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Consulting

 Club  at  Berkeley   1  


Case  Book  2012-­‐2013  
 
 
   

Case  Book  2012-­‐2013  


January  2013,  © Consulting  Club  @  Berkeley  
 
 
 
 
• An  undergraduate  guide  to  case  interview  preparation  
 
• Case-­‐specific  experience  from  Berkeley  graduates  in  consulting  industry  
 
• A  navigation  tool  to  training  resources  at  CCB  
 

U n i v e r s i t y   o f   C a l i f o r n i a   B e r k e l e y  
2   http://consulting.berkeley.edu  
 
Table  of  Contents  

1.  INTRODUCTION   3  
1.1  WHAT  TO  FIND  IN  CCB  CASE  BOOK   3  
1.2  HOW  THIS  BOOK  COMPLEMENTS  CCB  TRAINING   3  

2.  CASE  INTERVIEW  PREPARATION  -­‐  BASICS   4  


2.1  KNOWLEDGE   4  
         +BUSINESS  TERMS,  BUZZWORDS  AND  CONCEPTS                                                                                                
         +INDUSTRY-­‐SPECIFIC  KNOWLEDGE  
         +FRAMEWORKS  AND  HOW  TO  USE  THEM  
2.2  PREPARATION   9  
         +BE  AN  EFFECTIVE  INTERVIEWER  FOR  YOUR  CASE  PARTNER  
         +ANSWERING  CASE  QUESTIONS  
2.3  POST-­‐INTERVIEW  EVALUATION   13  

3.  CASE  INTERVIEW  PREPARATION-­‐ADVANCE   14  


 
 

4.  PREPARATION  BY  CASE  TYPE   15  


4.1  MARKET  SIZING  (NUMBERS)   22  
4.2  PROFITABILITY  PROBLEM  (SALES,  COST  ADN  PROFITS)   33  
4.3  GROWTH  STRATEGIES   40  
4.4  MARKET  ENTRY   45  
4.5  COMPETITIVE  RESPONSE  (INDUSTRY  ANALSYSIS   53  
4.6  NEW  BUSINESS  (PRICING  STRATEGIES  /  NEW  PRODUCT  DEVELOPMENT)   65  

5.  ADDITIONAL  RESOURCES  AND  REFERENCES   66  


 
 
 
 
 
 
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1.  Introduction-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐  
 
 
 
 1.1  What  to  find  in  CCB  Case  Book  
 
A case is usually a business situation where the client is facing a difficult problem with the
company, a product, competitors or a new opportunity to explore and asks you to help address
some of the issues. It is an exercise for the firms to test your analytical thinking and to examine
how well you can handle problem-solving questions.

CCB Case Book is compiled with Cal's undergraduate interests in consulting in mind. For
undergraduate students, the prospect of analyzing and presenting a case in front of an interviewer
might be daunting. Worse, for a student not yet equipped with business training, it takes months
for him or her to transform into an analytical business decision-maker. Starting from the most
basic terminologies, concepts and analytical structures, this book shows you that problem-
solving skills can be trained. Moreover, for those who merely want to know about the industry,
this book is also a great read to determine whether consulting is actually right for you. If you do
not enjoy problem-solving case interviews, the likelihood that you will enjoy consulting is fairly
small.

What makes the book unique is also its richness in first-hand experience from various alumni
who had excelled in their case interviews as well as from professional consultants in the real-
world arena. They are the people who you will have a chance to have in-depth discussion with
during club events, who will act as your mentors. They were kind enough to share their insights
on specific cases selected from a range of top-notch consulting firms as well as from a range of
case types. This is to ensure a broad exposure to case questions and the diverse culture of firms.
Also, their narration on personal experience surrounding case interviews and recruitment will
hopefully mentally prepare you for your Big Day.

1.2  How  this  book  complements  CCB  Training  


 
         Consulting Club at Berkeley takes a structured approach in case interview training. Cases are
divided into different case types. Each chapter is covered (extensively or briefly depending on
progress of members) either by experienced upperclassmen, MBA students or alumni, followed
by case practices between partners. Materials are also available to members for perusal outside
of sessions. Besides that, a multitude of references to other case books and online resources are
carefully selected for further information on specific topics. Thus, CCB Case Book forms the
core of CCB Training as well as a starting point for you to move beyond.

As an aspiring consultant, remember that competency exists not just in what you know. It is
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also evident by how you package your knowledge and how you present yourself both during and
outside of interviews. Subtleties are critical in establishing your credibility and effectiveness
with interviewers and ultimately with clients. Thus, CCB cultivates these subtleties through our
mentorship program and a series of professional events such as mock interviews, case
competition, and career workshops.

2.  Case  Interview  Preparation-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐  


       Basics  
 
 
2.1  Knowledge  
 
+  Business  terms,  buzzwords  and  concepts  
 
[ First-Person ]
 
 
 
 
 
+  Industry-­‐specific  knowledge  
 
Case interviews span a broad range of industries. You may
encounter everything from Financial Services to Mining to
Education to Formula 1. For those of you who have not worked
as consultants before will likely not have any background in
most of these industries, The following samples showcase how
to prepare for a very high level view of some ‘typical’
industries that cases focus on. For further insights, you can also
attend the industry primer series led by partners from various
firms as they will capture key insights and latest trends in those
industries that tend to be popular in cases.

A very basic overview of an industry helps to more effectively tackle a case. At the very least
it helps you construct a framework that is most applicable to that particular problem context. For
examples, in the consumer goods sector, branding is an important driver of success. In the
pharmaceutical industry, generics manufacturers pose a major competitive threat. Having said
that, while spending a little time informing yourself about the basics of a few key industries
should improve your problem-solving ability, it is not necessary to master industry specifics or
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memorize industry data.
6   http://consulting.berkeley.edu  
 

+  Frameworks  
 
         One of the keys to performing well in case interviews is to demonstrate a structured thought
process in solving case problems. While different firms may use different terms to discuss how
to excel in case interviews, they all invariably suggest taking a structured analytical approach.
Structured analysis involves developing a logical framework to examine the business situation
presented, and methodically progressing through that framework until a recommendation that
addresses the case issue can be proffered (or until time runs out).  
 
Although there are several different types of cases, every case should be tackled using an
analytical framework. A framework is nothing more then a mental outline of how you intend to
go about evaluating the case problem. Using a framework is important because it helps ensure
that your response will be structured, logical, and thorough. A framework should be applied
every time that a new strategic question is posed by the interviewer. Some firms will ask broad
strategic questions at both the opening of the case and two-thirds to three-quarters of the way
through the case. When this happens, the candidate should always stop and prepare a structured
methodology to work through the business question. Often, demonstrating the ability to bring
structure to ambiguity is just as important to the interviewer as the answer that is given.
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It is best to familiarize yourself with as many of these frameworks as possible, though


memorizing them is not necessary (and may be undesirable). Please understand that simply
memorizing frameworks and then blindly applying them is unlikely to be a successful approach.
While almost all cases can be loosely categorized
Several analytical frameworks exist that can be as a certain type, each case invariably contains
useful for approaching case problems. For details that make it unique. Consequently, in
instance, many cases can be evaluated using one some instances, it might make sense to draw on
or a combination of the following frameworks: parts of, or a combination of, established
frameworks. Remember that the most important
1) Porter's 5 Forces; thing is to have a framework when tackling a case
2) Consonance Analysis (B (benefit) drivers and (albeit taking care to avoid applying an altogether
C (cost) drivers); inappropriate framework). The exact framework
3) 4 Cs (company, competitors, customers, that one uses is of secondary importance.
collaborators);
4) Profitability (Revenues ñ Costs = Profits); One of the most often-asked questions about
5) Value chain analysis; the process is the pros and cons of using
6) Kotler's 4 Ps (product, placement, promotion, frameworks. This may be because prospective
price); consultants hear conflicting advice about the
process ñ some people tell them to employ more
7) Prof. Nordhielm The Big Picture;
structure, while others implore them to use less.
8) Market segmentation and SPSG (size,
Think of finding a middle ground. The
profitability, share, growth);
frameworks are like tools - they help do the job,
9) Internal/External (internal factors that affect but are not a substitute for the handyman's own
the firm vs. environmental/external factors that judgment and common sense. Furthermore, the
affect the firm); experienced handyman knows which tools to use
10) Microeconomics: market structures, supply- in which situations. It has been said that (s)he
demand, long-run/short run, price elasticity, who is good with a hammer tends to see
marginal cost and revenue, variable and fixed everything as a nail. Don't see every case as a nail
costs that you need to hammer.
11) Financial statement analysis (income
statement classification, revenue and cost So, in sum, the candidate wants to
analysis); communicate to the interviewer that he has a
12) Cost-Benefit Analysis; and, framework guiding his thought process, but in a
13) Net Present Value (NPV) and the cost of discreet way. For instance, it is a very bad idea to
capital. say, I'm going to use the 4 Cs' framework for this
case. Instead, the candidate should say something
to the effect of:

In order to understand whether or not the acquisition of Firm B by Firm A is a good idea, I'm
going to examine Firm A and B in terms of their competencies and cost structures (Company),
get a sense of the existing players in the market (Competitors and Collaborators), and understand
who they sell to (Customers). Uncovering this information will help me to determine whether or
not enough strategic synergies exist between Firm A and B to justify an acquisition.

