proposed
investment?
Are there significant market threats?
Do I have production advantages over competitors?
Level Three Questions: Is there a sizable profitable market?
Do I have good relationships with distributors?
Does the market have enough unsatisfied demand for new
capacity?
Can I sell at the right price?
Can the market be segmented?
9.2 Healthcare Company
9.2.1 Issue
A large healthcare company has decided it is interested in substantially increasing the
size of its operations. Its goal is to double total sales and profits in less than two
years.
As a consultant brought in to assist them, what would you do?
9.2.2 Possible Solution:
What is the current scope of operations? In what areas of healthcare does the
company deal? What is its current market share in these areas?
What plans has the company already considered is currently considering?
What is the competitive nature of the industry? What would be the effect on sales and
profits of reducing prices/margins?
What potential is therefor expansion by acquisition? Do they have the financial
capability? Do potential targets exist?
A suitable solution will depend upon the answers to the above questions.
A business can increase profits by:
- Increasing sales
- Increasing prices
- Cutting costs
However, if the company's margins are found to be consistent with industry norms, it
would seem unlikely that either increasing prices or cutting costs represent feasible
53
methods by which to double sales & profits, particularly if the company operating in
a moderately competitive environment.
This leaves only sales increases, which could be achieved by: selling more of the
current products to current customers selling new products to current customers
selling current products to new customers selling new products to new customers The
suitability of these options will again depend on the particular environment. In the
particular example of this case, it turned out that only selling new product to new
customers via some form of diversification could hope to achieve the company goals.
You should then consider the potential for increasing sale by means of diversification
through acquisition or joint venture. The relative benefits of each will depend on
financial resources as well as the existence or otherwise of suitable targets.
9.3 Electronic Joint Venture
9.3.1 Issue
A large microelectronics manufacturing company is considering participation in a
cooperative project which will receive 50% government funding. The company
currently uses several hundred millions of dollars worth of microelectronics every
year, the cost of which is growing steadily in many of the company's products.
Although the company already has a subsidiary that does some microchip fabrication,
the capacity of this subsidiary is small and its technology is relatively old. It is
interested in developing application specific ICs (ASICs). The government project
would more or less allow the company to define an individual project within the
broad category of process technology, CAD tool and equipment development
What are the important considerations to making this decision?
What factors are important for success in the ASIC business?
Should the company get involved? If so', with whom?
9.3.2 Possible Solutions:
What is an ASIC? When are they used for and for what reasons?
(An ASIC combines the functions of many semiconductor components on one chip,
decreasing size and weight and increasing speed and reliability. Assembly costs are
reduced, but development costs are higher.)
What is the market outlook for ASICS?
(High growth. currently about 15% of all ICs are ASICS & this figure is expected to
rise above 35% in the next 10-years. The IC market itself is expected to grow at over
10% per year too. Important demand segments are entertainment electronics and
automotive applications.)
How is the industry structured? How big and how competitive is the industry? Who
are the important competitors? What are their main business lines? How vertically
integrated are they? Are there already joint ventures and alliances?
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(There are about 150 firms producing ASICs, of which only a handful are of any size,
although there are powerful commodity-chip manufacturers. In contrast to the
commodity-chip manufacturers, most of the top ASIC producers are in fact
American. There is currently only one producer of ASICS in a similar line of
business to the company under discussion in this case but this competitor has much
more sophisticated semiconductor production capabilities. Strong demand has meant
that price erosion is not currently an issues in the ASIC industry However, some
strong alliances already exist in the industry and the possibility of converting old
DRAM production facilities into ASIC facilities may well lead to great overcapacity
when the next generation of memory chips takes over.)
Are there significant barriers to entry? What are the expected costs of entry?
(A state-of-the-art production facility large enough to meet the company's needs
would cost around $250 million. In addition, considerable effort would be required to
find the staff with suitable expertise. Also, firms whose core business was
semiconductors would have significant technology and R&D advantages.)
How is the ASIC business different from that of standard ICs? Consider typical
production volumes and hence the differences in fixed costs and design costs per unit
produced.
(Typical ASIC production volumes are much lower, therefore need to find some way
to reduce some of these costs e.g. using CAD to shorten design cycles.)
What are the client’s current purchasing habits?
(Currently purchase nearly all microelectronics through one subcontractor, who
delivers high value sub-assemblies.)
Do potential joint venture partners exist?
9.4 Television Cable Company
9.4.1 Issue
Three years ago a venture capital company purchased a cable TV system that had
access to 2MM households in the southwest. The VC firm was attracted by the
extremely large subscriber potential (2MM households) and potential for
considerable return. Despite their best efforts, they have failed to turn a profit in the
past three years. You have been hired to determine if they can turn a profit or if they
should sell.
9.4.2 Possible Solutions
- Analyze current revenue and cost structure
- Analyze the market potential of the area
- Analyze the competitive situation/ substitutes
- Provide recommendations
Cost Revenue
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Fixed costs associated with lying cable Subscribers monthly fees
Debt associated with fixed costs Subscribers special services -
movie channels
Maintenance of the cable system
Information provided as soon as these cost/revenue drivers are uncovered:
The fixed costs are extremely high due to the distance between cities in the system.
The debt and maintenance costs are also higher than systems in major metropolitan
areas. The current systems is only at 43% capacity (# of subscribers) vs. a 63%
industry average.
Assumptions:
High fixed costs are overwhelming the current revenues
The current subscriber rate is too low. Why? Moreover, can it be fixed?
Market Assumptions:
Based on the low subscriber rate, I would assume the population is less likely to
watch television perhaps because of income or lifestyle issues.
A: Actually they watch more television than the average.
Does the cable system offer what they enjoy watching.
A: Yes.
Competition:
If consumers are watching television, but not our cable system, there must be a strong
competitor in the market. What options do our consumer have?
A: In addition to the three network stations, there are eleven independent
broadcast stations in the area.
Is the reception from these independent stations strong?
A: Yes, very.
Are the stations offered free of charge?
A: Yes.
Overall Assumptions:
The low subscriber rate (revenues) cannot overcome the high fixed costs.
The subscriber rate is low due to the high number of competitive stations available to
our consumers (supply and demand problem).
Recommendations:
Determine if there are consumer needs not being met by the independents that could
be provided by our system and worth paying for. If not, sell.
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9.5 Magazine Sunday Supplement
9.5.1 Issue
A major magazine publisher (not unlike Time Warner) is thinking about publishing
a "Sunday supplement" for insertion in and distribution through metropolitan
newspapers. They have hired you to determine if they should proceed or not.
Additional Information:
There are currently two major Sunday Supplements: Parade and U.S. Weekly
They are distributed in over 90% of the US’s newspapers (combined)
A newspaper can only insert and distribute one Sunday Supplement
They are offered to the newspapers free-of-charge
9.5.2 Possible Solutions
Can we turn a profit by publishing this supplement?
How? -Revenue potential, costs, competitive response
Does it fit with our current publishing strategy?
Can we turn a profit?
Revenue Potential (Assumptions):
Major sources of revenue is the advertising revenue
Question: Can we expect to gain revenues from our existing advertisers?
A: You tell me-
Can you explain the format of the supplement?
A: Typically cheap paper, low quality editorial, light reading gossip,
modem day folklore
Assumption: Our current advertisers (for Time) would not be interested in this
format.
Cost Assumptions:
Fixed cost of supplement set-up
Editorial, printing/paper, distribution
Internal and external sales force - (gaining ad revenues and newspaper acceptance)
Assumption: There are few publishing synergies with our current publications.
A: True
Competitive Assumptions:
The competitors are deeply entrenched - 90% penetration.
Displacing a competitive supplement would require costly incentives to the
newspapers.
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Current newspapers use the supplements in order to publish low quality editorial
without disparaging their product offering.
Key Issues:
Based on these assumptions, turning a profit would be difficult due to the large
upstart costs and the strong competition for advertising revenues and newspaper
acceptance.
Strategic Fit Assumptions:
The poor editorial content associated with these supplements may disparage the
publisher’s current product offering.
Recommendations:
Based on this information and these assumptions, we would not recommend
proceeding with the supplement until potential advertisers were committed and
newspapers demonstrated an interest in accepting the supplement. (Even then, we
would recommend publishing under an alternate brand name).
9.6 American Express Charge Card
9.6.1 Issue
American Express has faced strong competition from new credit cards entering the
market. They are considering dropping the $50 annual fee. What are the "economics"
of such a decision and should they drop the fee or not?
9.6.2 Possible Solutions
Determine how American Express makes money.
Evaluate the pros and cons of dropping the annual fee.
Make a recommendation
Revenue Drivers - Assumptions:
$50 annual fee multiplied the number of members.
No additional revenue from consumers because they pay-off monthly.
Receive 1 % of the transactions from retailers who honor the AMX card.
Key issues:
If the annual fee is dropped, AMX loses ($50 x # of members).
To overcome this loss, they have to increase the revenues from consumer purchases
(1% from the retailer)
Is it likely that current cardholders will spend more per year if the annual fee is
dropped?
A: Not likely. They would still have to pay off their balance every month.
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Therefore, the only way to increase revenues from consumer purchases is to increase
the # of AMX cardholders
Assumptions:
Number of current cardholders = 4% of the U.S. population (Just a guess):
- 250MM x 4% = 10MM current cardholders
$50 x 10MM = Annual loss of $500MM by dropping the fee.
Current percentage revenue: 10NM members x $1000 annual purchase (avg.)
[10MM x (1000 x 1%)] = $100MM (Estimate of current percentage revenue)
Key Question:
Can we attract enough new members (without a fee) to offset a $500MM loss?
Each new member contributes $10 (1% of $1000 annual purchase).
(500MM/$10) = 50MM new members are needed
50MM new members is equivalent to 20% of the population (gut check)
Assessment/ Recommendation:
Based on these assumptions, increased membership equivalent to 20% of the
population is probably not likely. Do not drop the fee.
May want to consider varying the fee (sensitivity vs. new members)
9.7 Television Cable Company
9.7.1 Issue
You have been hired by the CEO of a department store that has numerous locations
in a major metropolitan area. She needs to increase the store's earnings over the next
year and has requested your help.
Relevant Information:
20 locations in the metropolitan and surrounding suburban areas (they are present in
every shopping mall).
The population growth of the city is flat
Overall, store revenue has declined slightly
They recently hired a consulting firm to streamline the back-room costs
How can you help?
9.7.2 Possible Solutions
Revenues have decreased for a reason
The streamlined costs may have caused revenue to falter
The revenue per store may differ - why?
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Increased competition?
Different consumer buying trends?
Start with Cost/Revenue Drivers:
Costs:
CGS
Personnel/ OH/ SG&A
Inventory holding costs, levels
Cost of debt
Other?
Revenues:
# of people shopping
Amount of purchase - $$
Frequency
Prices
Others?
You learn there is nothing drastically different (overall), so you turn to the individual
store level.
Questions:
Are certain stores more profitable than others are?
A. Yes.
Do the higher performing stores have any common characteristics such as size,
product mix, consumer demographics?
A: Yes, suburban stores are more profitable than urban stores. No, the
product mix is the same at all stores. Yes, the demos are different by
store.
Assumptions
The product mix may be more suitable and more profitable for suburban stores
The competition may be lower in the suburban areas (turns out not to be true)
The income level may be higher in the suburban areas
Product Mix:
What products are most profitable?
A: Appliances, tools, TV, Stereo, Jewelry - big-ticket items.
What products are less profitable?
A: Clothing, shoes, household items - low ticket items
Store by Store Sales/Demo's:
Do suburban Stores sell more big-ticket items?
A: Yes
What do the urban Stores sell?
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A: Clothing, household items, minor appliances
Are the demographics better suited for the mix in the suburbs?
A- Yes, higher income.
Assessment
Due to the identical product mix at each store and the varied profitability by item,
suburban stores are outperforming urban stores. Hence, the urban stores are hindering
earnings.
Potential Recommendations:
Re-configure the product mix by store (no sense holding excess inventory)
Assess the impact of the urban stores and determine the ramifications of closing
them.
9.8 Credit Card Division of Bank
9.8.1 Issue
Our consulting firm has been retained by a major bank to help improve the
profitability of their largest credit card offering. Their card (in the same class as a
Visa or MasterCard) provides average returns in comparison to the industry,
however, our client believes it can become more profitable. You need to analyze the
situation and make recommendations.
9.8.2 Possible Solutions
Opportunity to decrease costs or increase revenues - analyze drivers
Opportunity to vary the annual percentage rate or the annual fee
Benchmark competition for opportunities
Analyze cost and revenue drivers:
Costs Revenue
Marketing, SG&A, Personnel – Can not change Annual fee - currently $50
(Could
change)
Bad credit, theft, etc. - Cannot change Annual percentage rate = 14%
(Could change)
Other costs – Can not change Merchant fee = 1.5% (Can not
change)
Key Issues:
Cannot affect the cost structure, therefore have to increase revenues.
Only revenue variables available are changes to the annual fee and APR.
Competition:
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Interviewer tells you it is a very competitive environment - "move on".
Assumption:
Customers use the card differently, there may be different customer segments based
on the balance held, how quickly balances are paid off and the "need" for the card.
Case Interviewer suggests there are three distinct categories:
1. Pay-off in full every month
2. Hold small debt for short periods of time
3. Hold heavy debt for long periods of time (basically pay-off the interest) - 80% of
our
revenue
He/She then asks how you would tailor card services to each of these groups:
Recommendations:
Pay-Off in Full Each
Month
Hold Small Debt for Short
Term
Hold Heavy Debt Long
Term
Charge high monthly fee
Provide numerous services
(detailed reports, little
kudos)
Increase the APR slightly
Decrease the annual fee
Waive the annual fee
Increase their credit limits
Cash back programs, points
Access to case advances,
etc.
Key Issues:
These heavy debt card holders are the key to our profitability, it is imperative to get
them to sign up for the card (no annual fee), use the card (cash back, point systems)
and run up debt (automatic credit limit increases).
Note to Case Interviewer
As soon as the interviewee had identified the important drivers of revenue and cost,
the focus of the case was shifted to customer segmentation and tailored services for
each segment.
9.9 Movie Rental Business
9.9.1 Issue
Our client is a major entertainment company on the West Coast. One of their
divisions is a leading home video retailer. During the late '80's and early '90's this
division had a great run -opening 4,000 stores and realizing considerable profits. In
the last two years, both growth and profit have declined substantially. You have been
brought in by the CEO to assess the situation and provide recommendations.
Background: Our client's division is not unlike a chain of Blockbuster video stores.
The majority of their business is in movie rental with a much smaller portion in sales.
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9.9.2 Possible Solutions
Start with a simple: (Profit = revenue - costs) structure
Analyze the competitive situation
Analyze the "substitution" factor - how else are consumers getting movies?
Costs:
Revenues:
Cost of the new movies: (Actually decreased) # of rentals: (decreased, traffic
down)
Overhead: (No change) Price of rental: (No change)
SG&A: (No change) Sale of rentals: (decreased)
Leases, other: (No change) Accessories: (No change)
Key Learnings:
Costs have actually decreased, but not enough to offset the decreased store traffic.
Competitive Assessment/ Substitutes: (List potential causes of decreased
traffic)
New movie stores: (No real change)
New In-home sources - cable on demand: (Potential for future but no real current
affect)
Sales of movies for home use and collection: (Sales have increased dramatically)
[Once the important issues have been identified, the interviewer describes the
changing industry.]
I. When division was growing, it could buy excess numbers of the new releases to
satisfy customer demand. Later, they would send the excess copies to the new stores
as part of their "library" of existing tapes. With fewer new stores opening, this is no
longer an option therefore fewer new releases have been ordered. 2. Recently, the
studios have allowed new releases to be sold through warehouse stores (Wal-Mart) at
the same time they are made available to the rental retailers. Thus, many of our
customers are purchasing rather than renting. In addition, when customers rented a
new release, they quite often rented an existing tape from the library (additional lost
revenue)
Based on this industry outlook, what would you recommend for the division?
Provide a recap:
It appears as though the major issue facing the division is a reduction in store traffic
for new releases. This is mainly due to the sale of these same releases through
alternate channels. How can we regain store traffic or offset the rental loses?
Recommendations (these are just a few of the options considered):
Develop new, more convenient locations - kiosks, pick-up/delivery
Develop pricing/bundling formats combining new releases with existing movies
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Offer "rent to buy" programs - rent the first time, then have option to purchase
9.10 Auto Service Stores
9.10.1Issue
A successful chain of Canadian auto service stores (Autoland) has entered several
markets in the United States in hopes of duplicating their success in America. The
stores offer two services: 1. Retail sales of auto parts for customers who prefer to
perform their own maintenance. 2. A service center for fixing any automobile
problem, from an oil change to new transmission.
Since entering the U.S., Autoland has experienced $50MM in revenue with loses of
$20MM. The owner is considering pulling out of the United States. You have been
hired to determine if they can improve their performance or if they should exit the
market.
9.10.2Possible Solutions
Analyze the competitive situation
Analyze the market potential/ customer segments
Competitive Situation:
What is the competitive situation in Canada?
A: We are the major player (few local stores)
Are we providing the same services in Canada as in the U.S?
A: Yes
Do we have strong competition in the U.S?
A: Yes, a national chain of stores in the exact format as Autoland exists in the U.S. They copied
our Canadian format and have about 10 locations in every major city. They are very profitable in
all cities including our U.S. markets.
Assumptions: Due to size, I would guess they have superior buying power over
Autoland in the U.S. Is this true?
A: No, we have the same cost structure due to our presence in Canada. Assumption: The market
has potential due to the competitor's performance. Key is to determine why they are out-performing
Autoland.
Autoland Capabilities:
Assumption: We actually have two businesses under one roof, is one more profitable
than the other?