The great benefit of using a framework is that it helps the candidate use time both efficiently
8   http://consulting.berkeley.edu  
 
and effectively. One must make sure that he is uncovering all the important details of the case
situation, while not straying into fruitless digressions. A framework keeps the candidate on track.

The framework can serve as a crutch if the candidate gets nervous, or can't decide on the next
direction of inquiry. What the framework should not do, however, is to distract the candidate
from sound business thinking. The less the interviewee thinks of the case as a game or a puzzle,
and the more the interviewee imagines the case as a real business challenge that he might face as
a manager (or consultant), the better off he will be. Cases often do not have simple answers, so
be sure to convey the richness of your business intuition and your Kellogg-honed thought
process, and your practical experience when providing your final recommendation.

We suggest that you become very comfortable with 2-3 general frameworks, and then adapt
them on the fly in the interview to suit the needs of the situation. One helpful way to strengthen
your framework facility is to run through the same case a few times following different
frameworks. See how the use of different thought schemas affects your analysis path.

[ First-Person ]
 

2.2 Preparation
+  Be  an  effective  interviewer  for  your  case  partner  
[ 1. Prep yourself ]

Read the case thoroughly


Don't give a case that you have not studied yourself
Have any exhibits ready for use during the case
Be ready to take notes
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[ 2. Make it real ]

Make the experience as close to real as possible


Be serious during the case even if you give the case to your best friend
Be tough-test candidate's ability to deal with a negative vibes from interviewer
Control the time. Do not exceed 30-35 minutes for the case portion

[ 3. Step wise approach]

Introduce the problem statement


Allow 3-5 mins for candidate to gather her thoughts
Answer any questions that candidate may have
Guide the candidate accordingly if he or she is digressing from key issue

[ 4. Ask questions ]

Best way to make cases interesting to provide necessary hints indirectly (e.g. by asking related
questions)
Follow the case flow as provided in the original format - it helps in objective assessment

[ 5. Guide only when necessary ]

Give out information only when right question is asked


Idea is to let candidate stretch herself and get a feel for real situation

[ 6. Provide honest feed back]

Go back to your notes and think of both strengths and weaknesses


Be specific - what was the mistake and what's the right approach
Be honest - it's in candidate's best interest to make mistake with you and learn from them

Remember that there is no one answer to any case! A candidate can be creative enough to take a
new approach towards the problem.

Top  10  tips  for  answering  business  case  questions    


successfully1>>>    
1. Take notes

As your interviewer presents your case, be sure to take careful notes on the numbers or other
facts given. (Always bring a notepad and a pen to a consulting interview.) If you plan on drawing
                                                                                                               
1  Vault Guide to the Case Interview  
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graphs, add brownie points by bringing graph paper (which shows major foresight). Take notes
so you don’t have to ask your interviewer to repeat information.

2. Make no assumptions

As a case interviewee, you should never make any assumptions. Your interviewer will inevitably
leave things out of the case presented to you. (If an apple juice manufacturer has seen its
expenses rise dramatically, for example, your interviewer probably won’t mention the tree blight
that’s constricting the supply of apples.) You should assume the persona of an actual consultant
trying to learn about an assignment. You should also ask if the company has encountered a
similar problem, or what other companies in the field have done when faced with similar
situations. Your interviewer may not release that information but will be impressed that you
asked these sensible questions. Some good basic “professional” questions to ask, which apply to
most cases:

• What is the product?

• Who hired us?

• How long will this engagement last?

• Has the company faced this problem (or opportunity) before? If so, how did it react? What
was the outcome?

• What have other companies facing this situation done? 

3. Ask questions

Your interviewer expects you to ask questions – as many intelligent questions as you need to
obtain an accurate picture of the relevant facts in the case. Many inexperienced case interviewees
make the error of asking their interviewer too few questions. They may be afraid that they will
look ignorant, or not wish to “bother” the interviewer. Remember – not asking questions is a
fatal error in a case interview. If you don’t know the first thing about the helicopter market, ask
how much it costs to manufacture a rotor. If you need to estimate the demand for a beef-flavored
potato snack in Wichita, Kansas, then feel free to ask the population of Wichita and environs.

You will often find that your interviewer will direct your line of questioning to a specific area,
but you must always be ready to control the conversation in case the interviewer does not direct
your reasoning. If you are unsure, simply ask the interviewer. For instance, if you find the
interviewer offering little direction as you move through your initial questions, you may wish to
ask, “I find the lack of a risk assessment to be a potential showstopper. Might I ask some detailed
questions about this?” Or you might say, “Given what you have told me about the situation, I
would like to find out more about the client’s current relationship with its distribution partner.
Would that be OK?” In this way, you take charge of the line of questioning without stepping on
the interviewer’s role.
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4. Listen to the answers you get

One interview warns: “Many candidates get so caught up in asking the perfect questions that
they don’t listen to the answers they receive. They go through a mental list of all the questions
they want to ask, and ignore the response
they got. That throws off their reasoning.”  
Make sure you respond to the information
you receive and incorporate it into your
analysis.

5. Maintain eye contact

Always maintain direct eye contact during


the case interview. Eye contact is critical
when answering case questions – it
demonstrates confidence and authority.
Remember that in consulting you may find
yourself in front of 20 executives at a
major corporation presenting a strategy
you were briefed on only a half-hour ago.
And then you have to answer questions!
So you can see why business case
interviewing is so important to consulting
– it simulates the work environment
consultants must face every day.

6. Take your time

It’s perfectly fine to take a minute to think through your answer – in fact, most interviewers find
it preferable. “Whenever I asked to take the time out to collect my thoughts,” reports one
consultant who’s undergone “dozens” of case interviews, “my interviewers always said, ‘Okay,
good, go ahead.’” On the other hand, while “a minute of deep thinking” is fine, “five minutes is
really overkill. You don’t want your interviewer waiting there for five minutes. The case is only
supposed to be 15 or 20 minutes.”

7. Lay out a road map for your interviewer

After you’ve selected your approach, don’t keep it a secret. Tell your interviewer what approach
you’re going to take. For example, you might say, “First, I’m going to discuss the Mexican and
Canadian markets. Second, I’ll ask about our entry strategy. Finally, I’m making a
recommendation.” “One of the most important things consultants have to do is present complex
ideas in a lucid manner,” explains one interviewer. “That’s why you should take time to explain
your reasoning. Not only will it impress your interviewer and allow you to confirm any
assumption that you’re making, but it will allow you to get your own thinking straight.”
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8. Think out loud

In order to navigate case interviews successfully, you will need to act quickly and confidently.
The business case is an opportunity to show the interviewer how you think. Your interviewer
wants to know that you can reason in a rapid and logical fashion. As you assess, compile, and
analyze the elements presented to you, be sure that you speak aloud and explain your reasoning.
This is the only way the interviewer can assess your performance.

You may not be entirely comfortable thinking out loud. So if you’re not feeling confident
thinking aloud, try practicing by yourself. Start with something simple like explaining aloud to
yourself how to change a tire or how you brush your teeth. Minimize “ums” and other fillers, so
that what you say is concise, direct and clear.

Next, try practicing on friends or family. Have them ask questions for which you must assess a
situation. For example, they might ask, “I’m not sure at which bank I should open a checking
account. What are the trade-offs between Bank X and Bank Y?” or “I’ve got $50 to spend on
groceries, so what should I buy?” Even speaking to yourself in front of the mirror will build your
confidence thinking “on the fly” while simultaneously speaking.

9. Present your thinking in a clear, logical manner. Where useful, use frameworks and
business concepts to organize your answer

You should develop a framework for assessing case interview questions which can be applied to
different situations. In general, in any situation you will want to:

• Understand the scope of the engagement


• Pinpoint the objectives
• Identify the key players
• Work towards a recommendation

Beyond this, you may choose any line of questioning or structure with which you feel
comfortable. As you practice, you will find yourself developing this framework unconsciously as
you attempt to gain clarity over a situation. Capture and package this framework, and have it
available by memory (or on paper if you wish) for use at any time.

Where useful, also use advanced business concepts and frameworks – such as Porter’s Five
Forces or Value Chain Analysis – (see the chapter on case frameworks) to help organize your
thoughts and impress your interviewer.

10. Quickly summarize your conclusions

You have limited time in your case interview to make your point. If you are uncomfortable with
quickly summarizing your conclusions, think about being faced with this classic situation:

“A consultant working for a multinational corporation inadvertently bumped into the CEO of the
corporation while waiting for the elevator. As they got on the elevator, the CEO announced that
he was on his way to a Board of Directors meeting on the 34th floor. He then instructed the
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consultant to brief him completely on the major findings of the project in the time it took the
elevator to go from the 1st floor to the 34th floor.”

While this is no doubt an urban legend, it is extremely likely that you will encounter time-
pressured situations many times in your professional career, especially in consulting, where time
is a precious commodity. If you are taking a while reaching your conclusion, your interviewer
may ask you for the “60 second pitch.” Practice summarizing your answer in a minute or less.

2.3 Post-interview Evaluation


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3.  Case  Interview  Preparation-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐  


       Advanced  
 
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4.  Preparation  by  Case  Types-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐  


Case Types

4.1. Market Sizing (numbers)


4.2. Profitability Problem (sales, costs and profits)
4.3. Growth Strategies
4.4. Market Entry
4.5. Competitive Response (industry analysis)
4.6. New Business (pricing strategies / new product development)

4.1 Market Sizing-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐  


Basics
First, what is market sizing? In a case interview, market-sizing questions can be stand-alone or
segments of bigger problems. Typically, it will ask you to structurally estimate the market size
(note: this is the number of buyers x quantity purchased by an average buyer per year x the price
of average unit2) of a particular product within specific boundaries. For example, a
straightforward question would be: What is the market size for organic cucumber in the U.S.?
Often, these problems allow interviewers to gauge your abilities to do quick quantitative
calculations, make logical conclusions and reasonable assumptions, and think creatively under
time pressure.
Second, what’s the big picture? By figuring out the market size of a certain product, you’re
effectively answering the following things:
• Should one invest in this market?
• Should one increase/decrease investment in this market?

Thus, market-sizing problems are often parts of bigger cases, such as market entry, industry
analysis, profitability, scaling, etc.
                                                                                                               
2  Weiss,  Allen.  "How  to  Determine  the  Size  of  Your  Market  –  Part  1."  MarketingProfs.com.  N.p.,  1  Jan  2011.  Web.  14  Jan.  
2013.  
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Before we dwell into the nitty-gritty of how to calculate market size, however, let’s be clear on
one thing: usually, interviewers do not know or care about the exact answer to these problems.
Interviewers are much more interested in the process that you used to arrive at your answer.
After all, a market size problem is often described as a back-of-the-envelope calculation, or a
guesstimate, so don’t stressed about exact numbers.

With that said, interviewers DO care about how you answer your question. Remember to always
be organized and state every assumption you make along the way. In other words, think out loud,
or better yet, draw diagrams. Also, try not to use too many decimals; round to the closest 10%
whenever you can (when in doubt, ask the interviewer for permission before rounding).

Some helpful facts to remember:

1. Population: US 300 M, Canada 33 M, China 1.2 B, Mexico 100 M, and India 1 B


2. There is approximately 100 million households in the US
a. ~ 3 persons/household; 2 adults and 1 child
3. 10,000 towns/cities in the US
4. 8 M people live in NYC
a. 1.5 M live in Manhattan
b. 45 M visit every year
5. 3.5 M in LA
6. 7 M in London

Now that we’ve gotten the basics down, let’s look at a sample case that will cover both the top-
down and the bottom-up approaches. But don’t let this example fool you into thinking that these
are the only ways of solving such cases. You’re free to bend the rules and make up your own
frameworks. Just remember to be creatively logical and structured!

+ A Sample Case
How big is the U.S. Disposable Diapers Market in annual revenue dollars?3

• Top-down approach
o Develop and state assumptions starting with the big picture and working
downward
o Talk to interviewers through your assumptions as you make them and let them
know why you’re using the numbers you picked
o Follow the cues from the interviewer
o Do a gut check with final number before committing to it (use common sense!)

                                                                                                               
3  Taken  from  the  Management  Consulting  Association’s  casebook,  Casing  Boot  Camp  (2006).    
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Total US # of Kids Assume Assume 5 Assume Assume


Population (under 18 10% wear diapers/day 360 $0.60 per
yrs old) diapers days/year diaper
(<3 yrs
old)
300 M 100 M 100M x 10M x 5 = 50M x 360 18B x
10% = 10 50 M = 18 billion $0.60 =
M diapers/day diapers/year $10.8 B

• Bottom-up approach
o Develop and state assumptions starting at a lower level of detail
o Talk to interviewers through your assumptions as you make them and let them
know why you’re using the numbers you picked
o Follow the cues from the interviewer
o Do a gut check with final number before committing to it (use common sense!)

Baby G uses 6 I live in SF – Assume 360 Approx. 10,000 Assume each


diapers/day 10% of pop. days per year towns/cities in diaper costs
are babies in US $0.60
diapers
6 diapers/day (2M x 10%) x 1.2M x 360 = 432M x 10,000 4.3B x $0.60 =
6 = 1.2M 432M = 4.3B $2.6 B
diapers in SF diapers/yr in SF diapers/yr

As you can see, both answers are radically different, proving that the answers don’t really matter
as long as your method is sound.

Okay, now that you’ve gotten your feet wet, let’s look at more thorough samples. Here’s a
market sizing case from the Final Interviewing Round at McKinsey in 2005. (Note how the
interviewee is using a top-down approach to crack the case.)

+ Practice Case 1
Piano Market Sizing4

Problem Statement
We’re going to look at the sales of Pianos in the United States. What do you think annual sales
(total revenues) are in the US for Pianos?

                                                                                                               
4  Taken  from  the  Columbia  Case  Book  (2006),  pages  26-­‐28.  
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Suggested Answer Scheme
Answer should show a logical way of sizing the market. You need to make some assumptions,
and show your way of getting to an answer. Actual numbers aren’t as important as the logic
behind the method.

Candidate’s Response

I am thinking there are two types of piano buyers, personal households and institutions. Of those,
a certain percentage already owns a piano. Piano buyers, in a given year, would be divided into:
1) First-time piano owners
2) Upgrading an old piano or replacing a damaged piano
3) Adding a second piano (small for households, larger for institutions)

Then, I would need to estimate who these buyers might be:


Households: For example, approx. 300 Million people in the US. Avg. household is 3 (which
might be high due to many single people.) So, 100 Million households.

From there deduce how many are in the $75,000/year income bracket, as they are most likely to
purchase a piano (for example, 25% which equals 25 Million households.) Out of those 25
Million, 5% currently own a piano already (1.25 Million Pianos). If I assume every year, 2% of
the 25 Million will buy a piano, then there are 500K pianos sold to households every year.

Follow a similar logic for institutions – e.g. colleges, universities, symphonies, Carnegie Hall,
bars/businesses, etc. Assume that there are 1 million of these institutions, of which 20% (200K)
would want a piano. Of that, perhaps 5% buy a piano every year, or 10K pianos sold to
institutions.

Then, I would need to figure the average price paid per piano.
It is important to distinguish between new and used piano sales, as the price points are different.

In the New Piano market, I would think the low price for a piano is $5,000 and the high price is
$15,000, so the avg. price of a new piano is $10,000.
For a used piano, the low is probably $1,000 and new is $5,000, so the average price is $3,000.

I would venture that 20% of pianos sold are used and 80% are new for both households and
institutions. If this is the case, 102K total new pianos are sold and 408K used pianos are sold. To
make the numbers simple, use 100K and 400K. This leads you to $1B in new piano sales and
$1.2B in used piano sales, or $2.2B in total sales.
Consulting  Club  at  Berkeley   19  
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+ Practice Case 2
This case demonstrates how one can approach an unfamiliar market sizing case by asking the
right questions.

Eye Surgery5

BCG First Round in 2006

Problem Statement

Our client is a manufacturer of equipment for eye surgery. Specifically, the machines measure
deficiency in eyes, and the company also produces lasers for post-operational procedures and
adjustments. They don’t actually make the lasers or devices used for Lasik – rather, they are
complementary products for this procedure.
The global market for these devices is growing, but at a declining rate. As a result, the client
wants to get into a higher growth area, so they are looking at acquiring a company that makes
inter-ocular devices. These devices are used instead of Lasik but with similar effectiveness, and
they are used for two major categories of patients:
• Patients with cataracts
• Refractive surgery (to correct near or far sightedness)

How would you approach this opportunity? What would you look at?

Information to be provided upon request

Interviewee asked about the specifics of what the machines were so as to consider synergies
between the two companies and product offerings. There would be significant synergies and that
is a component of answering the case.

Interviewer Information & Suggested Answer Scheme

Given that we’re looking at a company with an existing product line that is exploring moving
into a related product line, we need to understand any links between the two. It is vital that the
interviewee demonstrates his acknowledgement of the risks of cannibalization and the benefits of
synergy between the old and new lines. Also key is to show an understanding of some of the
basics of M&A. High level, a framework looking into internal factors of both the target and
acquirer (such as culture, finances, and the synergies there might be between the two), external
factors such as market trends and competition, and customer factors (both doctors and patient
segments) is necessary. The interviewee should also remember the significance of the valuation
of the target- is it worth the asking price.