A: In Canada - no. However, in the U.S. we are profitable in retail sales and losing heavily on the
service center. Are the costs associated with each side of the business different?
A: Yes, the service center is much more expensive to operate, we have to pay mechanics and have
high fixed costs
Assumption: We are profitable in retail, but losing in service. We attract the wrong
consumer.
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Market/ Customers:
Autoland provides two services, are the customers for each service different?
A: Yes. The customers that shop for retails parts typically have lower to middle incomes and are
trying to save a few dollars by performing their own maintenance. The customers who utilize the
service center have higher incomes and no interest in fixing their own car.
Assumption: We are attempting to attract two distinct customer segments. Are we
doing this successfully?
A: We are not sure, how would you help us determine if we are?
Factors:
Marketing. A: We do the same as the competition
Pricing. A: Identical to competition
Location. A: Different, we located in the inner
cities to save money on leases.
Where is competition located? A.- Between the inner city and the
suburbs (on the border)
Assumptions/ Recommendations:
Our location is great for the retail sales business, but prohibits heavy use of the
service center due the distribution of income between the inner city vs. the suburbs.
In new markets, locate between the lower and upper income areas to attract both
segments.
In existing markets, move, or drop the service business and retain the profitable retail
portion
9.11 Sports Franchise
9.11.1Issue
A wealthy woman, Mrs. Wentworth, who is worth millions, wants to invest in either
the Cleveland Cavaliers (a basketball team) or the Cleveland Indians (a baseball
team). She is indifferent between choosing between the two teams, but would like to
maximize the profit from the investment. Which team should she buy?
Additional Facts
1. She wants to own a sports team: however, the interviewee must recognize that
there are other investments that she should consider.
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2. The purchase price is the same for both franchises. Let us say that there is a $100
million price tag.
3. The financing terms available to Mrs. Wentworth are the same, regardless of the
team she chooses.
4. The Balance Sheets of both teams are the same in terms of liabilities and assets.
5. Neither franchise owns the stadium. The interviewee must ask for this
information to be given credit.
6. Ticket Prices on average are $25 for basketball games and $6.50 for baseball
games.
7. The number of basketball and baseball home games is 41 and 81, respectively.
8. The stadium capacity is 20,000 for basketball games and 54,000 for baseball
games.
9. Utilization on average is 70% for both sporting events.
10. The interviewee should explore other streams of revenue but are irrelevant
(important streams are - licensing of apparel, concessions and parking) for
purposes of this analysis. It is important that interviewees recognize these as
possible sources of value to the investment.
11. The key is to figure out whether ticket prices can be raised. The interviewee must
figure out a model to answer this question. Possible sources of data - historical
sales patterns, comparable data for other franchises in other cities and overall
market demand. After exploration of this issue, it turns out that they cannot be
raised.
12. Examine if 100% utilization can be reached. Research shows that Cleveland
residents are indifferent. Do not give this information away, make the candidate
probe for it.
9.11.2Possible Solution
Everything cancels out except that baseball has more seats available. Thus, the
baseball investment has a potential for greater revenue.
Equation = # of seats * # of games * stadium capacity * utilization
9.12 Durable Goods Distribution Case
9.12.1Issues
SETUP
A large durable goods manufacturer (i.e. washing machines)
Sells products directly to customers (80% of sales)
Has six wholly owned subsidiaries that stock and sell products (20% of sales)
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What changes would you make to the organization to increase its value?
FACTS TO FIND
The market will not respond to advertising (i.e., the firm cannot create demand
pull)
Consumer purchase frequency is constant (i.e. buy one new every six years).
Consumers buy primarily based on lowest cost product.
Parent manufactures all equipment (parent’s manufacturing is not the scope of
this case).
Subsidiaries maintain all functions (were once bought by independent businesses,
then bought by parent).
Accounting
Order Processing
Sales
Management
Finance
9.12.2Possible Solutions
Would it be more efficient to provide central functions from parent, then diversified
functional operations?
Maybe, but how would you measure that value?
Study each subsidiary's functions and determine efficiencies to be realized. For
example, we could determine the number of labor hours for a transaction for the sub
and parent. Plot labor/units on vertical, units on horizontal. If parent is higher,
centralize the operations.
Problems with this approach?
Eliminating sales function and order processing at sub may reduce flexibility and hurt
customer service?
Maybe, but how would you measure this problem?
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Interview clients and determine the importance of flexibility and personalized sales.
9.13 Business Forms Case
9.13.1Issue
OVERVIEW
A manufacturer of business forms wants to increase profitability by using pricing as a
competitive weapon. The product line includes credit card receipts, multi-copy sales
receipts, warranty papers, invoice forms, etc.
The CEO has hired you to assess and make business recommendations, if possible.
You have ten minutes to interview the CEO before she leaves for a meeting. What
will you ask? What do you need to know? What is important? Can you make
recommendations?
HELPFUL INFORMATION (not to be offered unless asked)
MARKET: Market share in the Business Forms business is 4%. The market is
fragmented with many small local printers. The largest player has 5%.
MANUFACTURING: The firm is a ―world class‖ manufacturer. The company
has four regional plants (Midwest, East Coast, West Coast & Texas). The firm
has modern facilities and good cost controls already in place. The firm uses JIT,
SPC and other cutting edge manufacturing techniques. An internal study
indicates that the firm is the low cost producer in the industry.
PROFIT CENTERS: Manufacturing and sales are profit centers. Transfer prices
negotiated between manufacturing and sales are in place. The sales division sets
the prices to customer.
DISTRIBUTION: Extensive information system is in place. The system handles
over 100 daily orders. The UPS delivers most orders within two days for
standard items. Custom orders shipped between one to three weeks depending on
complexity and quantity of the order. The company does not own delivery
trucks.
SALES FORCE: A two hundred person sales team is in place that focuses on
important accounts. The sales force is paid on commissions. A salesperson
receives 25% of all revenue above a standard cost. Contacts primarily via
telephone, supplemented with occasional visits. All sales are handled through the
sales force.
MARKETING: The firm only uses direct mail fliers and catalogs. Client survey
reveals that the company is known for the ―high quality, wide product range,
excellent return policy and its ability to fulfill any order.‖ The firm is able to
deliver larger orders faster than competition when asked for rush delivery.
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COST STRUCTURE: Not important. However, the materials cost is less than
the shipping cost or fees charged for customized work.
Possible Solution
One possible solution is to use price as a competitive weapon, but not necessarily to
increase market share by lowering price. The firm should exploit rush order
customers by raising prices on less price sensitive customers. Use ―Time Based
Competition‖ to increase profitability.
Use ABC inventory analysis to get a ―better‖ standard cost and empower the sales
force to maximize revenue. The firms should constantly monitor standard costs
because of volume fluctuations.
9.14 “High-End” Pots & Pans Company Case
9.14.1Issue
OVERVIEW
The CEO of a Pots & Pans manufacturer hired you to solve her problem:
Foreign competitors are gaining market share
Products are barely profitable at market prices
Pots & Pans is considered to be of premium quality, sold primarily in sets and is
expensive. According to the CEO, a typical customer is a newly wed who places
pots & pans on the registry at Hudson’s or Marshall Fields.
You have ten minutes to interview the CEO before she leaves for a meeting. What
will you ask? What do you need to know? What is important? Can you make
recommendations?
HELPFUL INFORMATION (not to be offered unless asked)
MARKET: Market share in overall market is 10%. The market share in high-
end pots & pans is 35%.
MANUFACTURING: The firm has one plant in North Carolina
DISTRIBUTION: Products are sent to local warehouses and then to six regional
warehouses and than to the departmental stores. No products are shipped directly
from the factory. The company and not customer pay shipping costs.
RETAIL OUTLETS: The product is carried in high-end department stores. Each
store carries one set of each product line for display and one set for inventory
purposes. The reason for the low inventory levels is that the product is bulky and
expensive to store. Department stores demand quick replacement upon sale.
MARKETING: The firm uses little advertising. The firm has a three person sales
staff that works with department store buyers. Department store buyers know the
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company and its products well. Little discussion or negotiation required. Repeat
sales equal almost 100% of the business.
COST STRUCTURE:
Materials - 30% Labor - 20%
Var. O/H - 10%
Fixed O/H - 20% Shipping/Packaging -
20%
9.14.2Possible Solutions
The six regional warehouses were setup in the 1950s when long distance delivery
times were slow and costs were high. With the advent of FedEx, the cost of
delivering products quickly decreased. Eliminating warehouses leads to O/H savings
that are far greater than the increased shipping costs. Inventory and outdated
inventory would also decrease.
Distribution is a trade-off between cost and service level. The higher the service
level, the lower the cost (more inventory pools, warehouses and shipments).
Therefore, you need to ask where the inventory is being held. It turns out that stores,
since they sell so few of these pots and pans hold no inventory and thus require next-
day replenishment after a sale. The next thing you need to know is where the
warehouses are located, since the closer they are to the stores the cheaper distribution
costs will be. Your client has six warehouses - two in Charleston, two in Philadelphia
and two in LA from which he services the whole country.
A quick way to solve this case is to realize that if stores require next day service from
these six warehouses, the only way they can do this is by shipping overnight at a
premium rate. You can save them a bunch of money by closing down a few
warehouses and shipping everything from the plant in Charleston by UPS (after
negotiating a volume rate discount). This can be confirmed by asking for the annual
sales, which turns out to be 10,000 units. When you divide this into the $1 million
distribution cost you discover that they are pay $100 to deliver a pan to the store.
Beat this figure and you have earned your exorbitant fee.
9.15 Paper Products Manufacturer Case
9.15.1Issue
OVERVIEW
Your company makes legal pads, notebooks, and other standard paper products.
Your firm uses a sixty-year-old plant in Gary, Indiana that has been producing paper
for 60 years. The firm purchases 100,000 tons of white 20lb paper to produce its
product lines.
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You are the purchasing agent responsible for buying the white 20lb paper. Due to
recent developments, you have a new option to buy from Brazil, instead. Currently,
you buy from a US company in Oregon. Your company values long-term supplier
relationships. The Brazilian firm is offering to sell at $.35 a square yard compared
with the $.38 a square yard from the current supplier. The firm will consider
switching if it can gain a long-term cost advantage.
How do you determine if the Brazilian company has a long term cost advantage over
the US company? What would you need to know? Why would it be important?
What must be considered? How would you find out what you need to know?
HELPFUL INFORMATION (not to be offered unless asked)
Possible Items you would need to know!
Cost Structure
Facility age, technology used, amount invested
Level of integration (does the firm own its own forests?)
Control over key suppliers (wood or chemical suppliers)
Shipping/Distribution costs
Quality of Brazilian paper over US paper
Sales volume
Company and Industry capacity
Capacity Utilization
Political stability in Brazil
Exchange rate fluctuation and ability to hedge
MANY MORE!
How to find out what you need to know!
Use Lexis/Nexis , ABI Inform
Ask Brazilian and US company for information and study the annual reports
Ask important suppliers for information.
Examine Brazil through Brazilian governmental reports
Look for analyst reports on the industry
BONUS QUESTION
A price war continued until the Brazilian company stopped lowering the price. The
firm stopped lower its price once it reached $.25 a square yard. Why did the
Brazilian company stop lowering its price?
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Realized that they were losing the price war
Reached variable cost level (incremental business)
Found more profitable use for capacity, maybe another customer.
9.16 Pianos
9.16.1Issue
This case is one of those ―are you kidding, why would you ever want to ask that in an
interview‖ cases, but -- it was asked, and similar cases always seem to pop up. The
case question is, ―How many pianos do you estimate there are in the United States?‖
(Similar cases involve American Express cards, gasoline stations, etc.) In this type of
case, the right number is not necessarily the right answer for the interviewer. Like all
cases, methodology is key.
9.16.2Possible Solutions
Along with a basic framework methodology, certain ―commonly known facts‖ should
be in your hip pocket when going into case interviews. One of these facts is the
approximate population of the United States. This fact can serve as your starting
point for cracking this case.
1. Split the population (~250 million) into households. Make an assumption about
the ―average household,‖ say three, and come up to about 84 million households.
2. Now, split the number of households into income quartiles.
Quartile # Households
Upper 21 million
Mid-Upper 21 million
Mid-Lower 21 million
Lower 21 million
3. Assign a percentage to each quartile to calculate the number of households with a
piano (assume households usually do not have more than one piano each).
Quartile # Households % With Piano # Pianos
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Upper 21 million 20% 4.2 million
Mid-Upper 21 million 10% 2.1 million
Mid-Lower 21 million 5% 1 million
Lower 21 million 0% 0
Using this methodology, the ―answer‖ to the case would be 7.3 million.
Better Answer: You have just estimated the number of pianos in homes in the United
States. For a ―better answer‖ to the question, you should state that schools, music
halls, stores need to be considered as well. Be careful how you word this, the
interviewer could very well say -- Well then, how would you come up with those
numbers?
Now...
Now that you have been able to calculate the number of pianos, the interviewer may
choose to expand on the case. (The number itself does not matter so much as the
approach.) For instance, ―given the number just calculated, how many piano tuners
do you think there are in the United States?‖
The solution to this question can be structured very similar to the one above.
1. Assign a ―number of times tuned‖ to each of the income quartiles. Assume that
the upper quartile tunes their piano once every year, the next quartile once every
three years and the next quartile once every ten years. This will give you the
following:
Quartile # Households % With Piano # Pianos # Tunings
Upper 21 million 20% 4.2 million 4.2 million
Mid-Upper 21 million 10% 2.1 million 0.7 million
Mid-Lower 21 million 5% 1 million 0.1 million
Lower 21 million 0% 0 0.0 million
2. This tells you that five million pianos need to be tuned each year. Assume a
piano tuner can tune four pianos a day for 250 day a year, or 1000 pianos a day.
3. Using this methodology, the number of piano tuners that you come up with is
about 5,000.
9.17 Coke vs. RC Value Chain
9.17.1Issue
There is very little set-up necessary for this case. The case is used simply to test the
interviewee’s ―assumption‖ skills and reasonable hypotheses. The interviewer does
not really need to provide a great deal of detail for this case to be used effectively.
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The interviewee is given a piece of paper with the following representation of Coca-
Cola’s value chain.
R&D Manufacturing Distribution Marketin
g
OHD Margin
Syrup Bottling ―Base‖
DC
Local DC
$.05 $.15 $.10 $.05 $.20 $.25 $.10 $.10
Price = $1.00
Given Coca-Cola’s value chain, the interviewee is asked to formulate the value chain
for a secondary manufacturer (use RC as an example).
9.17.2Possible Solutions
One approach to solve the problem would be to start at the end of the value chain
with the price of RC. The interviewee may want to start here because this may be a
―known‖ element (been shopping lately?). Now that the easy part is over, the next
step is to assign percentages of the price to each portion of the value chain. For this
part, the interviewee is expected to look at the percentage that Coca-Cola applies, and
make reasonable inferences as to how Coca-Cola differs from RC and what effect
this will have on the weighting for RC’s value chain.
Reasonable assumptions might be made about the following issues:
Can RC afford to fund as much R&D (as a percentage of price) as Coca-
Cola? Is RC a company which wants to be first in with a new product or a
fast follower?
Are in-house syrup production and bottling costs (%) really going to be
different between companies?
What type of distribution system would RC have compared to Coca-Cola?
RC is a local brand so the assumption might be made that RC can deal only
through the local DCs and do not have a large ―base‖ DC.
Does RC really do a lot of marketing by themselves or does it simply ―ride
the coattails‖ of Coca-Cola’s marketing?
If RC has similar machinery requirements, do they have to spread their OHD
over fewer products / less volume? RC’s percentage could very well be
higher than Coca-Cola.
The candidate should follow this line of ―assumption and inferences‖ until the
percentages are in place. Then the interviewee can simply apply the percentages to
each portion to arrive at a cost.
The interviewer can now ask if anything looks strange about the value chain or if you
would suggest a different way for RC to be doing business. (The interviewer can then
judge whether the assumptions are reasonable or whether the candidate sounds like
he has never even seen a bottle of Coca-Cola before.)
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One possible answer to this (think back to Crown Cork & Seal) is for RC to start
their value chain at a later stage in the process. If the syrup production and bottling
costs are too large of proportion of their costs, they could consider buying syrup from
someone else and use an outside bottler.
Again, this case, like most others, has no ―right‖ answer. The interviewer will just be
looking for the reasonableness of your approach and assumptions. Good luck!
9.18 Fertilizer
Issue
Your client is an agricultural chemical company. They produce fertilizer, which is a
cyclical industry that is currently in a downward cycle. Lately, Russia has been
selling fertilizer at a very low price. The firm’s plant in Louisiana blew up costing
them $600 million in damages. The plant produced $2 billion of product revenue
with $100 million in profits per year. The CEO resigned in shock and the new CEO
has called you in to determine what they should do.
HELPFUL INFORMATION (not to be offered unless asked)
Fertilizer uses a simple manufacturing process -- perfect commodity product
Farmers are the primary customer of the product
International markets are growing at a high rate relative to domestic demand
The firm is the low cost producer in the industry
They have a strong sales force in place
Transportation costs are in line with the industry average
Customers say it is cheaper to buy their fertilizer in LA and ship it themselves. In
other words, the final price charged to the farmers is very high compare to the
industry
Possible Solution
Transfer pricing (from manufacturing/production to distribution to sales) is
adding significant additional costs to the product. Therefore, the product is
becoming less competitive in the market.
Although they are the low cost producers, they are being priced out of the market
by this additional cost structure.
The sales force may not be adding the value that the company thought/needs in
order to be successful.
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9.19 Airplane Manufacturer
9.19.1Issue
You are consulting to a CEO of an airplane manufacturer. In the last couple of years,
you have gone from being number one in market share to number two. In addition,
another company has announced that it will be entering the business and is presently
tooling up its plant. As a consultant, what are the concerns your client might face?