                                                                                                               
5  Taken  from  the  Columbia  Case  Book  (2006),  pages  48-­‐50.  
Consulting  Club  at  Berkeley   20  
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This case is fairly simple if you hit the numbers – take your time and get them right. The overall
framework was very helpful as interviewee was able to reference it multiple times during a fairly
focused case discussion. The key is identifying that there will be different types of customers for
each offering, so suggesting ID-ing customer segments up front seemed to be a major plus.

Key Facts
• US population is roughly 300M
• 75% of the US population over 65 has cataracts
• US population is evenly distributed over 80 years, the same number of people are each
age
• When someone turns 65, they have a 75% chance of getting cataracts, and if they don’t
get it immediately they will never get it
• 1/3 of the population is near-sighted and ¼ of the population is far-sighted-> 175M
people need vision correction of some kind
• There are government caps on pricing for cataracts surgery and that there is substantial
competition from major national players.
• The refractive market is still very fragmented and growing rapidly – 1.5M surgeries/year
will grow to 3-4M as procedures become safer. Also, the patient pays 10x as much for
refractive surgery as a cataracts patient would pay.

Candidate’s Response

Interviewee: I would look into internal factors of both the target and acquirer (such as culture,
finances, and the synergies there might be between the two), external factors such as market
trends and competition, and customer factors (both doctors and patient segments). Related to all
of these would be the valuation placed on the company. If we could, I’d like to start with drilling
down on the customers.

Interviewer: OK, I like that. So let’s talk about the cataracts patients. If I were to tell you that
75% of the US population over 65 has cataracts, how many potential patients are we talking
about?

Interviewee: Well I know that 12% of the population is 65+, so let’s call that 10% for
simplicity. 10% of 300 million is 30 million. 75% of that is 22.5 million. But some of those
people might already have had surgery.

Interviewer: Good point. And it gets a little dicey because the segment would be skewed
towards 65. So here is a simplifying assumption – assume the US population is evenly
distributed over 80 years, the same number of people are each age. When someone turns 65,
they have a 75% chance of getting cataracts, and if they don’t get it immediately they will never
get it. What’s the market size thinking this way?

Interviewee: OK, so we have 300 million people over 80 years. That’s 3.75 million people in
each year age bucket. So it would be 3.75 million people turning 65 every year. If 75% of them
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get cataracts, that’s…roughly 2.9 people a year. Plus some percentage of the population already
over 65, I’m thinking right around 3 million people a year.

Interviewer: Does that make sense?

Interviewee: I don’t know a lot about cataracts, but it seems to. I’m not sure all of those people
currently get laser eye surgery currently, though.

Interviewer: Right. OK, now let’s turn our attention to the refractive surgery market. So your
research tells you that 1/3 of the population is near-sighted and ¼ of the population is far-sighted.
Assume that those numbers already include those who’ve had their vision corrected. How many
people are we talking about for the potential market size?

Interviewer: (Works out 4/12 + 3/12 = 7/12; 7/12 * 300 million people total = 175 [shortcut:
1/4 of 100 = 25, 25*7 = 175]) 175 million people.

Interviewer: Right. And it turns out that it translates to 1.5 million people a year actually
getting refractive surgery. So if we acquire this company and can position it as a cataracts
provider or a refractive surgery provider, which should we position it as? (note: the machinery
would be slightly different, enough so that it would be beneficial to go after one market or the
other).

Interviewee: OK, so I know that the cataracts market is around 3 million a year and the
refractive market is 1.5 million a year. But I don’t know anything about profitability so I can’t
really say. Can you tell me a bit about the markets?

Interviewer: What do you want to know?


(Key information: There are government caps on pricing for cataracts surgery and that there is
substantial competition from major national players. On the other hand, the refractive market is
still very fragmented and growing rapidly – 1.5 will grow to 3-4 as procedures become safer.
Also, the patient pays 10x as much for refractive surgery as a cataracts patient would pay).

Interviewee: So based on what we just discussed I’d like to target the refractive market.

Interviewer: Is there anything else you would want to know before making a decision to buy
the company?

Interviewee: I’d need to know more about the financials to give a clear answer. I’d also need to
better understand the synergies and how they’d be perceived in the market. However, it looks
promising given our examination of the market segments.

Interviewer: Excellent.
Consulting  Club  at  Berkeley   22  
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4.2 Profitability Problem----------------


Basics

Most of the business cases (if not all) come down to profitability problem at the end. An
interviewee will have to tackle either a pure profitability case or as a part of larger scale case at
one point during his/her interview process. This is also a very helpful framework to get used to
lay down your thoughts in an organizational manner and investigate them further one by one.

+ Buzzwords & Concepts

1) Bottom line: Gross sales minus taxes, 5) Gross sales: Total value of sales, before
interest, depreciation and other expenses deducting for customer discounts,
Also called net profit, net earnings or net allowances or returns.
income.
6) Net sales: gross sales minus returns,
2) Cost of goods sold (COGS): on an discounts and allowances.
income statement, the cost of purchasing raw
materials and manufacturing finished 7) Overhead: the ongoing administrative
products. expenses of a business, such as rent, utilities
and insurance.
3) Cost-based pricing: a pricing strategy in
which a product or service is priced 8) Price-based costing: a pricing strategy in
according to the cost of producing, which a product or service is priced
manufacturing or otherwise creating the according to what the market will bear, or
product or service. R&D and COGS are the what the consumer is willing to pay.
major determinants in this pricing strategy.
9) Transition phase: a phase of
4) Cost-benefit analysis: A technique development in which the company’s
designed to determine the feasibility of a earnings begin to mature and decelerate to
project or plan by quantifying its costs and the rate of growth of the economy as a
benefits. whole.
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Type Approach Elements

Increasing Sales Assessment (Increasing Growth relative to market


sales doesn’t necessarily share;
mean increasing profits) Changes in market share;
Customer polls;
Prices competitive?;
Competitor’s strategies
(marketing and product
development)

How? Increase volume


Increase amount of each
sale
Increase prices
Create seasonal balance
Reducing Costs Assessment Get cost breakdown
Investigate for irregularities
Benchmark competitors
Consider labor-saving
technologies
Internal Cost Analysis Union wages
Suppliers
Materials
Economies of scale
Increased support system

External Cost Analysis Economy


Interest rate
Government regulations
Transportation/ Shipping
Strikes

Increasing Profits Revenue Identification of revenue


E (P=R-C) (always look at streams?
external factors first) Percentage of total revenue
of each?
Unusual balance?
Have percentages changed?

Costs ID fixed costs


ID variable costs
Shifts in costs
Unusual costs
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Benchmark competitors
Reduce costs without
damaging revenue streams
Volume Expand into new areas
Increase sales (volume and
force)
Increase marketing
Reduce prices
Improve customer service

+ A Sample Case
Palm Tree Plantation Exports6

Problem Statement:

Palm Tree Plantation Exports grows, sells and leases twenty different varieties of palm trees and
other tropical plants throughout the United States. They posted a net income of $95m, down
from $105m last year. Yet their market share grew by 7%. What’s going on and how can we turn
it around?

Suggested Answer Scheme

Summarize the case

Whenever you get a question with numbers and the numbers are related, as in this case (net
income fell from $105m t o$95m), you should quantify the numbers. So instead of saying that
net income fell from $105m to $95m, or that it fell $10m, you should say the net income fell
about 10%.

Verify the objective

Determine what’s going on and how you can turn it around. There are no other objectives we
need to be concerned with.

Lay out your structure

Because this is a P&L case, you should use E(P=R-C)M. Look at external factors first because
we want to find out if this is a company problem or an industry problem. Economic factors in
                                                                                                               
6  Case in Point (7th Edition) Case 1

 
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this case should include unemployment, mortgage crisis, housing starts, state and city budgets,
interest rates, and water and gas process. All those things are important not only to the company,
but to the industry as a whole.

Ask industry questions

Interviewers have a lot of information they want to give you but you need to ask for it. Did you
ask about industry growth trends? Competition? Changing landscape? Environmental factors like
drought and disease? Who are the main customers and what is their industry like (states’ and
cities’ budgets are down, housing starts are down, and shopping mall and office building
development is also down)?

Ask company questions

Once you have a feel for the industry, go inside the parentheses to get a feel for the company.
Always start with the revenues. Ask, what are the major revenue streams and how have they
changed over time? What are the major costs, both fixed and variable and how have they
changed over time?

+ Practice Case 1
Bubble Gum Manufacturer7

Problem statement

You are a consultant working for a bubble gum manufacturer. The CEO of the gum
manufacturing company is concerned because his company is experiencing declining margin.
My questions to you are: (1) the reasons behind declining profitability (2) your suggestions for
improving profitability

Interviewer Information

Sales have been increasing

If asked about cost composition, ask the interviewee to brainstorm potential cost buckets:
• COGS: gum, sugar, flavor, smell, color
• Labor
• SG&A

Raw material cost has not changed (i.e. the unit cost is the same but total cost could be different
depending on product composition. ***This is the key to the case so don’t give the information
                                                                                                               
7  Case Practice Wharton casebook 2007-2008

 
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about the unit cost to the interviewee too early in the interview.