What additional information might you want to find out, and what recommendations
would you make?
9.19.2Possible Answers
As a consultant, you are concerned with three essential items:
1. The condition of the airplane manufacturing industry,
2. Why the firm has lost market share and,
3. How to prevent the new entrant from stealing market share.
The airplane industry's demand is a function of travel among two classes: business
and leisure. Business travel increases as a result of market globalization. Leisure
travel increases with growth of middle and upper classes. Business travelers are
primarily insensitive to price, leisure travelers are very price sensitive.
The current competitor; a comparison:
It turns out that the competitor's planes are cheaper to operate because they are more
fuel-efficient. The consultant should ask as a strategic question whether the firm is
interested in the manufacture of more fuel-efficient planes. The answer would depend
on the future of oil prices. The consultant should also consider whether it might be
better to try to compete on the basis of price, safety and service.
Prevention of a new competitor gaining share:
Key: creation of barriers to entry. Long-term contracts are pre-emptive. High
concern, on the part of purchasers for a proven safety record of accomplishment.
9.20 Mysterious Audiocassette Market
9.20.1Issue
Your client is the manufacturer of audiocassettes. They have hired you to figure out
why they have been experiencing an alarmingly poor sales year. They want you to
determine the problem, and then provide a possible solution.
Information to be divulged gradually
Mature market: 5-6 major players.
Client used to have a steady 30% market share, (second largest in industry). Now
the firm has a 44% share.
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Your client offers a full range of audiocassettes -- from low bias to high
bias/metal.
Your client is also using the most sophisticated and quality driven cassette
manufacturing techniques.
The firm has been losing sales reps yet loyal reps claim that sales are at record
high levels for the year.
The firm historically targeted two consumer groups -- older, middle income
enthusiasts and high school rock 'n roll stereophiles.
Recently your client has been losing younger target market customers.
The firm has traditionally managed its relationship with retailers well. However,
the firm has recently lost several major accounts due to its inability to move (the
firm's) products.
Possible Solutions
The combined market characteristics of sales decline and increased market share
suggest that competitors are abandoning this market due to a new and better
substitute technology (the compact laser disk, for example.)
Your client’s historically flat market share suggests brand loyal customers. Moreover,
your older target market is loyal -- perhaps less likely to switch to the new technology
in the short run. Assuming (1) that your client wants to be a provider of this new
technology and (2) has the capacity to manage a primary supplier position in its
traditional line of business -- short-term. The firm should target the older customers
as well as other segments that are less likely to switch over to CD's, for the long-
term. The firm should consider new sources and production necessary to exploit this
new demand. The firm should also explore the opportunities and constraints of
developing or acquiring the new technology.
9.21 Windmill
9.21.1Issue
You produce a windmill with an accompanying electric generator (generator
harnesses the power produced by the windmill). The windmill costs you $10,000 to
manufacture. How much are your customers willing to pay for it?
9.21.2Possible Solutions
Porter's five forces dictate that industry rivalry, potential substitutes, and
supplier/buyer power need to be assessed to determine the market price. This could
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be an appropriate start. To narrow it down, let us assume competition and
demand/supply levels are far beyond your capacity.
We must therefore examine other components. The $10m cost is irrelevant. You have
no idea what this product is worth to anyone. Assessing the value of the benefits of
the product is perhaps the next step. The closest substitute to the windmill is
probably utility produced electricity. Therefore, inquire how the electrical utilities
measure and charge for the electricity they provide. Convert the windmill's output
along these terms and assert a cost/benefit estimation of how much potential
customers would be willing to pay for it. Other considerations upon which to
discount the value might be reliability, maintenance, etc.
9.22 Bank of Luke
9.22.1Issue
Mr. Check is the Director of Retail Lock Box Services for the Bank of Luke, a
medium-sized Midwestern bank. The Retail Lock Box Department consists of 100
clerks and eight managers and Supervisors. Each year, in addition to handling of
retail lock box transactions, the Department generates $1.5 million of fee revenue
processing retail credit card and mortgage payments ("items") for 15 commercial
accounts. The bank has many other commercial accounts that use other companies
for their item processing. In fact, the Bank recently lost the item processing business
of one of its largest accounts to Vader Inc., the largest item processor in the U.S.
The item processing industry has undergone dramatic changes in recent years. Types
of items processed include credit card, mortgage, and utility payments (checks),
airline tickets, and coupons. In the past, these items were usually processed by the
issuing company (e.g., airlines would process their own tickets) or by bank item
processing departments like the Bank of Luke's. At banks, the processing of payment
items was done more as a service to bank customers rather than as a profit-making
endeavor. Hence, it received little focus from management. Historically, verifying the
correctness of incoming paperwork and manually sorting, filing, and totaling the
items was performed by only the largest banks which were highly automated.
Companies specializing in item processing have emerged in the past ten years. Vader,
Inc., the largest such company is a subsidiary of a small bank in Georgia. Each year
Vader processes millions of airline tickets and retail payments for hundreds of
companies, most of who are not customers of its parent bank. Vader uses high-speed
processing equipment and is highly automated. Processing time is rapid and
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processing costs are low. In fact, because of this speed advantage, the parent bank is
beginning to profit from the float of checks processed. Although industry-wide, a
majority of the items are still processed by the issuing company or by small
processors. Within five years, it is expected that most of the business will continue to
migrate to Vader and other large processors. It is expected that Vader and the other
large processors will dominate this market.
Vader has a significant cost advantage over smaller operations, such as the Bank of
Luke, because of the great economies of scale they gain from processing such
volumes of items. In addition, Vader benefits from a more constant workload by
processing both airline tickets and retail lock box receipts. Airline tickets have few
peaks and valleys, whereas mortgage payments always peak early in the month with
very low volumes the rest of the month. Mr. Check believes that Vader quotes prices
20 cents per item to large prospective customers while the Bank of Luke processes
items for 40 cents per item.
The President of the Bank, Mr. Kenobi, has asked Mr. Check to evaluate how the
retail lock box service can be made profitable; the service lost $100,000 last year.
Mr. Check believes that the bank must offer retail lock box services, and it must
price the service to be competitive with companies such as Vader. Recognizing that
outside expertise is needed, the President has given Mr. Check a budget to be used to
hire a consulting firm. Mr. Check has asked you to visit his office to discuss the
proposed engagement. While walking to his office, you observe that the Bank's retail
lock box operations remains primarily a manual system, with limited use of modern,
high-speed equipment and methods. Once in Mr. Check's officer, you note a picture
showing the Department's staff in 1965; Mr. Check was a supervising clerk at that
time. After reviewing some background information with you, Mr. Check asks you
the following questions:
Question One
What do you see as your (the consultant's) role at the Bank of Luke?
Question Two
What steps would you take and what information would you gather to diagnose the
problems facing the Retail Lock Box Department and to develop solutions to those
problems?
Question Three
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From what you now know, what are the problems facing the item processing service
and what recommendations would have the greatest impact on the performance of the
Bank of Luke and the item processing service?
9.22.2Possible Solutions
In this case, we want to test the candidate's ability to handle a case in which the
events appear hopeless until the end of the interview when an apparently easy
solution (automation) is made available. The candidates should challenge the general
premise of the case, and not simply believe that the business is necessary just because
Mr. Check says so. We also want to test creativity with this case. We purposely leave
the case rather vague by not suggesting any particular actions and by not offering
much data. The candidate should be given time to think about this case and propose
solutions which are not readily apparent
Why not sell the business of these customers?
Why not offer increased services to justify higher fees?
What is the strategic plan for the bank and how does this unit fit
into those plans?
What does Mr. Check feel his unit should be generating?
(After all, $15,000 per employee is pretty low!)
Has he considered acquiring other bank's customers to increase the
economies of scale in his own operation?
This case can also be used to discuss cost cutting. Again, creativity and sensitivity to
the real issues should be the goals of your probe; cutting 25 percent of the staff is too
obvious and too easy.
9.23 Candy Company
9.23.1Issue
Your company is a rather successful producer of candy. It originally started as a
single product line. The production process consists of two basic activities:
manufacturing and packaging. The firm has also expanded its sales through
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product line extensions. Management is concerned that sales are growing but profits
are not increasing at the same rate. What can you recommend?
9.23.2Possible Solution
This is a revenue vs. cost exercise. Margins are shrinking.
Find the critical components of cost: raw material, labor and fixed cost. Raw
materials are commodities with cyclical prices that have fallen in recent years but are
expected to swing up (as you have guessed, makes the problem worse). Labor and
fixed capital has increased per unit over-proportionally compared with ten years ago.
Upon further examination, you will find out that the company's controlling system is
still focusing on the manufacturing part of production and the cost explosion occurs
in packaging. (Candy is candy and the product line extension is primarily an issue of
different packaging.) Controlling schedules manufacturing which is rather efficient
already but not packaging, thus causing slack in labor and fixed capital (small batch
sizes. high setup times).
The firm should consider reducing the number of product lines and introducing
controlling/scheduling measures for packaging. However, we still need to consider
whether the company's customers (i.e., retailers) are willing to accept the reduced
product line.
Revenue killers: Concentration of retailers, trade brands, retailers demanding large
introductory discounts for new products and high failure rate of new products.
The firm should streamline product lines, reduce low margin trade brand production,
emphasize pull marketing, and reduce introduction rate for new products.
9.24 Skyscraper
9.24.1Issue
Your client is going to build a skyscraper, but is not sure how tall it should be. How
should he decide how tall to make the building?
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9.24.2Possible Solution
This is an economic supply/demand mind teaser. Clearly, you do not want to lose
money on the deal. The building will house tenants, who will pay to reside there. The
costs of building and maintaining the structure (both fixed and incremental by story)
needs to compared to the revenue generating capacity of the project. When marginal
revenue equals marginal cost, the firm should stop adding stories to the building.
9.25 Consulting Firm (I)
9.25.1Issue
Your are the managing director in a large international consulting firm. The
traditional strengths of your firm have been solving strategy and organizational
issues. Recently, you have noticed an increasing number of your firm's proposals are
rejected because of a lack of information technology expertise in your firm. So far,
your firm's growth has been strong enough that proposals lost have not hurt annual
earnings. Nonetheless, you are becoming increasingly concerned about the need to
develop the firm’s capabilities in information technology.
Assuming your concern is valid, what reasons will you provide to the other partners
about the need to acquire information technology skills?
Assuming you are able to convince other partners of the importance of IT expertise,
what steps would you take to rapidly build IT capacity in this area?
What are the major risks in executing an IT capacity-expansion?
9.25.2Possible Answers
Good answers focus on the value of IT to clients. Discussion topics should include
the increasing importance of information in business, strategic value of information
and information loss, the importance of information systems for implementing new
organizational structures and management control systems.
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Better answers focus on the costs of losing clients to competitors. Discussion topics
should included the incremental costs of having clients talking with competitors
about IT problems and the risk of losing new clients by not being able to solve a
problem.
Good answers will focus on various methods to build expertise. The methods may
include buying expertise by acquiring another firm, raiding IT practices of other firms
for a few key consultants, building capacity through recruitment of IT experts and
training them to be consultants, building capacity by training current consultants in
IT practice skills and establishing a strategic alliance with a IT boutique firm.
Candidates should discuss the pros and cons of each method. Discussion points
should address the impact on firm's current culture, the cost to the firm and the time
needed to build expertise.
Better answers will realize the importance of stimulating client demand as capacity
builds through seminars, articles, strategic studies in IT areas...
Good answers depend on the expansion methods discussed, but an important issue is
the loss of the firm’s focus on just strategy and organizational issues.
Better answers will focus on the difficulty of implementation in IT; rapid
technological changes in the IT industry require significant ongoing training and
development costs; new practice cultures may be significantly different from current
culture. These issues could be intensified if "external experts" are brought into the
organization.
9.26 Cosmetic Company in Europe
9.26.1Issue
Eurocos Inc. produces and sells various cosmetics products in several European
countries. The company's different brands are well established in the markets. The
various products are quite similar in terms of raw material and production.
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The company has been doing very well in the past, however profits have been
shrinking in recent years. The CEO of Eurocos Inc. thinks he should change his
strategy. He asks you if this is a good idea and what he should do next.
Additional information:
* The industry has many small to medium size companies.
* A few big companies own several brands.
* Many small to medium size brands.
* Eurocos produces all products in all countries
* Transportation costs are small (see operational part).
Possible Solutions
What is the structure of the industry? -- Highly fragmented industry with the
following characteristics:
* Low entry barriers (small setup costs...).
* High product differentiation (many ways of differentiation).
* Diverse markets, customer needs (language, complexions).
* High barriers, tariffs, customs exist between geographical markets
How can fragmentation be overcome and is the strategy feasible for Eurocos?
Learning curves present -- Yes
Standardize market needs -- No
Separate the commodity aspect of the product from fragmenting aspect -- Yes
Changing environment: reduced tariffs
The firm should consider consolidating production while keeping the marketing and
branding nationally decentralized.
Pros:
Lower costs in production (better sourcing, longer runs, quality)
Optimizes locations (interest rates, wages, labor)
Learning curve of running a more complex plant and logistics (see also Cons)
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Keep "fragmented" marketing required in the market
Total inventory decreases (safety stock at original plant locations can be pooled
centrally)
Cons:
More complex central operation
Increased logistic complexity
Transportation costs increase
9.27 Semiconductors
9.27.1Issue
The domestic semiconductor industry is beleaguered - brutal price competition from
the Japanese, accusations of "dumping‖ against the Japanese, etc. Domestic
semiconductor manufacturers are clamoring for protection from Washington, and
some of the public policy solutions being proposed are research consortium
sponsored by the government, trade restraints, etc. You are a consultant at a major
firm. You are concerned that the public policy debate ignores basic issues regarding
industry economics and whether the solutions being proposed will solve the problems
faced by your clients. You know that each generation of memory chips lasts only four
to five years. What are some of the factors you will consider while looking at the
economics of the industry and how might they impact the idea of shared research by
U.S. manufacturers?
9.27.2Possible Solutions
What are the cost drivers in the industry? (e.g., The split between fixed and variable
costs involved.) The basic issue to be determined is that it costs huge amounts of
money to be a player - roughly 250m in research and 600m for each plant. This
increases exponentially for each succeeding generation of memory chip. Therefore,
fixed costs are high.
Negligible variable costs. Cut-rate volume-oriented pricing - marginal cost of an
additional chip is minimal. Semiconductor firms need access to huge amounts of
capital on a continuous basis to survive for the long term.
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Raise pros/cons/issues of government participation in this issue. Is government
involvement even feasible? What will be the priorities for the scarce government
resources? Will the relaxation of anti-trust laws help? The candidate will also need to
consider foreigner's access to cheaper capital.
Finally, what will shared research accomplish?
9.28 Airline Industry
9.28.1Issue
Historically low returns and stiff competition characterize the airline industry. In the
early years after deregulation, discount carriers like People Express sprang up. Years
later, the discounters have gone out of business. In a price-competitive industry, why
is it that the higher-cost carriers were able to survive and the low-cost ones were not?
9.28.2Possible Solutions
Characteristics of discounters:
Low fares
Limited service.
Characteristics of major carriers:
Higher fares but better coverage and service
Hub systems
Full service capabilities with larger volume base.
Competitive moves by major airlines included the innovative use of information
technology for yield management and differential pricing. The larger airlines priced
every seat individually based on continuously monitoring of demand/supply. They
wooed leisure customers with fares lower than discounters and charged more from
business travelers (indifferent to price but sensitive to service and frequency). The
larger airlines stole the discounters' market and forced them out of business.
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9.29 Oil Tanker
9.29.1Issue
Your rich uncle has just passed away and left you with three small oil tankers in the
Persian Gulf. How do you determine how much they are worth?
9.29.2Possible Solutions
This problem involves the interplay of supply and demand forces to determine the
value of the tankers. The nature of tanker supply will be revealed by defining the
different tanker types (in layman’s terms: small. medium, and large) in the industry
and the cost-related prices associated with employing each type. In effect, a step-
function supply curve rsults for the industry with each step representing a different
tanker type. Demand for the services of tankers is assumed inelastic due to refinery
economics dominating the purchase decision. It will turn out (by carefully drafting
the supply/demand curves) that at the given level of demand, only large and medium
tankers are put into service. This renders your late uncle's small tankers suitable only
for scrap at the present time.
9.30 Fertilizer
9.30.1Issue
You have been hired by a fertilizer manufacturer to help them out of a difficult
situation. Their market share and profits are declining and they cannot figure out
what is happening. What are you going to do?
Possible Solutions
These are some of the basic issues to be flushed out:
Fertilizer is a commodity and consequently the basis for competition in the industry
is on a cost basis. Who are the major players? What is their cost position vis-a-vis
yours? It turns out that your client is the high-cost producer
Why is your client the high-cost producer? Examine the inputs to the process and
analyze each one vis-a-vis your competitors (a long drawn out process). Are there
economies of scale and where do you stack up on that dimension? It turns out that
you are comparable on all dimensions except for a critical raw material (phosphate).
You also do not have any scale advantages. Again, you will have to flush this out
with your questions and approach.
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Examine critical issues relating to your disadvantage in raw material supplies? Why
is it that you are at a disadvantage? It turns out that you probably cannot overcome
this disadvantage. What are your alternatives? (If you got this far, you are probably
doing fine!). Looks like you would try to explore the possibility of competing on a
scale basis. What do you look at to analyze the issue?
9.31 Retail Advertising Pricing
9.31.1Issue
You are the new retail-advertising manager of a large daily newspaper. This morning
you received a call from the advertising director (your boss). He sounded extremely
worried about the retail advertising division's performance. (Naturally, he does not
explain why, assuming that a hotshot like you would by now be totally familiar with
the status quo!) He has to attend a meeting of senior executives convened by the
publisher where he will have to defend the advertising department's performance. He
also wants to make a big splash by presenting a new "strategic pricing methodology"
aimed at achieving "value-based differentiated pricing."
9.31.2Possible Solutions
The interviewee must first find out the corporate profitability objectives. Assess gap
between actual departmental performance and assigned targets. Examine both
revenue and cost issues. (The candidate will discover that revenues have gone up
steadily over the past few years. Further, costs have not risen significantly. So, why
worry?) Apparently, corporate pressure to improve bottom-line results has led to
steep advertising price increases. A classic demand-curve scenario has led to greatly
decreased cumulative ad volume with potentially serious long-term consequences.
Examine competitor pricing and customer price sensitivity. Discuss heterogeneity in
advertising customers based on business size, breadth of product line, price-point,
etc. The candidate must understand advertising attributes of importance to different
segments (e.g., color, size, frequency, discounting, etc.). Use difference in needs of
customers to implement prices based on appropriate advertising service needed.
9.32 Automobile Industry
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9.32.1Issue
Your client, one of the big three automakers in Australia, has over the last few years
under-performed relative to its competitors as measured by profitability. All three
company’s current car models are "badged" Japanese designed cars (i.e., they are
products of joint ventures with one of the smaller Japanese automobile
manufactures). The Japanese market is much bigger than the Australian market.
These cars are then sold in both Japan and Australia, the only difference being the
place of manufacture and the model names (i.e., badges). You have been asked to
establish why your client has performed poorly relative to the competition.
9.32.2Possible Solutions
Explore possible reasons for the under-performance - dissimilar products or
production leading to the under-performance? - Different market segments? - Poor
sales/ distribution? - Interior product? - High general expenses (admin, marketing,
etc.)? - High cost of production?
Given that the reason for under-performance is the high cost of production, the
candidate should establish the sources of high costs relative to the (other auto
makers. using:
- Management accounts.
- Published financial accounts.
- Data from your American holding company.
- Reverse engineering.
NONE OF THE ABOVE HELPS! Don't panic, you know the solution of the problem
has something to do with cost so... determine what makes up the costs and their
relative importance?
- Labor costs.
- Raw materials.
- Manufacturing overhead.
- Design.
Given that design costs are by far the most important component of costs, explore the
relevance of the Japanese connection?
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- Are the terms of out joint venture different from our competitors? - It turns out that the
terms are all similar?
- What are the terms of the joint venture?
- Share of design costs pro-rated between the parties based on number
of cars sold respectively?
- Does our car cost more to design than our competitors?
Although the answer to the last set of questions are negative, the solution is at hand.
To recap, your client sells a similar product, in similar amounts and to similar
markets in Australia. Your Japanese partner incurred similar design costs (in absolute
costs). The key lies in your discovery that design costs are pro-rated. A line in the
description of the problem that mentioned that your client's partner is one of' the
smaller auto manufacturers in the huge Japanese market. Thus the design costs
defrayed by the Japanese partner's sales in Japan are relatively small and your client’s
share is significantly larger than the Japanese counterpart.
9.33 Scientific Industry
9.33.1Issue
A manufacturer of scientific instruments- is experiencing declining sales in its major
product line. Why?
9.33.2Possible Solutions
Here are some questions that may help isolate the important issues:
l. Describe the instrument and what it does. (Goal: gather background information
on the product).
Response: The instrument, call it Y, is able to perform elemental mapping; that is, it
is able to determine the specific composition of material placed in the chamber for
observation. Y is an accessory for larger and much more expensive instrument that
functions almost exactly like a microscope, which we will call X.
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2. What other products does our client manufacture? (Goal: gather background
information on the client).
Response: They recently began manufacturing X, and they have begun producing an
unrelated product.
1. Can these instruments be used separately and are they ever sold separately?
(Goal: understand the sales process and the potentially interactive role of the X
and Y sales forces).
Response: X can be used by itself, but Y is essentially dependent on X for its
operation. Consequently, except for replacement sales, Y is rarely sold individually.
In fact, X's sales force will frequently recommend that a buyer purchase a certain Y
while buying an X. Two years ago, over 30 percent of our clients sales were
generated by a manufacturer of X.
2. What is the current percentage? (Goal: determine whether this could be a cause of
the sales decline).
Response: It is currently around 5%.
3. Does our product X compete with other manufacturers of X and particularly the
manufacturer that was selling our Y? (Goal: understand reasons for our friendly
X manufacturer stopping promotion of our product).
Response: Yes, our X does compete directly with other Ys and our client introduced
the product about one and a half years ago. (You have discovered a significant
portion of the sales decline).
4. How does our product compare to other Y's? (Goal: determine whether others are
beating us in technological or other product features).
Response: Our client's product is regarded as one of the best in the market.
5. Is the market for X and Y growing, shrinking or flat? (Goal: a shrinking market
could be a good explanation for declining company sales).
Response: Both markets are flat.
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8. Who uses X and Y? (Goal: determine market segments).
Response: There are two basic user groups: industry - primarily semiconductor
manufacturers, and academia, in research labs. What we have noticed lately is that
the specific users in each of these groups, who also happen to be the primary buyers
have become relatively less sophisticated. In other words, they are hired just to run
the instruments and therefore know less about their technical qualities. These buyers
have become even more dependent on the sales forces. What has happened is that our
client alienated itself from other manufacturers of X at a time when a strong
relationship was becoming even more important than it used to be. The buyers are
relying more and more on the X sales force who is typically called well in advance of'
the Y sales force. (The interviewer will not likely give you all of this information at
once -questions about the buying process and changing decision makers would have
brought it out.)
This is the second part of the main reason for our clients declining sales. In addition
to ruining our relationship with a manufacturer of X by producing our own, we
happened to do so at a time when relationships became even more important.
9.34 Aluminum Industry
9.34.1Issue
Your client is a leading manufacturer in the aluminum industry. Because aluminum is
a commodity, relative cost position is the primary source of competitive advantage.
As part of a strategic review, you have been asked to construct an industry cost curve
(cost/kg of aluminum produces vs. industry supply), for various plant-to-market
combinations. There are five major players in the industry, supplying six major
geographic market segments. Your model should be flexible enough to enable
various future scenarios to be run.
9.34.2 Possible Solutions
How to estimate competitors cost management?
- Financial accounts.
- Direct estimates by client management.
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- Indirect estimates by client management.
How to simulate the market mechanism?
- Determine what kind of market structure exists - perhaps an oligopoly.
- Perfect competition.
Given perfect competition, how do you simulate demand?
- Back of the envelope approach. (There are many combinations!)
- Linear programming approach.
-
The use of linear programming allows considerable flexibility as well as provides
insight into questions such as:
- Is the industry currently efficiently configured?
- If a new plant is added to the industry, which market segment is most
likely to be affected?
- What will the equilibrium price be in the future?
9.35 Meat Packing Industry
9.35.1Issue
Your client, a US firm, owns a meat packing plant in Spain. Over the last few
periods, profits have steadily declined despite the fact that sales are growing. You
have been hired to figure out why.
9.35.2Possible Solutions
Porter's five forces is a useful starting model in this case. By looking at the suppliers,
you will know that they are independent farmers with little power against your client.
Therefore, the costs of your raw material cannot be the issue. In analyzing the
internal rivalry, you will discover the market is regional. Hence, transportation costs
and competition have not changed dramatically. In addition, your production costs
have remained stable. You will also discover that there has been no introduction of a
substitute product. Since there are stable costs and strong sales, the only other
alternative is the price of your product. Investigate this avenue, and you will discover
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the buyer link. Your margins are being squeezed due to the increasing concentration
and buying power of your customers.
9.36 Piano Tuners
9.36.1Issue
How many piano tuners are there in Chicago?
Possible Solutions
This is a brain teaser case. Its purpose is to test your logical and quick mathematical thinking. There is
no right answer. The test is to see if you can come up with an answer based on information that you
provide during the case using estimates.
You need to start by asking questions about the critical factors. One way to solve it is
to estimate the number of households in the Chicago area. The interviewer gave this
piece of information at 2,000,000 households. Next, you can break the income of the
households into four quarters (500,000 each). You can then make an estimate of 20%
of highest income quarter have pianos, 10% of second quarter, 5% of third, and 0%
of fourth.
Thus:
Income quarter Population % w/Pianos #of Pianos
1st 500,000
20 100,000
2nd 500,000
10 50,000
3rd 500,000
5 25,000
4th 500,000
0 0
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With 175,000 pianos to tune, you can estimate how often these pianos are tuned. You
can estimate that the top income cluster tunes their pianos once a year, the second
quarter once every three years and third quarter once every 10 years. This gives you
(100,000 + 50,000/3 + 25,000/10) = 119,167 or approximately 120,000.
We can estimate that a piano tuner can do four pianos a day, 250 days a year,
therefore:
120000/250=480 pianos a day to tune 4 = 120 pianos tuners needed.
How could you check this? Look in the yellow pages. Would all the piano turners be
in there? You could guess that at least half would be. By the way, there are 46 piano
tuners listed in the Chicago Yellow pages.
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9.37 Consulting Firm Strategy
9.37.1Issue
You are the newest member on the management committee of a well-known top-tier
strategy-consulting firm. Eager to be accepted by your more senior peers, you
volunteer to study the industry and propose a firm strategy for next millenium, 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 have committed yourself.
How do you evaluate the consulting environment and determine likely future
scenarios?
What information do you use in this process? How will this information be obtained?
What (to you believe is most likely to happen in the consulting industry given your
present knowledge? How did you arrive at this conclusion?
What strategy do you propose to the management committee?
Possible Solutions
This is one of the most difficult types of cases because the answers are completely
unknown and will vary substantially depending upon the interviewee's knowledge of
the industry. This is also an interesting case since the salience is likely to be high. As
an interviewer, you should feel free to add information on an as-needed basis. When
information is not available, ask the interviewee to develop his or her own
hypotheses. What matters here is the thinking process, not necessarily the 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): The management consulting industry is
fragmented, with many players each holding relatively small concentration of
total market. Firms act as competitive monopolists and differentiate
themselves by specialty, type of customer (Fortune 100 versus Fortune 1000
companies), reputation (McKinsey versus accounting firms), and the
resources they employ (no 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.
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Potential Entry (moderate): There are no great barriers to entry into the
consulting industry; however, it is primarily the established firms that
compete in the top tier of the industry. Its possible new firms would enter if
the industry were earning positive economic profits.
Substitutes (moderate): Companies can move the consulting process in-house
by hiring ex-consultants and bright MBAs.
Buyer Bargaining (moderate-high): In the last decade, the consulting market
supply generally following demand, which lowers buyer power. However, it
is appropriate to question the effect a recession might have on industry. Its
possible demand may decrease as companies quit expanding, which would
reduce demand, give buyers more bargaining power, and push prices lower.
Supplier Bargaining (low-moderate): Major suppliers are the intellectual
capital employed by firm (e.g., experienced consultants who bring in sales
and new consultants who provide analytic). Firms must pay market price or
risk losing suppliers.
Other interesting points might explore the critical success factors in the consulting
industry. What sets top tier firms apart 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 core competencies or advantages that set it
apart from other companies?
Determining likely future scenarios is more ambiguous. There are several important
points to consider:
What affect will a recession have on consulting firms?
Will top tier firms suffer differently from others?
How will the mix of products demanded change over time? (e.g. cost-cutting
studies rather than market expansion studies.)
Will the consulting market continue to expand or suffer a cutback?
Will certain geographical areas expand (Pacific Rim or Eastern Europe) faster
than others will?
Again, the thought process is more important here than actual answers.
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Information gathering is a critical reason companies use consultants. An interviewee
should have an understanding of business information sources and how information
is gathered.
Information can be broken into two groups: secondary and primarily. Usually one
begins with secondary material. Specifically, a complete review of published
literature (a "lit search") pertaining to the study (e.g. journal and newspaper articles,
investment bank research, specialized studies, books, etc.). This often points towards
other good sources (e.g. industry experts, associations, major competitors,
government sources, etc.). Hypotheses are often created from the secondary
information. Primary research is then used to focus in on the critical issues. This
research includes telephone interviews, in-person interviews, mailed questionnaires,
focus groups, laboratory experiments, etc.
Most answers will depend upon the material covered in the first two sections of the
interview. The interviewer should ask the following questions of the candidate:
What are the likely trends?
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?
There is no right answer here, so the interviewee may balk. However, you can
provide some structure y using the following questions:
What are the key success factors to succeeding in the industry?
Is there any way to achieve a sustainable advantage that cannot be duplicated
by your competitors?
Can you use non-traditional methods to achieve competitive advantage, such
as leveraging through technology?
Given your firm's competitive strengths and core competencies, what
is the best strategic route?
9.38 Corn Feed Company
9.38.1Issue
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A corn feed company has eight manufacturing plants located in the Midwest. These
plants service the entire United States. Their plant in Ohio is in need of refurbishing.
The company has four possible options:
1. Refurbish the existing plant
2. Build a larger plant at the current location
3. Build a similar size plant at a new location
4. Build a larger plant at a new location
Which is the best option for this plant?
9.38.2Possible Solutions
There are two issues to this decision. The plant size and the plant location should he
considered separate.
Size of Plant
First, consider the demand for the product. Corn feed is a commodity product.
Pricing on the product is dependent on current corn prices as opposed to the
manufacturing process. There are four main competitors in the industry - our
company is the second largest. All four competitors have similar manufacturing
processes and similar cost structure. The proposed largest plant will not have
economies of scales that are not already present in the existing plant. The capacity
utilization is 65%, which is industry standard. The current customers buy from all
four manufacturers in order to guarantee supply. Currently demand is being met and
there are no alternative uses for corn fed.
9.38.2.1.1.1.1 Location of Plant
Transportation cost and perishability are the main issues with location. The
transportation cost per ton of corn stock (raw material) is much higher than the cost
of transporting the actual feed. The corn is grown in the Ohio area and the feed is
sold to the East Coast. The raw material is perishable where as the corn feed can be
stored for any length of time and is easier to transport. Cost analysis of the
transportation cost of feed versus raw material should be completed. Included in this
analysis could be the rate of spoilage through longer transportation of corn stock.
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Conclusion
The current plant is located close to the cornfields and this is the best location for the
plant from the cost/benefit analysis.
9.39 Selective Binding Case
9.39.1°Issue
Your client is a major fashion magazine that has been offered by its printer a
proprietary new process called selective binding which enables publishers to
customize the pages included in readers magazines based on demographic data
known about the reader. For example, an ad in Better Homes & Gardens for lawn
chemical services could be placed in only in those issues going to subscribers who
live in houses and not to those living in condominiums or apartments. In this way,
advertisers can focus their communications on the demographic segment they are
targeting. Would you advise your client to take advantage of this new process and
offer selective binding to its advertisers?
9.39.2Possible Solutions
This is a straightforward cost/benefit analysis. The magazine would want to offer the
service to its advertisers if it would be able to enhance its earnings by being able to
charge its advertisers a premium for being able to target more exactly the
demographic segment. Of course, the increased revenue from any premium must be
able to offset revenue lost as advertisers stopped using mass advertising The
interviewee could start the analysis by obtaining the following information from the
interviewer.
Q. What demographic breakdowns are possible to make in the magazine's database?
A. The only breakdown possible on your database is between subscribers who make
under $50,000 and those who make over $50,000.
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Q. What is the total readership, the proportion of readers who are subscribers (as
opposed to newsstand buyers), and the proportion of subscribers in each demographic
category?
A. There are 1 million readers, 80% of who are subscribers. Twenty-five percent
of subscribers make under $50,000 and 75% make over $50,000. The same mix
applies to the newsstand buyers according to readership audits.
Q. What proportion of the client's advertisers target each demographic category of
readers'?
A. Most advertisers are selling high-end fashion products, so 75% of them are
targeting the high-income group.
Q. What is the cost of the selective binding service and what does the magazine
charge for its ads?
A: The service is being offered to your client for free for three years since the
printer wants to promote the services use by getting a major magazine to start
using it. The client charges $50 per thousand per full-page ad (selective binding
can only be offered on full-page ads). Therefore, revenue associated with a
single inserted page (front and back) in an issue is 100 per thousand.
Q. What does the client's closest direct competitor charge for ads and what is their
readership like?
A. The client's closest direct competitor has 500,000 readers, 100,000 of who are
subscribers. Effectively, all of their readers make over $50,000. They charge
$70 per thousand for their full one-page ads.
Since the printing cost to the client of selective binding is zero, the client simply
needs to evaluate cost on the basis of revenue per thousand gained or lost as their
advertiser base uses the service to better target. Presumably, instead of 100% of
advertisers paying the full $50/thousand per page, the 25% of advertisers targeting
the lower income segment will choose to target only that 25% of subscribers. The
75% of the advertisers targeting the high-income segment will advertise only to the
high-income subscribers (75% of subscribers). Assume that all advertisers continue
to advertise in 100% of the newsstand copies. The revenue effect of this change can
be calculated by looking at the impact the change would have on average ad rate per
thousand on subscription readership:
New add revenue per page = Old ad revenue per page X [(% low income subscribers
X % low income target advertisers) + (% high income subscribers X % high income
advertisers)]
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Thus,
New ad revenue per page = $50 X [(25% X 25%) + (75% X 75%)] at old rate =
$31.25 < $50
The next question is can ad rates per thousand on the selective binding portion of ads
sold be increased sufficiently to increase average revenue per thousand over what it is
today. To answer this question, our client's ad rates must be looked at from the
perspective of their advertisers. If you consider the advertisers targeting the high-
income group, their alternative to advertising in your client's magazine is to put their
ad dollars toward the 100% high-income readership competitor. The cost per
thousand high-income readers with the competitor magazine is:
(Page rate X total readership)/ (portion of readers who are high income) = ($70 X
500,000)/500,000 = $70
Thus, $70 is the maximum price per thousand the client can charge its advertisers for
selectively targeted ads. Any higher cost and the advertisers would switch to their
competitor. Note that currently the client is a cheaper option for these high-income
advertisers although they are paying to reach readers they do not want:
($50 X 1 million)/750,000 = $66.67
If the client charged $70/thousand for selectively bound ads, the average revenue per
thousand to the client would he:
$70 X [(255 X 25%) + (75% X 75%)] = $43.75
Since $43.75 is less than the $50 that advertisers are currently paying, the magazine
should not often advertisers the selective binding service.