Remember to push the interviewee so that she comes to the conclusion herself***)

Product portfolio – 2 types of products: flavored and flavorless gum

Both products are sold at the same price point.

Composition products:
• Flavored gum raw material: gum, sugar, flavor, color dye
• Flavorless gum raw material: gum, sugar, color dye

Gum, Sugar, and Color Dye raw materials are same in size for each of the two products.

Suggested Answer Scheme

Profitability has declined because sales of flavored gum have been increasing, which means that
raw material consumption is also increasing because flavored gum requires the additional flavor
component. This added with the fact that the price of flavored gum is the same as non-flavored
gum, means that, essentially, costs are now rising while revenues are not. To improve the profits
of the company, interviewee should come up with 4-5 suggestions (raising price of flavored gum,
sourcing cheaper flavors from other suppliers, negotiate with existing suppliers to reduce the
flavor cost, vertical integration of flavor manufacturing company)

Comments

The key focus of this case is in the product mix. Most interviewees may be really confused when
they get the info that sales have been raising and cost is constant. First, don't guide them into the
product portion right away b/c this is the topic that they should explore themselves. Logical
buckets that interviewees should explore are Sales trend, cost trend, cost composition, and
product mix. The conclusion should be concise as indicated in the logical conclusion section. For
the answers to the second question (how to improve profits), great interviewees would present
two types of options (short term (easy to implement, quick wins) would be to negotiate with
existing suppliers / look for other suppliers, long term (vertical integration)). When discussing
price change, you should ask interviewees risk regarding price increase and how they are
planning to cope with it. For example, customers may buy less of flavor gums b/c of price
increase. However, you can offer value-added product such as low-cal flavor gum & do
promotional/marketing efforts to justify price increase.
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4.2 Profitability Problem----------------


Advanced

+ Practice Case 1
Food services costs
Bain

Problem Statement Part 1

A large fast food chain has hired Bain to improve the company’s profitability. You’re about to
have an initial brainstorming session with your team around your client’s options, and you want
to collect your thoughts first. How would you begin to tackle your client’s profitability problem?

Suggested Answer Scheme

Your interviewer wants to know that you have a structure in mind. An appropriate structure for
this case would be the profit equation. Be sure to state that to your interviewer.

Sample Response

"Profit is: total revenue – total cost.


Where Revenue = Price * Quantity and Costs = Fixed Costs + Quantity * (Variable Costs).
In order for the company to improve its profitability, management needs to increase revenues
and/or decrease costs. So to begin tackling my client’s profit problem I am going to look at these
two sides of the equation:
· Could the client increase prices? How would customers react?
· Could the client sell more meals, either at existing branches or through opening new ones?
· Are there other creative ways to grow revenue (enter into large-scale catering contracts, for
example)?
· Could the client decrease our fixed costs by selling some of our branches or real estate?
· Could the client reduce the quantity of products they buy, such as ingredients for their meals?
· How else could they reduce their costs?"

Problem Statement Part 2

At your case team meeting, your manager informs the team the customer is price sensitive, the
market is fairly saturated, and that the fixed costs are pretty stable. Thus Bain and the client
agree that the team should focus on lowering variable costs. Specifically the client wants to
reduce their spending on purchased items (items the client buys from others and then uses or
offers to their customers, like the meat in the hamburgers or the ketchup packets). Without
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knowing much more about the situation, what would you suggest are some ways to do so?
Which ideas seem the most attractive and why?

Suggested Answer Scheme

Purchased goods in this business fall primarily into 2 categories: food and packaging. Variable
costs are a function of: price and volume. Therefore, the client needs to reduce volumes
purchased or negotiate lower prices.

Food:
· We could negotiate lower food prices with our suppliers (consolidate our purchasing, etc.).
· We could look for cheaper ingredients. This sounds risky because it could lower the quality of
the food that we sell.
· We could reduce the volume used. For the same reason, this sounds risky because it would
change our recipes, one of our competitive advantages in producing winning recipes.

Packaging:
· We could negotiate lower prices with our suppliers or look for cheaper alternatives.
· We could reduce the volume used.
Recommendation:
· Most attractive ideas are: negotiating lower food prices or packaging prices, looking for
cheaper packaging materials, or reducing the volume used.

Problem Statement Part 3

At this point in the brainstorming session, the VP adds that two years ago, the company launched
a program to centralize purchasing and successfully negotiated much lower prices. Therefore, it
is critical to determine if you could reduce the volume of goods that the client purchases. How
could you reduce the volume of purchased goods?

Suggested Answer Scheme

· Some good creative answers here include (but are in no way limited to):
· Can the client change the shape or size of food containers?
· Can the client packaging for families be consolidated?
· Can the client reduce the weight of the packaging while still protecting the food?
· Can the client reduce other qualities of the packaging including degree of color or logo
prevalence without sacrificing their brand?
· Can the client lock bathrooms so that non-customers do not waste toilet paper and towels?
· Can the client charge for extra condiments?
· Can the client reduce the size or number of napkins they purchase?

Problem Statement Part 4

Bain focuses on components that make up large portions of a company’s costs: reductions in
these areas will have the largest impact on a client’s overall costs. Bain’s philosophy is to always
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focus on where the value is. At first glance, napkins would not appear to fall within this category
because they are so low cost. But there is a new napkin dispensing technology on the market that
you have heard about and think could save the client some money. You decide to investigate.

One way to reduce volume is to reduce how many napkins a customer takes. Customers in fast
food chains often take many more napkins than are needed for the meal, or actively hoard them
to take home. One action some chains have taken to combat this is to switch their napkin
dispensers from small metal dispensers (from which you pull napkins out in bunches) to larger
plastic dispensers (from which you pull napkins one at a time, like a reverse Kleenex box). These
dispensers are produced by major paper manufacturers.

Let’s assume your chain came to you with the following question:
· How much money could we save per year in the US from using the new type of napkin
dispenser in all restaurants?

What information would you like to know from the company? (Do not take into account the cost
of the dispensers for now.)

Suggested Answer Scheme

Key information that would be necessary includes:


· Number of restaurants
· Number of customer visits per store per year
· Number of napkins used per customer now
· Number of napkins used per customer after the switch
· Price per napkin

Problem Statement Part 5

As you talk through the data points that you would need to gather with your colleagues, you
learn from a fellow AC who worked for a local restaurant that a case of 6000 napkins cost his
client $28. Thus, a reasonable price per napkin is about $0.005. Conduct your estimates as if
your client is similar to McDonald's in terms of the number of outlets.
Your manager calls you for a quick estimation of the market size before getting the actual data
from your client. Use creative approaches to hypothesize values for each of the above pieces of
information and then calculate the estimated savings.

Suggested Answer Scheme

The interviewer is not looking for you to know the values of each of these buckets, however it is
important for you to make reasonable estimates and be able to defend your answer. Were your
estimates near these, or did you at least take similar approaches?

Number of restaurants
Actual answer: ~12,000 McDonald's in the US.
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One estimation approach
Think of your hometown: How many McDonald's are there for the number of people? Assume
there is a McDonald's for every 20-25,000 Americans, with a population of ~275 million people
in the US, that would be 11-13,750 McDonald's.

Other approaches
· Estimate the entire fast food market and then estimate McDonald's share
· Estimate the area covered per McDonald's across the United States.
Note: With this approach, be careful to account for population differences between 10 square
miles of NYC and 10 square miles of Utah.

Number of customers per restaurant per day

Actual answer
Fast food restaurants expect around 1,500 customers a day.

One estimation approach


Assume the 20,000 people per McDonald's visit an average of twice a month, that's 24 times a
year per customer or 480,000 visits / 365 days = 1,315 customers per day.

Other approaches
One might take this a step further during a case interview and attempt to segment these
customers. For example, one might assume 50% of the restaurants customers are drive-through
and 25% of the remaining takes their food "to go." Drive-through customers do not take, but are
given napkins. "To go" customers may be more likely to "hoard napkins" as they cannot go back
to the counter for more.

Note: This would influence potential answers to the next question - but for now, assume you did
not take this step and all customers are the same.

Number of napkins used per customer per visit

Actual answer
Five napkins with old dispensers and two napkins with prohibitive dispensers for a savings of
three napkins per customer.

One estimation approach


During a case interview you would most likely just use personal experience here - how many
napkins do you take or see others take when you're at a fast food restaurant?

Other approaches
Bain would send people to the chain to watch napkin taking behavior or call fast food restaurants
with both kinds of dispensers to find out how many napkins they go through a day.

Calculations
$0.005 per napkin x 3 napkins x 1500 customers x 365 days per year x 12,000 restaurants
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= $98.6M dollars saved in napkin purchases.