Of course, there are other issues which interviewees might want to mention such as
the possibility of price discriminating between high - and low-income advertisers.
For example, the potential for and cost of expanding the advertising base using
selective binding as a selling tool. However, it is important at the end of the interview
to have reached a recommendation regarding the initial question posed by the
interviewer. To mention these other possibilities and areas for further investigation is
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certainly wise, but it is also important not to get too far off track or to complicate the
issue so much that a final recommendation is never reached.
9.40 Video Games
9.40.1Issue
The CEO of a large, diversified entertainment corporation has asked a consulting
team to examine the operations of a subsidiary of his corporation that manufactures
video games. Specifically, he needs to know if he should approve a $200 million
capital request for tripling the division's capacity.
You are a member of the consulting team assigned to this project. Assume you and I
are at the first team meeting. What are the critical issues we should plan to examine
to determine if the industry is an attractive one for the CEO to continue to invest and
why'?
9.40.2Possible Solutions
The following information may be given if requested by the candidates though you
should focus on having the candidate identifying issues and not simply obtain more
information.
Market Share: The division is the third largest manufacturer of hardware in the
industry with 10 percent market share. The top two producers have 30 and 25 percent
market share, respectively. The remainder is divided among small producers. The
division sells to great range of consumers.
Sales: The division sales have increased rapidly over last year from a relatively
small base. Current estimated annual sales of 500,000 units. The current estimate of
industry hardware sales is 5.000,000 units annually. Industry growth has been strong
though over last few months sales growth has slowed. The division’s current sales
price for the basic unit is $45 per unit. The division’s sales remain less than 20
percent of parent company sales. The top two competitors also develop, manufacture
and sell software/games though our division sells only licensed software. Industry
growth of software continues to increase.
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Costs: The division estimates current cost is $30 fully loaded. The requested
expansion should reduce the cost by 5 to 7 percent and triple production capacity of
the hardware units. Our competitors are estimated to have a 10 to 15 percent cost
advantage currently. The main costs are assembly components and labor.
Customers: The division estimates that much of the initial target market (young
families) have now purchased video game hardware. No other large segments
have been identified, yet.
Distribution: The primarily outlets of distribution are top retailers and electronics
stores.
Profitability: The division currently exceeds corporate return requirements;
however, margins have recently been falling.
Product: the industry leaders have established hardware standards. Product features
are constantly being developed (e.g.. new remote joystick) to appeal to market
segments.
The primary issue of the case is to determine if the industry is attractive and
especially, if our client's position in that industry is sustainable. The candidate should
identify issues that are necessary for assessing both the industry and our client's
position, but should not be expected to solve the problem, per se.
It the candidate begins to discuss too deeply a specific issue before having covered
the key issues overall, bring them back to discuss the industry more broadly by
asking "what other issues must be examined'?"
If the candidate is discussing issues that seem irrelevant to the attractiveness of the
industry, ask, "how will that analysis help to assess the attractiveness of the industry
or our client's position?" Then ask the candidate to identity other issues that must be
examined.
The following issues would need to be covered for the candidate to have done an
acceptable job:
1. What is the future market potential? The candidate needs to question the
continuation of overall industry growth. She/he might ask about the saturation of
markets, competitive products (home computers), and declining "per capita" usage.
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2. What is the competitive outlook? The candidate should at least recognize the need
to examine the competitive dynamics. Issue areas might include: concentration of
market shares; control of retail channels and R&D capabilities (rate of new product
introductions, etc.).
3. What will be the price/volume relationship in the future? Issues of prices need to
be considered.
There are no bounds on creativity, but better answers would address:
Market Potential
Recognize that there is a relationship between market penetration and growth in new
users which, when combined, yields an industry volume estimate.
Address the shitting mix of product purchases. In this case, from hardware (player
units) to software (videocassettes).
Seek to look at buyer behavior in critical buyer segments. (i.e., "fad" potential of
product.)
Software
Recognize industry leaders set technology standards. In this situation, the division as
a secondary player and will have to follow these standards.
Recognize that different distribution needs may exist for different products (in this
case. hardware versus software).
Company ability to Compete
Should ask what the capacity expansion is designed to do.
Explore the cost position of the client division relative to that of other competitors.
-Seek to understand the reason for poor profit performance of division.
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9.41 Steam Boiler Hoses
9.41.1Issue
The firm was asked by a diversified manufacturing client to help turn around the
steam boiler hose division. This steam hose division provides boiler hoses for both
external customers and the client's boiler division. Background information on the
client and industry includes:
Boiler hoses are sold both with original equipment and as replacements. There has
been increasing price pressure in the industry. The client is third of eight industry
participants.
How would you structure an analysis aimed at restoring profitability? Where do you
expect to be able to save in costs?
9.41.2Possible Solutions
The following information is also available in response to questions asked by the
candidate:
Last year's P&L showed (as a percent of sales):
Raw Material 70%
Labor 20%
Distributed overhead 10%
SG&A 15%
Profit (15%)
The raw material is a commodity petrochemical. At least two of the other companies
in the industry are making moderate profits.
MINIMUM REOUIREMENTS
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The candidate should avoid being bogged down in the following areas:
1. Drop the product line (apparently not possible because hoses are necessary for
boiler sales).
2. Raw material prices (they are the same as everyone else's)
3. Allocation of overhead (no cash savings and provides little savings potential)
4. SG&A (standard industry fee paid for independent installers).
BETTER ANSWERS
Better answers will move beyond the previous answers to consider:
1. Scale economies (client is big enough to achieve scale production).
2. Production technology (client has a modern plant)
3. Labor costs (wages rates and productivity are average for the industry)
4. Raw material purchasing practices (material are purchased through long term
contracts with prices based on the spot market minus a discount).
OUTSTANDING ANSWERS
The best answers follow a logical progression and should not stumble upon the actual
answer:
The product has been over-designed, requiring excess raw material.
The answer should address the following organizational implication:
1. How is our product engineering operation wired into the marketplace? (There is
little contact between the engineering and marketing/sales organizations.)
2. What kind of comments are we receiving form our sales force? (Customers are
delighted with our hoses but require all the product features.)
3. Are there other areas in the company where similar problems exist?
9.42 Merger Candidate in Chemical Industry
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9.42.1Issue
One major chemical producer has retained the consulting firm to evaluate another
major participant in the industry. Both companies are bulk commodity chemical
producers. We have been asked to begin our work by analyzing the future prospects
of the target company's major product line, a bulk chemical used in the production of
plastics. Essential facts included:
* Production of this chemical has slowly declined over the last five years.
* Prices have declined rapidly.
* There are 7 to 8 major producers: the largest producer has a 30 percent share,
number two has 20 percent, our target company has 15 percent and the rest is
divided among the other competitors.
* The two largest competitors earn a small return. The target company is
probably at break-even and the rest are operating at break-even or loss.
* The largest competitor has just announced construction plans for a major new
plant.
How would you structure an analysis of the target company's future prospects in this
product line?
9.42.2Possible Solutions
MINIMUM REOUIRENENTS
1. What markets use this chemical and what has been the nature of the growth in
these markets? (The end users of this product are largely automotive-related.)
2. How much overall capacity exists now? (Far too much.)
3. What has been the relative capacity utilization of competitors in the industry? (60
to 70 percent for last three years).
4. What are relative cost positions of competitors? (Related to size/efficiency, age of
plant. The target company has reasonably "good" position.)
BETTER ANSWERS
1. How rational is pricing in the market? (The industry is prone to self-destructive
cuts to gain temporary share points.)
2. Are there niche or value-added uses for chemical? (Not really.)
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3. Does the chemical have a major by-product or is it a by-product? (Not of
significance in this case.)
4. How often have companies entered/exited, and how expensive is entry/exit''
(Entrance is expensive; exit cheap mostly because older plants are fully depreciated.)
5. How important is this product line to each of the competitors? (Most producers are
fully diversified.)
OUTSTANDING ANSWERS
1. Reasons for announced capacity expansion. (It is a bluff to try to encourage
smaller competitors to shut down.)
2. Is regulation important? (Yes: all competitors have installed pollution control
equipment.)
3. What is nature of operational improvements that target company could make?
(Lots)
4. How is the product sold and distributed? (Economies of scale in marketing and
transportation are critical.)
5. Is there synergy between our client and target? (Not really.)
9.43 Machine-Loading Case
TYPE Macroeconomic
PURPOSE To determine whether the candidate can dissect a general economic
problem
9.43.1Issue
A client produces a range of synthetic materials in varying widths and lengths. Each
material is used for packaging but differs in physical properties in terms of costs,
weight, flexibility, and general performance. Each material can he coated with any
one of four or five types of chemicals which make the materials more or less
impervious to heat, light, water, vapor, etc.
All of the machines on which these materials are made are housed in one enormous
factory location. Each machine is capable of running any one of the various materials
and/or coating combinations. The client does not wish to invest in additional
equipment at this time.
The client has asked us what combination of products he should ran to increase the
profitability of the plant. How would you go about determining the optimal mix of
potential products?
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9.43.2Possible Solutions
Market Share: The industry is highly fragmented. A variety of' small manufacturers
supply similar products to a wide range of customers. Our client estimates he has less
than 1 percent of' the total market. No competitor has more than three percent of the
total market.
Cost: Each product has a different cost to manufacture dependent on materials used
and the manufacturing process.
Price: Each product has a different price dependent on both the client's cost to
manufacture as well as the market for the product.
Products: Our client's machinery can produce hundreds of different products. Some
are unique to meet specific customer requirements while others are used by a variety
of customers.
Customers: Our client's customers are primarily consumers or industrial product
manufacturers who use the synthetic materials in packaging their own products.
Suppliers: Our client uses primarily commodity products in the manufacturing
process. All products can be obtained from a number of sources.
NOTE TO THE INTERVIEWER
The primary issue of the case is to determine that the profits of the plant will be
maximized when the most profitable product mix is produced and sold. The
candidate could cover differences for each product in the fixed and variable
manufacturing, selling cost and prices. These areas must be determined to
understand the profitability of each product. The interviewee should also address the
market demand for each product (to ensure what is produced can be sold at an
acceptable price).
MINIMUM REQUIREMENTS
1. Are there market limitations to the potential production of any one material'?
2. Is there competition for these products?
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3. Are there differences in costs in the manufacturing of these materials? For
example, do some coatings cost more than others do? Do some materials have
inherent cost differences?
4. Is there flexibility in pricing of' these products?
BETTER AN'SWERS
1. Are there differences in setup time and cost for various materials or coatings?
2. Do these materials move at different speeds through the machines?
3. Are the machines truly interchangeable or are some better suited to one product or
another?
4. Is there unlimited market demand for these products?
5. Are there technological displacement or replacement products on the horizon?
OUTSTANDIN'G ANSWERS
The best candidates will formulate a profit maximization algorithm. The best
algorithm is to maximize the profit contribution per machine hour.
1. Profit contribution is (unit volume) times (unit price minus variable cost).
2. Machine-hour capacity is a surrogate for fixed costs per unit of volume. Fixed
costs take into account depreciation and standby costs as well as those costs that are
independent of the variable costs per pound or ton produced.
3. An outstanding answer must include recognition of the asset costs and capital
implied in that as well as income or profit contribution. In addition, the potential
substantial differences in volume produced per product-hour and/or the price
obtainable in the market demand and competitive actions.
9.44 Oil Refining Industry
9.44.1Issue
Your company has 25% world-wide market share of the oil industry. You generate
$4M annually in revenues through the machinery division of the company, which
supplies machinery to refineries (not owned by your company) around the world.
How do you asses the current operating status of this division?
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9.44.2Possible Solutions
Define "assess...operating status" - most likely in comparison two dissimilar pieces of
information: 25% market share and $4M (but no idea what % of the market this
represents). The guide is to request what % of the market $4M represents. Assume
this is unknown. An estimate of the market size is therefore needs to be done. The
way to do this is to ask how many oil refineries there are, how much does each cost
to build, how long they last (actual life, not dependent life) and what the machinery
replacement costs are. From this, one can estimate what the industry spends per year
on machinery can. Divide the above mentioned $4M into this and the refining
division's market share can be assessed. This % can then be compared to the 25%
share of the parent.
9.45 Agricultural Equipment Manufacturer
9.45.1 Issue
Your client is a large agricultural equipment manufacturer. Their primary product
line, farming tractors, is losing money. What questions would you ask of your client
to help them solve their profitability problem?
9.45.2 Possible Solutions
It is unlikely that there are too many players in this market. You might want to start
off by asking how many competitors there are. Suppose the answer is that there are
two direct competitors.
What is your client's market share relative to their competitors (your client has 40%
of the market, competitor #1: 30%, competitor #2: 15%, with the remaining 15%
belonging to many small manufacturers.)
What-are the market share trends in the industry? (Five years ago, your client had
60% of the market, competitor #l, 15%, and competitor #2, 10%. Obviously, your
client has lost significant market share to its two competitors over the last few years.)
Do all three competitors sell to the same customers? (Yes)
How is your product priced relative to your competitors? (Your client’s product is
priced higher than the others.)
Has this always been the case? (Yes)
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Are the products the same? (Essentially yes, they all have the same basic features. Of
course, tractors are not commodity items and a few differences do exist.)
What are the differences that allow you to charge a premium for your product? (Your
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 meant they would
last longer and need less maintenance. This can be critical for some farmers because
they cannot afford to have a piece of equipment break down at a critical time.)
Are sales revenues down? Are sales quantities down? (Yes)
Is the price down? All costs the same? (No, in fact both the price and costs are up.)
Have fixed costs increased? (`No, material costs, (variable costs,) have gone up out
of sight, and the client has no answer as to why material prices have gone up so
staggeringly.)
Do you manufacture your tractor or just assemble it? (Primarily an assembly
operation.) Finished part prices have gone up? (Yes)
Raw material prices for your suppliers? (I don't believe so)
Have labor costs Increased for your supplier? (No)
Have you changed suppliers? (No)
Why are your suppliers charging you higher prices for the same products? (Well,
they're not, the prices have increased as a result of our product improvement efforts.
We've tightened tolerances and improved the durability of our component parts.)
Why do you make these improvements? (Because we strive to continue to sell the
best tractors
in the world.)
Are your customers willing to pay for these product improvements? (What do you
mean.)
Are your customers willing to pay a marginal price which will cover your cost of
implementing these improvements? (I don't know, I guess we assume that they
will...)
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It turns out that prices have been raised to cover the costs of these improvements, but
customers do not value these improvements unless they are essentially free --so sales
are down. The client needs to incorporate a cost/benefit analysis procedure into its
product improvement process. Don't forget though, that you must consider the
long-term effects of these decisions.
9.46 Insurance Company
9.46.1 Issue
An insurance company pays its sales people a base salary of monthly wages and
commission of 25% of new policy sales (2% of renewal). Which is the right way to
pay the sales agents?
9.46.2Possible Solutions
This, in case you have not already surmised, is an organizational behavior scenario.
Again, you must define what the "right way is". Assume some generic definition like
"the manner by which agents are both motivated and equipped to accomplish there
tasks in the interests of the organization..." is applicable. Having set up by definition,
the results achieved by the above mentioned composed system are examined. The
only factor determining how much the agents paid is their sales $. In essence, they
are motivated to issue a policy to anyone at as high a price as possible. They are not
motivated to give consideration to the riskiness of the insured party. The absence of
such a consideration (for example) would be detrimental to the company in the long
run. A more efficient compensation structure might pay the agent on a sliding scale,
depending on how risky (costly) an insured party proves to be.
9.47 Consulting Firm (2)
9.47.1 Issue
Your client is the treasurer in a significantly privately held corporation. She is in
charge of managing a portfolio of investments in addition to her treasury
responsibilities. Recently, she has asked your advice about the purchase of a large
position in company 456, whose stock is listed on the NYSE.
Company 456 is currently selling for $22 per share. The treasurer's investment
analyst predicts that the stock will pay a dividend of $1.25 for the foreseeable future.
Short-term treasury bills are yielding 7 percent, and long-term t-bills are yielding 8
percent. The treasurer is contemplating the purchase of 5000 shares of company 456
and wants your help in determining a fair market price.
How would you go about determining a fair price for company 456?
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9.47.2 Solution
$22 per share
9.48 Pots & Pans (2)
9.48.1 Issue
A manufacturing company based in Charleston, SC makes high quality pots and pans
which are sold throughout the U.S. in specialty and department stores. You are
called in because they feel that the $ l million that they spent on distribution last year
was way too high. How can you show your client money that he can save money.
9.48.2 Possible Solutions
Distribution is basically a trade-off between cost and service level. The higher the
service level, the higher the cost (more inventory pools, warehouses and shipments).
So you need to ask where the inventory is being held. It turns out that stores, since
they sell so few of these pots and pans, hold no inventory and thus require next-day
replenishment after a sale. The next thing you need to know is where the warehouses
are located, since the closer they are to the stores the cheaper the distribution costs.
Your client has three warehouses - one in Charleston, one in Philadelphia and one in
LA - from which they cover the whole country.