Problem Statement Part 6

Does this estimate sound reasonable?

· How would you go about feeling comfortable with this figure and pressure checking your
assumptions?

·What would you want to flag for your manager as factors that might significantly alter the
answer?

Suggested Answer Scheme

To check the magnitude of the overall number some options include:

· Looking at a comparable company’s operating income to see what percentage of the expense
napkins account for.

· Find out what your client currently spends per restaurant per year on napkins. Keep in mind
that with a company of this size any small changes in assumptions will significantly alter your
answer. Some things to flag for your manager:

· The chain you work for probably gets a significantly better deal on napkin pricing due to the
magnitude of their orders (in contrast to the single-location restaurant napkin price estimate you
received)

· Up to 50% of customers are drive-through and their napkin behavior should not change. This
would reduce the savings by up to 50%

· The three napkin reduction estimate needs refining. Perhaps a pilot program would need to be
done to see if the dispensers really have the desired effect

Problem Statement Part 7

Assume you would need 10 dispensers per store for a total of 120,000 dispensers. Also note that
napkins in these dispensers cost more at a price of $.01 per napkin (remember it is the paper
companies that make the new dispensers). At what price per dispenser would the investment not
be worth doing?

Suggested Answer Scheme

120,000 x cost of dispenser + 2 napkins x .$01 per napkin x 1,500 customers x 365 days x12,000
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stores
=5 napkins x .005 per napkin x 1,500 customers x 365 days x 12,000 stores

120,000 x cost of dispenser = $32.85M

The most you would be willing to pay per dispenser would be $273.

Note: In an actual case interview you can use round number estimates so that mental math is
easier.

Problem Statement Part 8

The actual cost of these dispensers is around $50.


· Can you see any other factors your client should consider before making a decision?
· What other advantages and disadvantages might there be to this switch? (Impact on costs and
customers.)
· How might you evaluate the impact of the extraneous factors?

Suggested Answer Scheme

Some potential ideas include:

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

Disadvantages:
With the new dispenser locking you into a paper provider you may lose buyer power. There is
the potential for additional napkin price increases in the future.
Customer reaction: Will a customer find this to be poor service? What if he or she needs to grab
a handful of napkins after a spill?

Implementation:
Management will need to negotiate a contract that includes limits on future pricing.
Bain will need to do customer research and pilot programs to evaluate customer reaction.

And many, many more! As you can see, the keys to a good case interview are logical
assumptions, creative thinking, and basic quantitative ability. Take time to think through
problems and share your thought process with your interviewer and you will do great.
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4.4 Market Entry--------------------------


Basics
Market entry cases deal with a firm looking to expand into a new geographic region, a
new/related business, or a new customer segment. For example: "Company X manufactures and
sells high-end audio speakers in Indonesia. The firm is considering expanding its operations into
China. Would you recommend that it do so?"

+ Buzzwords & Concepts


1) Cost & benefit analysis: A technique 6) Core Competencies: Areas in which a
used to quantify the tangible and intangible company excels
upsides and downsides of a project.
7) Joint venture: Two companies join
2) Breakeven Analysis: For data-driven together to form a new incorporated
market entry cases, adopt a breakeven company. Both parties provide equity and
analysis approach resources to the JV and share in the
management, profits and losses.
3) Methods of entry:
• Starting a new business (Greenfield 8) Market Segmentation:
project) • Delineate market into discrete groups
• Acquisition • Match product offering to discrete groups
• Joint venture • Segment price structure
• Licensing • Define a niche and deliver niche-specific
products
4) Barriers to entry: Characteristics of a
company or industry that make it difficult for 9) Product differentiation: Distinguishing a
new competitors to succeed. A number of product or service from others, to make it
factors determine the degree of difficulty in more attractive to a particular target market.
entering an industry. This involves differentiating it from
competitors' products as well as a firm's own
• Economies of scale product offerings. This is done after the
• Product differentiation market is segmented.
• Capital requirements vs. switching costs
• Access to distribution channels 10) SWOT Analysis:
• Proprietary product technology It is a method to evaluate Strengths,
• Government policy / subsidies Weaknesses, Opportunities and Threats
involved in business venture. It can be used
5) Barriers to exit: to explore the reasoning behind a market
• High investment in fixed assets, e.g. entry decision.
manufacturing
• Contract agreements with employees,
suppliers or buyers
Consulting  Club  at  Berkeley   34  
Case  Book  2012-­‐2013  
 

A sample of cost-benefit analysis of each entry method

Jamaican Battery Company8

Problem Statement

Our  client  is  the  Jamaican  Battery  Company.  Currently,  they  sell  car  batteries  throughout  
the  Caribbean,  Africa,  and  Central  and  South  America.  Over  the  past  two  decades  they  have  
been  eyeing  the  Cuban  battery  market.  However,  Cuban  Battery  Enterprise,  a  state-­‐owned  
battery  company  currently  has  100  percent  of  the  secondary  market.  The  reason  they  have  
I00  percent  of  the  secondary  market  is  because  the  Cuban  Government  has  a  5o  percent  
tariff  on  the  manufacturing  costs  and  shipping  costs  on  all  imported  batteries.  
 
The  Castro  government  has  just  announced  they  will  be  lowering  the  tariff  on  batteries  by  
5  percent  a  year  for  the  next  no  years  until  the  tariff  reaches  zero.  
The  Jamaican  Battery  board  of  Directors  wants  to  know  the  size  of  the  Cuban  market  and  if,  
when  and  how  they  should  enter  it.  
 
A  section  of  the  candidate's  response  
 
—  We're  switching  hats  again.  You  are  now  back  to  advising  the  Jamaican  Battery  
Company.  You  have  seen  that  the  Cuban  Battery  Enterprise  has  upgraded  its  plant,  
increased  its  distribution  channels,  formed  a  joint  venture  with  the  Cuban  Tire  
Enterprise  and  has  launched  a  nationalistic  marketing  campaign.  Do  you  now  enter  the  
Cuban  battery  market,  if  so  how?  
 
Whenever  you  enter  a  new  market  there  are  several  things  you  need  to  examine.  Who  are  
the  major  players?  What  size  market  share  do  they  have?  How  are  their  products  or  
services  different  from  ours?  And  are  there  any  barriers  to  entry?  The  major  player  is  the  
Cuban  Battery  Enterprise.  They  have  100  percent  of  the  market.  Two  years  ago,  their  
products  were  inferior,  but  today  they  are  very  similar.  The  tariff  was  a  barrier  to  entry,  but  
now  it  looks  as  if  access  to  distribution  channels  could  be  a  threat.  
 
I've  learned  that  there  are  three  main  ways  to  enter  a  market.  Start  from  scratch,  buy  your  
way  in.  or  form  a  joint  venture.  I'd  like  to  do  a  quick  cost  benefit  analysis  of  each.  Starting  
from  scratch  would  be  a  fine  strategy  if  we  can  define  our  distribution  channels.  If  the  
Cuban  
firm  has  all  the  gas  stations  tied  up  and  have  built  tire  and  battery  stores,  then  our  
distribution  means  are  limited.  Plus,  selling  17,000  batteries  a  year  might  not  justify  an  
investment  of  building  our  own  battery  stores.  
 
                                                                                                               
8  Case in Point (4th Edition) Case 13

 
Consulting  Club  at  Berkeley   35  
Case  Book  2012-­‐2013    
 
The  second  strategy  is  to  buy  our  way  in.  Since  this  is  a  communist  country  there  isn't  a  lot  
of  buying  opportunity.  If  we  were  going  to  buy  anyone,  it  would  have  been  the  Cuban  
Enterprise.  And  we  should  have  bought  it  when  they  were  a  mess  and  not  a  formidable  
competitor.  
 
The  third  way  is  to  form  a  joint  venture.  lf  I  work  under  the  assumption  that  there  are  no  
independent  battery  distributors,  then  my  first  choice  is  to  form  a  joint  venture  with  one  of  
the  tire  companies  that  are  entering  the  market.  My  guess  is  that  there  will  be  several  tire  
companies  and  battery  companies  jumping  in,  so  we  need  to  be  part  of  that  coalition.  
 
 
 
A  sample  of  market  segmentation  leading  up  to  product  differentiation  

Imagitas9

Problem Statement

Imagitas has a contract with the U.S. Postal Service to deliver a booklet called "the Mover's
Guide". It has helpful hints on how to move and coupons to stores and services that the mover
will need when moving. Imagitas also sends a "Welcome Kit" to the mover's new address with
coupons and information that she might find helpful in her new neighborhood. Imagitas saves the
U.S. Postal Service over $12 million dollars a year while making over $50 million in ad
revenues. Imagitas now needs a strategic plan to reach the college market.

Sample Response (Excerpt)

I can think of five segments to this market. Heading to school for the first time, heading back to
school, moving back home with their parents for the summer, moving to a new city for a summer
internship and moving to a new city for their first job. The three that I'd like to focus on first are
heading to school for the first time, heading back to school-each year, and moving to a new city
for their first job.