A quick way to solve this case is to realize that if stores require next day service from
these three warehouses, the only way they can do this is by shipping overnight at a
premium rate (UPS - no wonder they're spending so much). You can save them a
bunch of money by closing down Philadelphia and LA and shipping everything from
the plant In Charleston by UPS (negotiate a volume rate). This can be confirmed by
asking for the annual sales which turns out to be 10,000 units. When you divide this
into the $1 million distribution cost you discover that they are pay $100 to deliver a
pan to the store. Beat this figure and you've earned your exorbitant fee.
9.49 Diapers
9.49.1 Issue
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.
9.49.2 Possible Solution
Wet your pants/skirts. (No, wait until after the interview for that). This is strictly a
mathematical, number crunching exercise. You need a numerator (diapers) and a
denominator (total US household garbage). Let's assume this will be done in pounds.
For diapers you could take the total $ sales of disposable diapers and divide by the
average price per total unit (box: etc.). Multiply this number by the average weight
per unit, yielding the estimate of total diaper weight (numerator).
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Figures on garbage tonnage (denominator) are probably available in some obscure
federal report.
9.50 Cable Television Company (2)
9.50.1 Issue
Q: Your client is a small holding company that owns three cable television companies
in the Northeast: Rochester, NY, Philadelphia and Stamford, CT. Each of these three
companies is profitable, and each has been experiencing steadily growing sales over the
past few years. However, the management feels that th e Northeast is not the fastest
growing area of the country, and, therefore, acquired another cable television company
in Tucson, Arizona a little over a year ago. Despite every effort of management, the
Tucson company’s sales have been stagnant, and the company has been losing money.
How would you analyze this situation, and what could be the cause of the poor
performance of the Tucson cable company?
To be divulged gradually:
The Tucson area is smaller than Philadelphia, but larger than Rochester and
Stamford. Tucson is also growing at 12% per year on average. Per capita income is
higher than in Philadelphia and the same as in Rochester and in Stamford.
Operating costs in Tucson are essentially the same as in the other markets. The cost
of programming is based on number of subscribers and is equal across the nation.
Operating costs are composed of variable items: sales staff, maitenence,
administration and marketing. Only maintenance is higher that in the other markets,
due to the larger land area serviced. Fixed costs relate to the cable lines, which is a
function of physical area covered.
The Tucson company has attempted marketing efforts in the past, such as free Disney
programming for one month, free HBO for one month, free hookup, etc. These
programs have been modeled after the other three markets.
Cable penetration rates in the three Northeastern markets average 45%. The
penetration rate in Tucson is 20%. These rates have been steady over the past three
years in the Northeast. The penetration rate in Tucson has only rised by 2% in the
past three years in Tucson.
There is only one real substitute good for cable television: satellite dishes. However,
many communities are enacting legislation that limits their usage in Tucson. They
are also prohibitively expensive for most people.
9.50.2 Solution
The real error of management results from their failure to recognize another
―substitute‖ good: no cable television at all; television reception is far better in the
desert Southwest than in Northeastern cities. The lower penetration rate is most
likely a result of different climate conditions and lower interference in Arizona.
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9.51 Chilled Beverages
You are consulting for the manager of a division of a large consumer products
company. Her division produces fruit juices in three forms, all marketed under the
same name: chilled (found in the milk section of the supermarket, usually), juice
boxes, and frozen concentrate. This division has sales of $600 million per year. The
entire company has sales of over $20 billion. The chilled segment represents $120
million in sales per year. While juice boxes and frozen concentrate are profitable,
chilled juices are only breaking even in good quarters and losing money in bad
quarters. She has received a proposal from upper management to sell the chilled
juices business. What would you advise that she do?
To be divulged gradually:
Chilled beverages is a $5 billion dollar industry nationwide. There are two large
players that have 40% and 25% of the market, respectively. Your client’s market
share, 12%, makes her third in the industry.
The best available information indicates that the two market leaders are profitable.
The two market leaders are able to fund more advertising and more promotion, trade
and couponing that your client.
The market leaders produce pure orange juice and blends that are based on citrus
juices. Your product uses more elaborate blends of juices, usually with a base of
pear or peach juice (95% of the inputs) and flavored with cranberries, bananas,
mangoes, etc. (the other 5% of the inputs). Pear and peach juice are about the same
price as orange juice, but the other flavorings cost about twice as much.
The market for chilled juices is essentially mothers with school age children. This is
a highly price sensitive market that loves coupons, promotions, etc.
Brand name is important in this market, as in juice boxes and frozen concentrate, as
mothers tend to prefer highly reliable products for their children. However, the brand
premium must be in line with other branded products. Therefore, all branded juices
tend to sell in the same price range.
One plant in California produces all of the product, chilled, juice boxes and frozen.
It would be difficult to find another use for the plant without a major conversion.
9.51.1 Solution:
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There are three choices:
Sell the chilled juice business. This would, however, affect the juice bix and frozen
concentrate businesses, as there are both advertising and manufacturing synergies.
Sell all of the juice business. This may be more feasible, as the buyer could capture
the synergies, but would not be too likely to turn the business around. The selling
price is likely to be low.
Keep the chilled juice business and rework the ingredients and costs. This turns out
to be the most feasible option, as evidenced by the success of the competitors.
9.52 Distilled Spirits
9.52.1 Issue
You are consulting for a major United States producer of distilled spirits. Their
primary products are a line of mid-priced vodkas and two brands of mid-range rum.
Over the past few years, the business has become less and less profitable. What
could be causing this:
Other information:
The split of product sold has consistently been 60% vodka / 40% run over the past
few years. The selling prices of the two lines are essentially the same. Overall sales
are growing at about 3 to 5% per year, the same as the idustry average for these
product lines.
An analysis of the costs reveals the following:
Production Costs have remained constant
Advertising Costs have remained constant on average
Distribution Costs have increased significantly
The products are sold throughout the country. In 27 states, where alcohol is sold in
privately managed supermarkets and liquor stores, ―open‖ states, shelf space is
extremely expensive and trade promotions are critical. Such stores are alsom
becoming less and less willing to hold inventory, which is increasing distribution
costs by requiring more frequent deliveries. In the other 23 states, liquor is only sold
through state regulated liquor stores. Distribution costs in these states is much lower,
as there are far fewer outlets to service and central warehouses for the state-run
stores. Advertising of alcohol is much more tightly regulated, and therefore,
advertising spending is lower.
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9.52.2 Solution:
A greater and greater share of the volume is being sold in the ―open‖ states, with
sales in these states increasing at about 10% per year. Sales in the regulated states
are actually decreasing. Because the regulated states are less expensive to serve, and
therefore, more profitable, the fact that they represent a shrinking portion of the total
has caused total profits to decline.
9.53 Chewing Gum Market
9.53.1 Issue
How would you estimate the size of the annual U.S. chewing gum market? Check
your answer for reasonableness.
9.53.2A typical approach:
Estimate the number of people who chew gum: of the 300 million population, 15%
are between the ages of 10 and 20, the heaviest users, for a total of 45 million.
Estimate that these people chew two packs per week, for annual sales of 4,500
million packs. For the other users over age 20, (70% of the 300 million population,
or 210 million) estimate a usage rate of one half pack per week, for a total of 5,250
packs per year. Total packs per year is 9,750.
To check for reasonableness, figure the dollar sales that these packs represent: at 25
cents per pack, annual sales would be $2.4 billion, a reasonable figure.
9.54 French Pizza Market
Pizza Hut has recently entered the home pizza delivery business in Paris. The market
for home delivery is currently dominated by Spizza Pizza. Pizza Hut has asked your
consulting firm to help it analyze issues that will determine its likelihood of success
in the Parisian Pizza market. First, what information would you need and second,
how would you analyze the pizza delivery market?
9.54.1Possible Information Needs:
An estimate of the size of the Parisian home pizza delivery market. This could be
obtained by knowing the population of Paris (6 million) and making some educated
guesses about factors that determine pizza market size.
You may also want to know the size of Spizza, the current competitor, including
sales, number of stores, and proportion of Paris that is currently served by Spizza.
Other useful information: market segments targeted and served by Spizza; market
segments that are neglected by Spizza; what type of product do they offer; what do
they charge for thier product; what is the cost structure of their business and what
products are most profitable.
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9.54.2Method of analysis:
The best method of analysis would start by determining if any part of the market is
not well served currently by Spizza. Determine what are the needs of any neglected
market, and understand if your client could profitably serve this market.
Also, try to understand the likely competitive response of Spizza to your client’s
entry. How will you defend your position if Spizza decides to fight for market share?
9.55 Golfball Market Entry
9.55.1 Issue
You are visiting a client who sells golfballs in the United States. Having had no time
to do background research, you sit on the plane wondering what is the annual market
size for golfballs inthe U.S. and what factors drive demand. Your plane lands in
fifteen minutes. How do you go about answering these questions?
9.55.2 Typical solution:
Golfball sales are driven by end-users. The number of end users: take the population
of 300 million; assume that people between 20 and 70 play golf (about 2/3 of the
population, or 200 million) and estimate what proportion of these people ever learn
to play golf (guess 1/4) which reduces the pool to 50 million. Now, estimate the
frequentcy of purchase. If the average golfer plays twenty times per year, and
requires two balls per time, that’s forty balls per person. Multipy that times the 50
million, resulting in a 2 billion ball market.
9.56 Overseas Construction
9.56.1 Issue
An overseas construction firm wants to expand by estamblishing a presence in a
growing U.S. regional market. How should it go about doing this? What factors are
critical for its success?
9.56.2 Suggested framework
What are the diversifying firm’s distinct competitive advantages?
What is its capacity for funding an acquisition?
What is the competitive environment like in the proposed region?
How does this environment differ from the current markets of the diversifying firm?
9.56.3 Possible Solution
Diversification could be effected through joint ventures or through acquisition.
Which of these two strategies would prove the most suitable would depend on the
availability of funds and uponthe nature of the companies operation in the region.
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However, the success of the venture would depend notonly upon the means of entry.
Other critical factors would include:
The existence of a distinct sustainable competitive advantage. For example:
Non-unionized labor might help support a low cost production strategy (but for how
long?)
Proprietary technology not available to other compaies in the region
Special expertise in a growth area (such as, for example, hazardous waste)
Access to distribution channels
9.57 Packaging Material Manufacturer
Your client is the largest North American producer of a certain kind of bubble-pack
packaging material. Currently, the company has 80% of the market, and has asked
your firm to assess the strategic outlook for this company. How would you begin to
assess the future for this client, and what type of recommendations could you make?
Information to be divulged gradually:
Costs for the product are broken down as follows: 20% for polyethylene, a plastic
chemical. 35% conversion costs, including allocated fixed costs, labor and energy
costs 10% distribution and storage, 15% marketing and overhead. Profit margins are
20%. Poyethylene is a commodity chemical. The factory is thriry years old, and the
technology used is the same as when the factory opened.
The client had 100% of the market until two years ago. Since that time, a localized
upstart company has appeared in the Philadelphia / New Jersey market and has
captured nearly all of that market. This factory has purchased technology from a
German company. Your client does not have much information about this
competitor, but it appears that their factory is extremely efficient. They have also
been undercutting your client on price.
Solution:
The competitor has used their new technology to produce a lower price product. As
evidenced in the Philadelphia / New Jersey market, nearly all customers prefer this
product to your client’s. Therefore, the future is extremely bleak for your client, and
they should be advised to respond to the competitive threat, perhaps by updating their
own technology.
9.58 Airline Expansion
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A major airline is considering acquiring an existing route from Tokyo to New York.
How can it determine if the route is a good idea?
Suggested frameworks:
Profitability analysis looks like the best approach. Simply determine if revenue less
costs equals a positive profit. Then, analyze the factors that go into revenue and the
factors that comprise cost to come to a conclusion.
Interviewer Notes:
Revenues will be determined by occupancy rates and expected prices. Both of these
will be determined by expected demand, the competitive invironment and the extent
to which our client could win over passengers from competitor routes.
Operating costs will depend on expected fuel costs, incremental costs for landing
rights, etc. It is also very important to estimate the cost of cannibalization on existing
Tokyo-LA, LA-New York routes. And, last but not least, it is important to note that
losing passengers to cannibalization is better than losing them to competitors.
9.59 Health Care Costs
Bill Clinton has just fired Hillary Clinton as Chief of Health Reforms and has
appointed you to fill the position. while in his office, you discover that kidney
dialysis is a major portion of public health care expenditures. What analytical
techniques do you use to determine if this cost can be reduced?
Suggested frameworks:
You can start this case by looking at the cost half of profitability analysis (Costs -
Fixed + Variable). Since this is a procedure, rather than a shole industry, it is mostly
a variable costs, the sum of which is measured by cost per unit x # of units. Thus,
one could look at this problem by analyzing (1) how much it costs per kidney dialysis
and (2) how many kidney dialyses occur in the U.S. also, Don’t forget the external
factors, such as corruption or government regulation, that may play role.
Interviewer Notes:
Analyze the proportion of public versus private health expenditures that are applied
to kidney treatment to determine if this expensive treatment is being pushed onto the
public leath budget by unscrupulous practitioners.
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Compare the indicence of kidney disorder in the country with other countries. is ours
higher? If so, can public policy ofr efforts to increase awareness help reduce it?
If incidence is indeed higher for the U.S, build a model (regression, perhaps) that will
somehow determine the factors that are most related to kidney treatment. Perhaps
those who are typically covered by public funds (the poor, the elderly) have a higher
incidence of kidney problems. Is there room for any type of preventative program for
these groups?
9.60 Local Banking Demand
How would you determine whether a location in New York City holds enough
banking demand to warrant opening a branch?
Suggested framework:
Because this is a demand-oriented question, one should consider a marketing
framework, such as the 4 P’s.
Interviewer Notes:
The demographics of the area surrounding the prospective branch should be
examined. Population, business concentration, income levels, etc. should be
compared with those of historically successful branches.
Competitor reactions could easily make this benture unprofitable, so it is essential to
anticipate them. These will depend on the importance of the area to competitiors (in
terms of profit, share, etc.)
The client will have to match competitors’ incentives to customers and should
estimate the cost of doing so.
The client must examine if the new branch would complement their existing
competence and strategy (retail or commercial, high growth or high profitability, etc.)
and what purpose it would serve. If the need focuses on deposits and withdrawls
only, maybe a cash machine would suffice.
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9.61 Frozen Desserts
You are consulting for a small, regional maker of high quality premium priced frozen
desserts. (Ice cream and similar products). Though sales have been increasing, the
business is barely making a profit and the management is unsure that they will able to
pay their usual dividend this year. They have asked you to help them identify the
problem.
Additional information:
The client sells a complete line of product (ice cream and frozen yogurt) in major
supermarket chains in the Northeast. In recent years, as Americans jump on the
fitness bandwagon, frozen yogurt has begun to outsell ice cream, and currently
represents 55% of product sold.
The selling price per pint is the same for frozen yogurt and ice cream. The
ingredients are different, however. Ice cream uses locally available milk and cream,
and flavorings such as chocolate, pecans, vanilla and coffee. The premium frozen
yogurts use more exotic flavorings such as mangoes, kiwis, pineapple and
raspberries. All other costs are equal for the two lines.
Solution:
Margins on frozen yogurt products must be lower than for ice cream, or possibly
even negative, due to the higher ingredient costs. Therefore, the shift of sales from
ice cream into frozen yogurt is causing the company as a whole to be less profitable.
9.62 Direct Mail Retailer
You are consulting for a direct mail retailer that sells ladies clothing. Your client’s
catalog printing and postage costs have just increased to thirty-two cents per catalog.
How can your client decide if the new price is acceptable?
Information to be divulged gradually:
The average response rate for catalogs mailed is 2%. In other words, each 100
catalogs mailed results in 2.5 orders place. The average order size is $80. In
addition, 25% of customers who order product can be expected to reorder within six
months. The fully allocated profit margin (excluding mailing costs) on catalog
orders is 15%.
Solution:
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For each 100 catalogs mailed, printing and postage costs are $32. (100 x 32 cents).
Each 100 catalogs will result in 2 orders, plus 2 x 25%, or .5 additional reorders, for a
total of 2.5 orders placed per 100 catalogs mailed.
2.5 orders will result in 2.5 x 80, or $200 in sales. At a profit margin of fifteen
percent, these sales will return a total profit of $30.
The $30 profit is not sufficient to cover the printing and mailing costs of $32.
Therefore, the client should reject the printing arrangement at 32 cents per copy.
9.63 Chemical Sweetener Manufacturer
Your client manufactures a chemical sweetener used in beverages and other food
products. The chemical will come off patent in one year. You have been asked to
predict what might happen to the profitability of this product when the product comes
off patent.
Information to be divulged gradually:
This is the only product of its kind, in terms of taste and safety (lack of harmful
health effects) as proven in lab tests. The brand name of the product has slowly
become a common household word.
The largest two customers (75% of your sales) are two worldwide beverage
companies. The companies feature the brand name of your client’s chemical on their
product, and consider it a sign of quality. In addition, the cost of the chemical
sweetener represents 1.5% of their total costs.
The costs to manufacture the product are extremely low (about 20% of the price of
the product). Currently, the margins on this chemical are almost 40%.
Solution:
This is a classic customer analysis problem. While most products that come off
patent quickly drop in price (e.g. pharmaceuticals), this product will be able to retain
some of its premium due to the strong brand name. Because the major two
customers feature the chemical name on their product, and because the chemical
represents such a small portion of their total costs, they can be expected to be willing
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to continue to pay the premium into the future. Therefore, the outlook for the
product is good even after the patent expires.
9.64 Telecommunications Diversification
A Baby Bell company is interested in diversifying into other areas besides
telecommunications. They are considering entering the market for electronic home
security systems. Would you recommend that they do so?