Heading to school for the first time is a great opportunity for a very strong Mover's Guide
package if sent early enough before the parents go shopping. Coupons for Linens & Things and
The Gap might be good additions to the Mover's Guide.

When the student arrives on campus, the Welcome Kit can be unique with a strong mix of
national and local coupons, if segmented by school or city. Coupons should be for "room stash",
batteries, pizza, dry cleaners, that sort of thing.

                                                                                                               
9  Case in Point (4th Edition) Case 28

 
Consulting  Club  at  Berkeley   36  
Case  Book  2012-­‐2013  
 
With the group that is heading back to school, I'd focus mostly on the "Welcome Kit". If
Imagitas can segment by school or city, then they can get a large number of local merchants as
well as national chains.

Finally, there is the group that is moving to a new city for thee first job. Again, this gives us a
great opportunity to weigh heavy on the "welcome Kit". This group will need everything and
now has a paycheck to pay for it. National retailers like Create & Barrel and Linens & Things
should jump on it.

+ Useful frameworks
The most typical strategic questions center on whether or not a new market is appropriate for a
client. Sometimes, the focus is on the theoretical analysis of whether or not to enter; other times,
the key is to focus on practical methods of entering a market. Often, these are combined into one
case, where the first part is spent analyzing a market and the second part is devoted to developing
a specific entry strategy.

A direct framework:
Major  players,  market  share,  strengths  and  
weaknesses,  profitability  (quantitative)  
 
Current Market Product differentiation
-Size
-Growth Rate
-Customer Barriers to entry / Barriers to exit
Segmentation
Start from A  cost  benefit  analysis  of  
scratch each    
If yes, how? Acquisitions
(as  demonstrated  above)  
Entering Joint Venture
No

Associated questions:

Step 1: Determine why-----------------------------------------------------------------------------------------


What's our goal?
What's our objective?
Does it fit into our overall strategy?

Step 2: Determine the state of the current and future market---------------------------------------------


What is the size of the market?
What is the growth rate?
Consulting  Club  at  Berkeley   37  
Case  Book  2012-­‐2013    
 
Where is it in its life cycle? (Stage of development: Emerging? Mature? Decline?)
Who are the customers and how are they segmented?
What role does technology play in the industry and how quickly does it change?
How will the competition respond?
Step 3: Investigate the market to determine whether entering it would make good business sense-
Who is our competition and what size market share does each competitor have
How do their products and services differ from ours?
How will we price our products or services?
Are there substitutions available?
Are there any barriers to entry? (See Buzzwords & Concepts)
Are there any barriers to exit? How do we exit if this market sours?
What are the risks? Such as: market, regulation or technology?

Step 4: If we decide to enter the market, we need to figure out the best way to become a-----------
player-------------------------------------------------------------------------------------------------------------

Supplemental Frameworks

Sample Approach I10:

“Four Cs” for exploring the theory behind a - Proposing a market entry strategy-------
strategy---------------------------------------------

Customer-------------------------------------------
Segment every time
Cannibalization issues
Competition--------------------------------------- Start from scratch--------------------------
Barriers to entry Time to market?
Number and strength of competitors Can we grow the capabilities we need?
Market share 
Quality
Types of companies in market License/partner with another company-
Competing for end users or intermediaries Or joint venture (“JV”)-------------------
Company------------------------------------------- Partnership issues
Costs of new project Conflicting goals
Ease of changing to new project/strategy Cultures
Channels------------------------------------------- Synergies
What do we use  
What could we use
What do others use
Costs/benefits of different channels
                                                                                                                 
10  Taken  from  Fuqua  School  of  Business  Consulting  Case  Book  
Consulting  Club  at  Berkeley   38  
Case  Book  2012-­‐2013  
 

Sample Approach II11:

+ A Sample Case

Texas Star Markets12

Problem Statement:

Our client is a large grocery chain throughout Texas. Their stores are concentrated suburbs
outside all the major cities in Texas: Dallas, Arlington, Fort Worth, Houston, Austin, Galveston,
San Antonio, Amarillo, Corpus Christi, El Paso and Padre Island. They are looking to grow the
company — but only in Texas. They feel that they have saturated the grocery market in the
suburbs and have dismissed the idea of opening up stores downtown.

They already have an online grocery ordering and delivery service, so they are thinking of
entering into the convenience store business. Is this a good idea? If so, how best to enter the
market?

Sample Response:

Basically, a large Texas-based grocery chain wants to explore the possibility of entering the
convenience market. We need to determine if this is a good idea, and if it is, how best to enter
this new market?
                                                                                                               
11  From  Wharton  Consulting  Case  Book  2008-­‐2009  
12  Case  in  Point  (4th  Edition)  Case  22  

 
Consulting  Club  at  Berkeley   39  
Case  Book  2012-­‐2013    
 

— That's right.

Besides the ones stated above, are there any other objectives I should be aware of?

— No.

Talking in broad strokes, I'd like to figure out why the company wants to expand, what the
current convenience store market is like, and then discuss ways to enter that market. Does that
sound like a good idea?

— Possibly. I wouldn't have done it like that, but let's see how you make out.

I assume the reason or reasons Texas Star is entertaining this notion is because A) they have
excess cash on hand and want to see if this is a better return on investment than a money market
or other investments they've looked at, B) they want to increase their market share of the Texas
in-store food business, C) there has been a decline in their existing business, maybe because of
shrinking sales or higher costs, and or D) they see this as a growing market.

— Assumptions A, B & D are correct. ~

May I take a moment to jot a few ideas down?

— Sure.

I know that there's plenty of competition with 7Eleven, Christy's, Dairy Mart, White Hen, The
Red Apple and Utote-um, just to name a few. Can you give me any market share information?

— I can tell you that the leader is 7Eleven and that they did over $3 billion in sales last year.
That includes both in-store merchandise and gasoline sales, but I don't know what their market
share is.

Do you know how many stores they have?

— Over 58,000 in the U.S. and Canada. But I don't think that's relevant.

You're right. The proper question should have been how many of those stores are in Texas and
how many convenience stores are there in Texas?

— That's right, but I don't have that information.

I can't think of any barriers to entry, so I'll assume that's not a concern.

— What are the concerns?


Consulting  Club  at  Berkeley   40  
Case  Book  2012-­‐2013  
 
While our grocery stores have name recognition, we need to figure out a way to capitalize on that
and any other competitive advantage we might have. A convenience store is a convenience store.
We'll probably be selling the same items as the 7Eleven around the corner. Why would people
come to us? I can think of three reasons, location, price or loyalty to the grocery chain.

— Okay, I like that. Explore it some more.

Well, the first one was location. Which leads me to the next question. How do we plan to enter
the market? We can start from scratch, buy our way in or do a strategic alliance.

— Texas Star doesn't want to do a strategic alliance.

I'd like to come back and visit this question in a minute. However, we would need to look at the
real estate market and see what kinds of locations are available. We may want to see if there is a
small chain of existing stores with good locations but poor management that we could take over.

— What else?

Next on the list was price. This is where I think we make our mark. People pay for convenience.
Prices are high because costs are high because stores tend to buy many items in low volumes.
One of our advantages is that we already buy large amounts of all the products we would sell in
the store, so we have economies of scales working for us. We should be able to leverage our
current value chain components.

— What does that mean?

To be honest, I'm not sure.

— Let's call a time out for a second. Never use jargon or phrases that you don't understand. If
you do it in an interview, then I'll assume that you will do it in front of a client. It's easy for the
interviewer to lose trust in a candidate, because I can't trust you in front of a client. Now it just so
happens that I like you and that you are doing really well on the question, so I’m going to
pretend that I didn't hear that. Continue. Where were we?

We were discussing price. If we can price our items somewhere between what we charge in our
grocery stores and what our-competitors charge in their convenience stores we could drive in
traffic. For instance, if I buy a gallon of milk at the grocery store it costs me $2.95. If I buy that
same product in a convenience store, it costs me $3.95, a dollar more. If we could price it at
$3.49, that's a significant enough difference where it would drive people into the store. In
addition, I'm assuming that Texas Star, like most large grocery stores, has store-label items, such
as their own brand of peanut butter. Those items sell for significantly less than the traditional
name brands, so the price difference would be even greater. We could offer all the traditional
convenience store items while adding things like a salad bar and prepared gourmet meals. This
could change the genetic code of convenience store retailing.

— Let's not get carried away. -


Consulting  Club  at  Berkeley   41  
Case  Book  2012-­‐2013    
 

Let's look at the company's resources and capabilities. We buy in large volume, we have the
management team, the marketing team, trained workers, name recognition, and we have an
untraditional marketing channel through our existing stores. I don't think that there would be any
cannibalization of existing grocery store sales, because items would still be less expensive in the
grocery store. In fact, we could cross market and offer coupons to try our convenience stores.