Suggested frameworks:
Use an industry attractiveness framework, such as Porter’s Five Forces, to determine
whether this is a business you want to be in, or at least to determine what kind of
returns you can expect to achieve. then, use the value chain to look at where value is
added in the home security business. finally, once you feel you understand the
market, determine if the core competencies of the Baby Bell are likely to match the
demands of the home security markets.
Interviewer Notes:
The company is a holding company. They have previously made unsuccessful forays
into software and into real estate.
The home security business is highly fragmented. The top five players in the industry
generate less than 4% of the total industry revenues. This implies that the industry
largely consists of small, regional companies.
10% of all residences currently own an electronic security systems.
This is is some sense a razor and razor blade sort of business. The economics are:
Item Retail Price Cost / Margin
Equipment and Installation $500 - $1,500 0-10% margin
Monthly Service $20 / month $5 / month
What strengths / competencies of the Baby Bell company are useful in this market?
Consider: Installation expertise, operator services, transmission system (phone lines)
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It turns out that the ―expensive home‖ segment of this market is saturated. Growth
has been slow in recent years.
Price sensitivity is unknown in ―moderate-priced home‖ segment.
The conclusion is that this business is a reasonably good fit for the company, but that
more market research needs to be done to assess the growth and profit potential of
each segment of the market.
9.65 Aluminium Can Manufacturer
An aluminum can manufacturer has discovered a way to improve its manufacturing
process. As a result, its manufacturing cost has been reduced from $0.89 to $0.79
cents. How can the manufacturer best exploit this cost advantage?
Suggested frameworks:
Remember basic economics. The firm can either use a penetration strategy or price
skimming strategy. Consider the impact of either strategy on the company and its
competitors. Also, don’t forget to think about any substitutes for aluminum cans.
Interviewer Notes:
Clearly, the client should either drop price or reap additional profits.
It turns out that the client is the leader in its market with a 40% share and supplies
directly to major beverage manufacturers. The number two player in the market has
about 30% of the market and the rest is shared by many small competitors.
Aluminum cans have a lower priced substitute, steel cans, which have inferior
printing and stamping characteristics. Steel cans are used by customers who do not
want to pay the premium for aluminum cans.
If the client drops prices, other competitors will have to follow since this is a
commodity market and not following would mean a quick demise. The lowering of
prices might increase the client’s market share marginally, but some smaller
competitors will have to start exiting the industry and larger competitors will have to
start investing to discover the client’s cost advantage.
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At the same time, steel can users sill start switching to aluminum cans, thus hurting
manufacturers in that market. The resulting growth in the aluminum can market will
attract steel can manufacturers to enter it. Since some steel can manufacturers have
deep pockets and a strong backing, these new entrants could pose a future threat to
our client. In conclusion, it is best to retain prices and generate extra profits for now.
The cost advantage may help another day during a price war.
9.66 Film Processing
The CEO of the largest domestic manufacturer of photo film want to enter the film
developing business. He needs your advice on how to go about evaluation this idea.
What would your approach be?
Suggested frameworks:
This is and industry entry question; look at industry attractiveness with Porter’s five
forces analysis. Then, think about what part of the marketing mix (4 P’s) would be
best for film developing. Finally, analyze competitive response.
Interviewer Notes:
Distribution chanels are the key factor in this business. Major discout stores sell the
service.
This is a scale economy business in the back-office, so profits are easier with high
volume. This makes the business tough to enter.
This company ended up establishing a ―store within a store‖ concept with Wal-Mart.
9.67 Concrete Manufacturer
Your client, a concrete manufacturer is considering acquiring a small local firm.
What factors should be considered? After considering these factors, would you
recommend the acquisition?
Additional Information to be divulged gradually:
The target firm is currently profitable, with margins of 5%. Your client’s margin is
15%. Your client attributes its higher profit margin to economies of scale in
trucking and mixing, and a stable labor force.
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Both companies compete in the geographical market, the Southeastern U.S. Your
client’s customers are large construction firms and contractors generally in the office
and commercial building construction business. The smaller firm sells mainly to
other small businesses and contractors. (Swimming pool installation firms, patio
builders, etc.)
Additional research shows that the smaller customers for concrete are growing, while
the major office building construction market is stagnant. The smaller firm has
strong contacts with many local customers, and is often the preferred supplier due to
their customer responsiveness.
Your client is not able to fund the acquisition internally, but could obtain bank
financing at a rate of 10%. Similar acquisitions generally are made for two to three
times current sales of the target firm.
Solution:
From a financial point of view, the acquisition is not attractive if there are no
synergies between the firms. With profit margins of only 5%, the income generated
by the smaller firm will not cover the capital charges (interest due to the bank) on the
acquisition price. (Acquisition price = 3 x sales. Interest on this amount will be 10%
x 3 x sales, or 30% of annual sales. Profits are only 5% of sales. This analysis, of
course, ignores the tax shields.)
However, if your client were able to use some of its competitive advantages to
improve the financial outlook of the target firm, the acquisition would be advisable.
It is reasonable to expect that synergies would arise from economies of scale in
trucking and mixing, which could raise the profit level of the target firm, and make
the acquisition more attractive.
9.68 Shipping Container Manufacturer
Your client is a manufacturer of large steel shipping containers that are designed to
hold up to several tons of material for shipping on ocean liners. The container
consists of a steel frame, a steel shell and an insulation and waterproofing material
that uses a hazardous chemical. The containers are leased by the company to
worldwide shipping companies. Shippers can lease the containers one-way or round-
trip. The client has asked you to do an assessment of their strategy. What issues
might you examine?
Suggessted Issues:
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Sales and cost issues: The growth of the shipping container market; your client’s
share in that market; trends in the leasing terms in the industry; customer power; steel
prices; manufacturing costs.
Market issues: changes in the worldwide shipping market (e.g. does the growth of an
area like Southeast Asia imply many more one-way contracts than round-trip?);
growth of the largest customer industries; new technology in shipping containers;
customs and trade agreement trends.
Environmental Issues: Production and disposal of the insulation chemicals; costs of
handling the chemicals.
9.69 Healthcare Company Growth
A large healthcare company has decided it is interested in substantially increasing the
size of its operations. Its goal is to double total sales and profits in less than two
years. As a consultant brought in to assis them, what would you do? What issues
would you consider? What are some likely alternatives for the company?
Possible issues to consider:
What is the current scope of operations? In what areas of healthcare does the
company deal? What is its current market share in these areas?
What plans has the company already considered?
What is the competitive nature of the industry? What would be the effect on sales
and profits of reducing prices and margins?
What potential is there for expansion by acquisition? Do they have the financial
capability? do potential acquisition targets exist? Will the market for acquisitions be
competitive?
Possible recommendations:
Naturally, a suitable solution will depend upon the answers to the above questions.
A business can increase profits by:
Increasing sales
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Increasing prices
Decreasing costs
However, if the company’s margins are found to be consistent with industry norms, it
would seem unlikely that either increasing prices or cutting costs represent feasible
methods by which to double sales & profits, particularly if the company is operating
in a moderately competitive environment.
This leaves only sales increases, which could be achieved by:
Selling more of the current products to current customers
Selling new products to current customers
Selling current products to new customers
Selling new products to new customers
The suitability of these options will again depend on the particular environment. In
the particular example of this case, it turned out that only selling new products to
new customers via some form of diversification could hope to achieve the company
goals.
You should then consider the potential for increasing sales by means of
diversification through acquisition or joint venture. The relative benefits of each will
depend on financial resources as well as the existence of, and competition for
suitable targets.
9.70 Regional Grocery Store Chain
A regional chain of grocery stores currently receives its stock on a decentralized
basis, i.e. each store deals directly with the vairous suppliers. The president of the
chain is wondering whether it would be better if they established a centralized
warehouse through which all supplies would be delivered and then disbursed by
company trucks. What are the key consideration to making this decision?
Issues to consider:
Would the savings from bulk purhcasing more than compensate for the cost of:
Building and maintaining the warehouse
Employing additional personnel and trucks
Opportunity cost of capital tied up in inventory for additional periods
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Do the stores buy similar products? (i.e. do purchasing synergies actually exist?)
Will delivery frequency to the stores by better or worse? Consider the costs of
stockout and the need for fresh produce.
Will the stores prefer delivery direct from the supplier or from the warehouse?
Consider the time tied up in order processing, the flexibility of delivery times and
quantities.
Possible solution:
The proposed solution would depend upon your interpretation of the trade-offs both
financially and organizationally for the two methods of delivery. For you to propose
going with the new method, you need to establish not only that it will cost less, but
also that all the affected players can be persuaded to buy into it.
9.71 Magazine Distribution
A magazine publisher is trying to decide how many magazines she should deliver to
each individual distribution outlet in order to maximize profits. She has massive
amounts of historical data for sales volumes through these outlets and a well
constructed internal accounting system. How should she go about computing an
appropriate number?
Possible solution:
The best way to tackle this one (without going into a huge Economic Order Quantity
qunatitative analysis) is not so much to start asking questions as to set out and outline
analysis and fill in as you go.
It should be observed immediately that to maximize profits, marginal revenues
whould be set equal to marginal costs. The marginal revenue for a magazine would
be its cover price times the probability that it will be sold. The probability of sale,
with an appropriate confidence interval, could be established in some manner from
the historical data. The marginal costs could be obtained from the internal
accounting data.
A detailed discussion of the application of these concepts from basic microeconomics
and statistics may be necessary.
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9.72 Knitting Machine Demand
How would you asses the world demand for knitting machines?
Possible Solution:
The worl demand for knitting machines basically depends on the world demand for
cloth.
In order to evaluate the world demand for cloth, we need to know how much cloth
(measured in square meters, for instance) is being purchased per unit time per
inhabitant of the world. In order to refine our appraisal, we may segment the
inhabitants of our planet per level of personal wealth. Note that this may not be a
linear relationship.
Furthermore, you may need to consider other factors:
The current level of the ratio: amount of cloth manufactured per working year
/ number of machines
The expected usable life of an average machine
The existence of substitues for knitting machines and the consequences of
this on our expected demand
9.73 Cement Manufacturer Capacity Addition
You are consulting for the number-one producer of cement in Portugal. This
company currently has 45% of the market, and feel it could have more, but is running
at 100% capacity of their one plant, located near Lisbon, in Southern Portugal. The
CEO has asked you to help him decide if they should build another plant or expand
the current plant.
Additional information to be divulged gradually:
The cost structure for cement production is as follows:
Raw materials 28%
Labor and allocated fixed costs 16%
Distribution 26%
Sales and overhead 18%
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Pre-tax profit 12%
The company’s selling prices are set by prevailing market prices in Portugal. Land is
available to expand the current factory; there is also a suitable site near Porto, about
200 miles to the north. Approximately 80% of the customers are within 100 miles of
the current plant.
Raw materials are purchased from a government-owned company, and prices are set
by a yearly contract with the government. The plant is unionized, and extra shifts are
not possible. The trucks are owned by the company, and transport all product
directly to the customers throughout the country. Customers pay for trucking by the
mile. The fixed cost of plant additions is roughly the same as the cost of a new plant
of the same capacity.
Solution:
As distribution is the second-largest cost item, it makes sense to minimize
distribution costs in choosing the site of the next facility. From the data, it is safe to
assume customers that are further away are less inclined to buy due to the increased
trucking costs. Therefore, location of the plant in the north may increase sales in the
north by reducing delivery costs to these customers.
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9.74 Snack Food Company
A large salted snack food company has steadily been losing market share over that
past two years, from a high of 20% to the current level of 18%. Profits as a percent
of sales, however, have been growing. What could be causing this?
Additional Information to be divulged gradually:
The size of the total salted snack food market has grown from $15 billion to $17
billion during these two years; the interviewee’s conclusion should be that the
client’s total dollar sales have actually grown, but not kept pace with the market. The
product line of the client has not changed over this period.
The costs for the client have changed over this period: ( % of selling price)
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%
The total sales force was cut to reduce costs, though the same number of outlets are
still covered by this sales force. The changes in the marketing budget come from
reduced trade promotions.
The products are mostly sold through large grocery store chains and convenience
stores. The sales force generally visits each customer at least once per quarter.
Promotions usually occur at the end of each quarter. Grocery stores and convenience
stores require some type of promotion to grant valuable end of aisle displays or
advertising space.
The largest competitors are two multinational consumer products companies that
feature complete lines of snack foods. Their sales forces are regarded as the best in
the industry. Together, these two companies have 55% of the market.
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Solution:
The data show that the greatest change is in the sales force numbers. It turns out that
the company went on a cost-cutting spree over the past two years. The sales force
was drastically cut and the commission scheme was reworked. The marketing
expenditure was also decreased. Most of the reduction came from trade promotions.
The product is sold through the same channels as previously: large grocery chains
and convenience stores. These channels are traditionally driven by periodic trade
promotions. The reduction in trade promotions brought about a loss of shelf space,
which has directly led to the decrease in market share. Also, the product line has
not changed in the past two years in a product category where new products and line
extensions are routine. In addition, the market has been growing, indicating a missed
opportunity for new products in the market. Lastly, the increase in profitability has
resulted from the lower costs, but may not be sustainable.
9.75 Beverage Company Cost Structure
RC Cola and Coca Cola both compete in the same industry. Their cost structures are
vastly different, however. Using Coca Cola as a benchmark, estimate the likely cost
structure for RC Cola. In other words, for which costs would RC Cola be higher, for
which would they be lower, and why?
Possible solution:
This is a twist on the standard price/cost case that also questions the interviewee’s
understanding of the cost items. A possible analysis, line item by line item:
Cost of goods sold: RC Cola would be higher due to their lesser power in
negotiating price breaks from suppliers.
Distribution: would be higher for RC Cola for two reasons. RC is not distributed in
as many outlets as Coca Cola. Therefore, the average truck driver will be driving
more miles and spending more time to deliver a truckload of RC that the Coca Cola
driver, who will have several stops within an immediate area. Also, the typical order
size for RC Cola would be smaller, meaning that more stops would have to be made.
In the case of Coca Cola, it is conceivable that one truckload may be deliver to just
one customer.
Sales Costs: could be lower for RC, as there are fewer, but more loyal customers.
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Marketing: is lower for RC Cola as they are not a frequent advertiser like Coca Cola.
Administration / Overhead: lower for RC Cola as they are more of a ―one-product‖
company than is Coca Cola.
9.76 Permanent Light Bulbs
A small R&D lab in the Swiss Alps has developed a super-durable filament for light
bulbs; with this filament, the light bulb will never burn out. The lab is ready to
licence this product to a light bulb manufacturer. What will be the effect on the light
bulb industry?
Additional Information:
The light bulb industry is dominated by two multinational producers. The two
companies sell their products side by side for essentially the same price in similar
outlets internationally. There are a several small local players in various regions of
the world who produce local brands and some private store brand light bulbs. There
have been no technological innovations in light bulbs for many years.
Possible solutions:
One outcome is that one of the two major players purchases the technology. If the
technology is patented and exclusively licenced, this player may enjoy an advantage
for a limited time. If the producer makes enough bulbs at a low enough cost, all
customers will eventually switch over to the permanent light bulb, thereby drying up
the industry, putting the competitor out of business and greatly reducing their own
business.
Another solution is that all of the players obtain some version of this technology. If
that were to happen, the price for this product would decline to the normal industry
profit level, and customers would shift to the permanent light bulb. Over time, all
bulbs would be permanent and the industry volume would greatly decrease, making
the industry more competitive and wiping out industry profits.
9.77 Super Regional Bank
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You have a have recently been assigned to a project with one of the nation’s super
regional banks. The bank is one of the top 10 largest retail banks in the country.
Like most banks in its class it has branches in 8 geographically contiguous states.
Your client has recently concluded that the old ―local branch‖ way of business is no
longer viable. Typically, this bank has canvassed its territory with small free-
standing branches; however, the new age of electronic banking and commerce is
changing all of that.
They are considering replacing many branches with Calling Centers. Calling Centers
offer both live and phone automated services that may be accessed by phone. The
new Centers would offer virtually all of the services currently offered through local
branches plus some additional things.
The question to you is: how would you go about setting up the engagement to
determine the viability of this new concept? Specifically, what kinds of things would
you investigate? and what hypothesis would you form?
Possible Solution:
This is a very open broad-brushed case. There certainly is no right answer; however
this type of case occurs frequently. The following is a guideline of some things you
should probably consider:
Market analysis: What kinds of customers would be attracted to this no service?
What kinds of customers would be turned off? (Hypothesis: younger people would
be heavier users and more attracted than older) Of the people attracted to this new
service, how profitable are they? How profitable are the people who are turned off
by this service? (Hypothesis: older people have more money and thus are more
profitable)
Revenue: What types of new services could be added to increase revenues?
Automatic bill payment, Fund transfer, etc.
Cost Savings: How much would it cost to establish a Calling Center and what are the
risks involved? Do we have the expertise in-house to do this? How many branches
could we close? Can we cut down on traffic to existing branches - thus requiring less
tellers?
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Summary: It probably is best setup as a cost benefit analysis. The number of new
customers times the expected revenue from them plus the additional revenue
generated by potential new services plus the cost savings must outweigh the forgone
revenue generated by the customers you end up driving away.
9.78 Cigar Bar
I was sitting in one of Chicago’s new specialty ―Cigar Bars‖ around the end of
August with a friend. It was a Saturday night and the weather was fair. While
enjoying one of the bar’s finest stogies and sipping a cognac, I asked my friend how
much he thought the bar was worth.
On the back of an envelope, how would you go about determining the value of this
bar?
Issues to consider
We arrived at the bar around 8:30pm. There appeared to be 30 customers already
there. By 11pm the place had at least 70 customers. I would estimate the maximum
capacity to be close to 100.
The bar sells two things: liquor and cigars. The average cost of a cigar is $8 and the
average cost of a drink is $7.
There was one bar tender, a waiter and a waitresses. All three were there the entire
evening.
The bar is located on one of Chicago’s trendier streets with a lot of foot traffic.
The bar is open Tuesday thru Sunday from 5 pm until 2 am.
Possible Solution:
This is a straight forward valuation. To perform a valuation you must estimate the
cash flows from the business and discount them back using an appropriate weighted
average cost of capital (WACC).
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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.
Keep in mind that Friday’s and Saturday’s are typically busier than other days and
that people tend to be out more during the Summer than in the Winter.
Costs: There are two components to costs: fixed costs and variable costs. Under
fixed costs you might consider: rent, general maintenance, management, insurance,
liquor license, and possibly employees. The only real variable cost is the cost of
goods sold.
Valuation: Subtract the costs from the revenues and adjust for taxes. You now have
the annual cash flows generated from the bar. How long do you anticipate this bar
being around? Cigar bars are a trend. In any case pick some number for the expected
life (4-5 years). The discount rate should be a rate representative of WACC’s of
similar businesses with the same risk. Perhaps 20%. This gives you a value of:
Value = CF1/1.2 + CF2/(1.2)2 + ... + Cfn/(1.2)
n
9.79 New Magazine
Your client is the CEO of a publishing company that produces a line of educational
magazines as well as a line of women’s magazines. Both businesses are profitable
but are not growing quickly. He want’s to start a third monthly magazine in the US
targeted at 30-50 year old men (eg. GQ Magazine) His stated goal is to generate
circulation revenues of $10 million in the first year. He has hired you to figure out
whether this is possible.
Possible Solution:
This is an estimation case. The key here is to clearly define your assumptions, the
specific anwser is not important as long as you are making reasonable assumptions.
For example
Target Customers
The total US population is approximately 240 million. Based on a normal
distribution with the average life span of 80 years, approximately 2/3 of the
population falls between 30-50 or about 160 million people. Approximately 1/2 are
male or 80 million.
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Of the 80 million 30-50 year old men in the country, assume that at least 1/2 would
read a magazine or 40 million. Given the wide range of magazines on the market
assume that only 10% of magazine readers would want to read a men’s journal or 4
million target customers.
Share
As a new magazine assume that you can generate a 5% share of the men’s magazine
market in year one or 240,000 customers.
Revenues
Based on what other magazines sell for ($2.50-$5.00) assume a cover price. Lets say
$3/magazine at the news stand and $2/magazine for a subscription. Now make some
assumptions on how many customers will buy on the news stand versus subscription,
lets say 50% subsrcibe (120,000) and 50% buy at the news stand (120,000). This
comes out to $360,000 + $240,000 or $600,000. Finally, this is a monthly magazine.
For simplicity assume that all target customers buy a magazine every month. This
would generate total revenues of $600,000 X 12 or $7.2 million.
In this case given the CEO’s stated goal of $10 million in circulation revenues, it
would not make sense to launch the magazine.
9.80 Castor Manufacturer
Q: Your client manufactures castors (the wheels found on the bottom of office
chairs) out of a plant in West Germany and One in East Germany. Over the past two
years the company’s profits have declined by 20% while revenues have been
relatively flat. You have been asked to find out what is happening and suggest a
course of action to reverse these trends.
Information to be divulged slowly:
The company operates in three divisions: 50% of sales are to hospital bed
manufacturers, 25% are to mop bucket manufacturers, and 25% are to chair
manufacturers. The hospital bed and mop bucket divisions are located in the West
German manufacturing operation, the hospital bed division is located in the East
German manufacturing operation.
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Breaking out each division as a separate profit center shows that revenues are up 10%
for both mop bucket and chair divisions but down 10% for the hospital bed division.
Similarly, profits are down 10% for both the mop bucket and chair divisions but are
down 30% for the hospital bed division.
Further investigation shows that labor is the major component of cost in
manufacturing castors. In the past two years, wages in the formerly state regulated
East Germany have skyrocketed. This is what is driving most of the increased costs.
Similarly, the demand for hospital beds (and thus castors) in East Germany has
declined as they have become more efficient at managing their health care system.
A:
This is a typical revenue/cost case. We have already been told that revenues are flat
which should be a clue to explore the cost side of the income statement. In this case
it helps to work logically through both the fixed and variable costs to see if there are
any major items. Sometimes the interviewer will provide you with an income
statement that will break out the major cost components by percentage.
Case Type: Industry Analysis; Profitability Analysis
9.81 Logging Company
Background:
You are hired by a Canadian logging company to analyze its current operations and
provide advice on future operations. The logging industry in Canada is regulated by
the government. Land is leased to individual companies by the government. The
company is making a lot of money and is unsure why. You have been asked to
determine: (1) Why they are making money? (2) Is it sustainable? (3) Is it replicable?
Additional Details:
Products: The company produces lumber boards of two sizes 2‖x4‖ and 2‖x8‖.
Lumber is a commodity product and as such the company is a price-taker in the
market.
Leases: The government leases tracts of land at a annual price that is set to allow for
a 12% profit margin for the entire logging industry. Thus, all tracts of land have
the same lease price per acre. The leases last for 99 years and the original lessee
has the right of first renewal on the lease.
Profit Structure: The profit equation for the lumber industry can be written as:
Profit per ft^3 = Revenue per ft^3 - Non-land cost per ft^3 - Lease Cost per ft^3
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Revenues: There is a revenue advantage for the company due to its product mix.
Margins are higher on 2‖x8‖ boards than on 2‖x4‖ boards. The company’s
product mix is made up of a greater percentage of 2‖x8‖ boards than the
―typical‖ logging company percentage.
Non-land Costs: The company has a 5% cost advantage in its ‖tree-to-dock‖
production process. There is no significant difference between the distribution
costs among the industry firms.
Production Process: The cost advantage is not generated by a better logging
process (i.e. better equipment, more skilled laborers) but instead exists because of
the exceptional quality of the trees on the particular piece of land that the
company leases. The mineral content of the land leads to faster growth of
healthier trees which improves both yield and turnover. Healthier trees are
straighter and easier to cut, thus reducing costs in each phase of the logging
process. These healthier, taller, straighter trees yield more 2‖x8‖ board-feet than
is typical and leads to the advantaged product mix. There are no significant
economies of scale to the process.
Key Points
The company leases land with a significantly higher quality of trees. This leads to
a revenue advantage because more 2‖x8‖ board-feet can be produced per acre of
land. Additionally, there is a cost advantage because the higher quality inputs
make the logging process easier and increase yields and turnover.
Since the leases are for 99 years and renewable, the current situation seems
sustainable.
Since it is unlikely that another piece of land similar to this one exists or that
another firm will give up advantaged land, the situation is not replicable.
9.82 Information Services Company
Background:
You are hired by a library information services company that provides a
computerized article search product on CD-ROM. The product allows users in a
library to locate articles by keyword search. The company currently has a weak
market share of only 10% of all installed units. The company wants to understand
(1) why they have so small a market share, (2) what could be done to improve the
situation, and (3) where it should focus its resources.
Additional Details:
Competition: There is a single major competitor which has 50% market share.
The client and two other competitors each have 10%; and the remainder is
divided among many competitors.
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Market Segmentation: The following table outlines many of the details of the
market segmentation and client product data.
Type of Library
Number
of
Libraries
Client
Market
Share
Major
Competitor
Market
Share
Competitive Features
Academic 5000 20% 60%
Research 500 80% 10% Search Quality,
Content
Other 4500 13% 66% Content, Ease of Use
Public 10000 10% 40% Content, Ease of Use
Secondary
Schools
20000 ~0% 10% Price, Ease of Use
Product: The client sells a CD-ROM based product which is used on a dedicated
PC in a library. The product has different versions that are upgraded each year.
Each version is marketed to a specific library segment. Libraries are interested in
matching the article search to hardboard volumes available within the library.
The client’s product is considered to have the highest quality of article search.
Pricing: The client sells its product at a 25% discount to the major competitor
and has the lowest prices in the industry. The pricing and profit schedule for each
version are shown below.
Library Client Price Client Profit per
Unit
Major Competitor
Price
Academic $2000 >$500 $2667
Public $1500 $500 $2000
Secondary School $1000 $100 $1333
Competitive Features: Competition within the industry focuses on four
dimensions: (1) Search Quality, (2) Content, (3) Ease of Use, and (4) Price. The
table above indicates the relative preference for these features for each market
segment. There is a trade-off between ease of use and search quality. A better
search requires a more skilled approach to keyword usage and often makes the
search more difficult. The client’s product is considered to have the highest
quality search among the competitors.
Production: the product is created by programmers who seek to match the
product to library volumes. Since the principal input is labor, the type of CD-
ROM created can be altered relatively easily.
Key Points
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The client’s product does not match the needs of the large segments of the market
(i.e. the client’s high quality of search only appeals to a small segment of the total
market) ==> weak market share
The client should reallocate its resources to create products in the larger market
segments -- products that emphasize content and ease of use over search quality.
The most profitable segment can be identified by using current client prices which
should allow it to gain market share (due to the 25% discount to the major
competitor) and calculating the maximum market profit. Academic = 5000 x 500=
$2.5M; Public = 10000 x 500 = $5.0M; Secondary = 20000 x 100 = $2.0M.
Therefore, if we realign our product to emphasize ease of use and content, the
potential profit is 4500 x 500 + 10000 x 500 = 7.25M ( minimum since profit in
academic segment is > $500 per unit).
9.83 Pipeline Company
Case Type: Industry Analysis
Background:
You are hired by a large pipeline company to evaluate the current and future potential
of the pipeline industry. The pipeline industry sprang up as transportation costs for
mineral extraction companies began to escalate. There is currently 20,000 miles of
pipeline throughout the U.S. What information would you want to know about the
pipeline industry that could help you plot a strategy for a pipeline company?
Additional Details:
Industry Structure: There are many pipeline competitors. Pipeline can be
characterized as either common carrier pipelines (~70% of all pipeline miles)
which are regulated by the government and proprietary pipelines (~30% of all
pipeline miles) which are wholly located on the private property of a firm (e.g. a
pipeline from a port station to a near-shore refinery). There are many suppliers of
common carrier pipelines. The second group (proprietary) is not regulated by the
government.
Products: The pipelines carry liquid and gaseous materials -- crude oil, natural
gas, methane gas, liquid nitrogen, refined oil products (gasoline), and chemicals.
Cost Structure: There are exceptionally high fixed costs involved in a pipeline.
The variable costs are primarily the electricity to power pumping stations along
the pipeline. There are different cost structures depending on the type of product
being moved. Pumping crude oil along the pipeline can cost as much as
$2M/month in electricity for a station. Gaseous products require considerably
less energy to move.
Market Conditions: U.S. proven reserves are diminishing and foreign imports are
increasing. It is expected that for the next 5-10 years demand will be steady.
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Key Points: (classic Porter analysis could be used -- This is rarely the case!!!)
Threat of Entry is low because ...
- there are high fixed costs (high initial investment)
- pipeline services are essentially a commodity product (commodity markets are slow
growth and unattractive)
Industry Rivalry is strong because ...
- there are many competitors and switching costs are low
- industry growth is expected to be slow (i.e. market share is important)
- many competitors use pipeline for in-house uses and only carry other products if
capacity is underutilized
- there are very high exit barriers (i.e. there is a strategic relationship between
refining and piping)
Substitute Products are many as witnessed ...
- by proliferation of tanker cars and tractor trailer rigs for liquid and gaseous
materials
Power of Suppliers is not a significant factor.
Power of Buyers is not a significant factor because many pipelines are regulated and
there are many buyers
Other considerations:
- Product Mix: The margins on gaseous products is higher than heavy unrefined
products.
- Government Regulation: Margins are greatly affected by common carrier status.
Any future environmental regulations will cut even deeper into
margins.
- Pipeline as a storage medium: For many firms the product in a pipeline can be a
significant portion of its inventory and the volume in line must be considered in
production. The classic question: Is it better to make product and sell it now at
low prices or wait for prices to increase (e.g. crude oil prices)? A large
pipeline could be a temporary storage facility.
- Operations: Maximizing profit means understanding the parameters of pumping --
costs of pumping at less than full capacity; layout of pipeline and pumping
stations; products which can share the same pipeline; construction of parallel
pipelines.
Market Differences: The market for crude oil is very different than the market
for specialty chemicals or natural gas. the pipeline manager must aware
of these rapidly changing commodity markets to maximize his profit.
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9.84 Auto Manufacturer
Background:
Your team is hired by a large U.S. automobile manufacturer (GM). They are
interested in your evaluation of their $10B after-market parts business. This business
can be segmented into two sets of buyers: dealers authorized to sell GM parts ($8B)
and non-dealer merchandisers ($2B). This second group can be subdivided into mass
merchandisers and ―service‖ providers. Mass merchandisers are of two types -- those
which specialize in auto parts (e.g. Auto Zone) and those which sell diverse products
including auto parts (e.g. Sears). ―Service‖ providers include Goodyear or Western
Auto. GM would like for you to answer two questions: (1) Is there an opportunity to
expand this part of the business? (2) How would they go about doing it if they chose
to expand?
Additional Details:
Company Economics: There are tremendous fixed costs in the auto business
(including labor). All of GM’s parts manufacturing facilities are fully
depreciated and they currently have excess capacity.
Competitors: While Ford and Chrysler make parts for their own cars, they are not
nearly as integrated as GM and tend to focus in specific parts categories. There
are hundreds of small parts manufacturers which tend to focus on commodity-like
auto parts (e.g. oil filters).
Products: GM produces a full spectrum of parts classified as either platform-
specific or universal.
Platform-specific Parts Universal Parts
Types of Parts Body panels, brakes, transmissions,
engines
Spark plugs, filters, hoses,
batteries
Market
Characteristics
Sold through dealers under warranty;
high margins/low volume
Sold through many outlets;
high turnover; strong
competition; slim margins/very
high volume
GM Sales $8B $2B
Growth Rates: The table below provides the basic facts about each market
segment’s growth rate.
Market Segment Overall Market Growth
Rate
Total Market Size
Dealer-authorized -35% per annum $40B
Non-dealer
Mass +65% per annum $70B
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merchandisers
Service
providers
+15% per annum $30B
Key Points: (Porter Five Forces analysis)
Threat of Entry is minimal for a broad category because the fixed costs are very
high. However, a manufacturer could go after a niche play if it were to develop
an advantaged cost structure or superior product. Switching costs among
consumers is very low.
Industry Rivalry is important for the mass merchandiser category because
margins are slim (meaning price wars are more prevalent). Brand names (e.g.
Fram, AC Delco, AutoLite) are important to many consumers.
Substitute Products are relevant only in the sense that there are many competing
products and future technologies such as electric cars could eliminate the need for
many types of parts.
Power of Suppliers is not a significant factor because inputs are commodity raw
metal and rubber.
Power of Buyers is important since there are few mass merchandisers such as
Sears or Kmart and they demand full range of products and tremendous volume
discounts.
GM’s Position: GM may have a cost advantage due to its fully depreciated plants
and excess capacity in a fixed-cost environment. Thus its variable costs must be
below sales revenue. Also, its brand names are respected and are valuable to
merchandisers in maintaining margins. GM’s ability to produce a full-range of
products is also an advantage. These advantages combined with the high growth
rates for the non-dealer merchandisers should motivate GM to expand it business in
this segment.. GM should use its cost advantage, brand names, and full range of
products to go after the most lucrative market -- the mass merchandisers.
9.85 Deli Meat Producer
Background:
You have been hired by a producer of deli meats to investigate the cause of its recent
decline in market share. The client would like an action plan for resolving the cause
of this decrease.
Details:
The Company:
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- Product: The firm produces plastic-wrapped packages of sliced deli meats at all
price points (generic, midrange, and premium). The market share loss is
primarily in the premium category. The deli meats carry a well-known brand
label.
- Price: Products in the premium category carry a higher price and have slightly
higher margins. Although price decreases will garner market share, the
competitors have maintained prices during the recent loss in market share.
-Place (Distribution): The product is sold in grocery stores and delis. Company
investigation has shown that grocers have maintained the same amount of
shelf facings and space for your product (so the decrease in share was not
caused by changes in display or incentives provided to the grocers by
competitors).
- Promotion: Advertising and marketing efforts have been steady during this period
of decline and there has been no noticeable change in the competition’s efforts.
The Competition: There are three other competitors in the deli meat industry.
Each of these competitors has about 20% of the market share; the client has 40%
of the market share. Overall the market (generic, midrange and premium) is
growing. The competition uses the same channels to sell its products.
The Customer: Although the customer buying premium deli meats has not
changed, a survey of the customers indicated a variability in the quality of the
product produced by the client. Sometimes the product was better than the
competition; sometimes not. This was causing customers to change to the
competition.
Solution:
Production Process: The client receives chunk meat in bins which meet a certain
average quality measurement. Meat is rated on a scale of 1 to 100 (100 being
best). The client is in a long-term contract with a supplier for bins at three quality
ratings: 40, 70, and 90. Individual chunks within a bin may vary from this
average. The premium deli meats are made from a mix of the three bins with the
majority coming from the 90-rated bin. Meat in the 90-rated bin ranges from 80-
95 while meat in the 70-rated bin ranges from 55-80. The variability in the
quality of the premium product is being driven by the variability within a 90-rated
bin.
To reduce the variability, the client could (1) negotiate with the supplier to
narrow the range within a bin or (2) sort the meat within the 90-rated bin at his
own facility. The impact of the first proposal will depend on the relationship
with the supplier. That is, is the client a major buyer; how much longer is the
contract set to run.? The second option will add cost to the production process
and reduce margins.