The last thing on my list was brand loyalty. Texas Star obviously has a strong following, a
commitment to Texas and, I'm guessing, to local communities.

— All right, summarize for me.

Texas Star is looking to expand. Their idea of getting into the convenience store market is a
viable one. This market will continue to grow and there are no major barriers to entry. It will
allow Texas Star to build on their name recognition and take advantage of the organization's
existing resources and capabilities. They can offer lower prices and store-brand items, cross
market with their grocery stores and offer new items to traditional convenience store fare.

The best way to enter the market is to look for a small chain that has good locations but bad
management. Buy the chain, change the name and bring in your own management. All stores
should be in close proximity to a Texas Star grocery store. If they can't find a buy-out target,
they should start from scratch.

And I just want to restate that it is a combination of name recognition, location and prices that
will make this idea a success.

— Okay, well that was pretty good. Now you got me thinking. Texas Star, as you can tell is
always looking for new ways to increase their revenue streams. They are also considering
opening an in-store bank. No other competitors in their area are currently doing it. What do we
need to be thinking about?

Again, they are entering a new market. There are a number of things that they need to figure and
decide. First, do they have the space in their stores or will they have to construct additional
space? Also, if they do have the space, we need to think about whether that space can be used
more effectively. How much space is needed? . _
— It's the equivalent of a florist department, and we already have one of those. And yes, we do
have the space for this. It would take some remodeling, but nothing significant. We need to look
at who the major players are; what size market share they have; will our products or services be
any different from our competitor's, and if there are any barriers to entry.

— What would you guess?

That there's‘ plenty of competition and that our products or services might be basic compared to
our competitors. All we really have to offer them is convenience. Hopefully, there will be
increased traffic at the grocery stores due to the bank. But now, with ATMs, debit cards and cash
Consulting  Club  at  Berkeley   42  
Case  Book  2012-­‐2013  
 
back the basic services are easily covered. I'm thinking that we need to figure out how best to
enter the market and determine if this makes sense.

There are three ways to enter the market: start from scratch, buy our way in, and a joint venture.
What are the costs in each of theses options? What are the potential revenue streams and how do
they differ, and what is the risk associated with each?

— Do a quick cost benefit analysis for each.

Starting from scratch will be time consuming and somewhat expensive. We'd have to hire new
people with experience in banking to run the organization. There might be some barriers due to
federal and state banking regulations, which might take some additional time. And if it fails or
doesn't live up to expectations, it could damage the overall Texas Star brand. On the other hand,
we already have locations and our rent would be minimal. Revenues will come from bank
transactions and possibly increased grocery sales. However, I'm not convinced that this is the
best way.

Buying our way in would mean buying an existing bank and taking over their business. We
would already have the people in place, a number of existing locations, and some brand
recognition. It might be expensive. We would have to do due diligence on the entire bank and the
banking industry. We might be able to sell some of the branches to other banks to help reduce
any debt we would incur. This would be really jumping in with both feet.

The third way would be a joint venture with an existing bank. I think this is the simplest solution
and holds the least risk to profits and our brand. We would just lease space to the bank for a
monthly fee. We would have to weigh the rental income against the remodeling costs.

— So what are you saying?

I would tell Texas Market that if they feel that having a bank branch in their grocery stores
would result in increased traffic and maybe higher sales, they should form a joint venture with an
existing bank and keep risk to a minimum and lease out the space. Starting from scratch or
buying an existing player is expensive and risky. We currently know nothing about the industry
and a failure could hurt the Texas Star brand.

Comments

Besides getting into trouble for using business jargon that he did not know, the interviewee did
pretty well. He laid out his strategy upfront and stuck to it, but also added ways that the client
could differentiate itself from the competition. He seemed to roll into the banking part of the case
with a little more confidence.
Consulting  Club  at  Berkeley   43  
Case  Book  2012-­‐2013    
 
+ Practice Cases

S SOFTWARE13

BCG 2nd Round

Problem Statement
An US software company wants to offshore its engineering/designing unit to India, as well as to
penetrate into the India software engineering market. Should they do it?

Interviewer Information & Suggested Answer Scheme


Since it’s a two-fold question, a strong candidate will begin with laying out a clear scope and
then gather relevant information to analyze the situation.

Market Share – the company is the industry leader in US with close followers chasing behind.

Profitability – declining (unknown reason, but increasing labor costs can be a reasonable
assumption).

Capability – strong engineering department in the US.

Cost – R&D is the major cost and Indian engineers are estimated to be 1/4 of the cost of the US
engineers with the same technical capability.

                                                                                                               
13  Wharton Consulting Case Book 2005-2006 Case 8  
Consulting  Club  at  Berkeley   44  
Case  Book  2012-­‐2013  
 
Customer –
• Has a strong existing customer base in the US.
• Customers care about the quality of service, but are also considering lowering cost in the
long run. A strong candidate should follow up with questions about customer
segmentation.
• Most of S Software’s clients are medium to large companies in US.
• The most profitable clients are large companies in developed countries where S Software
already has a strong base.
• S Software doesn’t have any international presence yet.

Competition – US
• Key US competitors are all off-shoring in order to lower the cost.

Competition – International
• The growth of the international market is impressive compared to the more mature and stable
US market.
• Key competitors are expanding their international business aggressively.
• India is one of the fastest growing international markets as well as the one with the largest
market size.

A strong candidate will get the hint that entering the international market, especially the India
market, is critical for the company to both fulfill current customer’s emerging needs of cost
saving and grow its future business. He/she should then start to compare the competitive
advantages between large US companies off-shoring and local Indian players.

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

• In the long-run, even current customers with established relationship will need to look for
cheaper alternatives. S Software can offshore its R&D to lower the cost but still keeps its
customer service team in the US to maintain the high service quality.
Consulting  Club  at  Berkeley   45  
Case  Book  2012-­‐2013    
 

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

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

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

4.4 Market Entry-------------------------


Advanced
+ A Sample Case
Li-Ion Battery Separators

BCG Round 1

Problem Statement

Your client is a U.S. Textile Manufacturer. They have recently developed a new technology for
making Lithium Ion battery separators. Is this an attractive industry? And should your client
enter the market?

Interviewer Information

• Your client has no prior experience or knowledge of the battery separator market
• Battery separators are an integral part of the lithium ion batteries. They need to be thin and
provide a medium for charged particles to pass between the cathode and anode (positive and
negative terminals).
• We do not know if our technology is better than existing technology.
• Your client had $250 million in sales last year.
• No current patent, but we can get a patent on our technology.
• Safety is a big issue in this industry and so there is a very expensive 1-year certification
process.
Consulting  Club  at  Berkeley   46  
Case  Book  2012-­‐2013  
 

Suggested Answer Scheme

A good structure will include:

• Industry analysis (five forces, profitability, competition, customers)


• Client (patents, experience, etc.)
• How to Enter (JV, Greenfield, Acquisition, Licensing)
• Exit strategies

After the structure, allow the candidate to ask for data. Feel free to push them on the definition of
an attractive Industry – sustained profitability.

A good analysis will consider the following:


• Barriers to Entry (HIGH)
• High switching costs between suppliers
• Expensive certification process
• Existing customer relationships
• Supplier Power (HIGH)
• Can charge premium price for certified safe product
• Existing relationships
• Rivalry (LOW)
• Limited competition due to existing relationships
• Profitable
• Price drop in separators less than price drop for rest of battery components
• Because component costs have decreased at the same rate this indicates higher margins for
separators

Sample note-taking during the interview


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+ How to level up in this case


from a professional's viewpoint

What can distinguish a candidate from others

Firm-specific case response strategy - BCG

+ Practice Case 1
Zenith Hotel14
Bain Round 1

Problem statement:

Zenith Hotel is a global hotel chain with 50 hotels in 20 countries. The company is evaluating the
construction of a new hotel in the Bahamas. Zenith has come to us asking whether it should and
can move forward with the project

Interviewer Information:

Overview of the case:

This case is extremely straightforward and open ended. The interviewer read the problem
statement and waited for the candidate to drive the rest of the case. No exhibits were introduced.

This was primarily a case about feasibility, so the discussion should focus on an internal /

                                                                                                               
14  Wharton  Consulting  Club  2008-­‐2009  
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external analysis of the company’s plans with two math problems to solve.

Information to be provided upon request:

The hotel will have 400 rooms

Suggested Answer Scheme:

Key elements of analysis to solve the case Possible follow-up and guidance to
interviewer

Internal

• Capabilities • Ask the candidate to walk through the costs


• Start-up costs that the hotel would occur on an on-going basis
• Expected profits, driven by revenues • Make sure that insurance and marketing costs
(volume * price) and costs (broken down are included
by fixed and variable)

External

Competition
Consumer demand Regulatory/country-specific issues are not a
Regulatory/other issues concern

Feasibility

See mathematical detail below See mathematical detail below

Question 1 - Breakeven

How much would Zenith need to charge on average per room to break even?

Overall approach, good shortcuts & solution


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Costs over 5 years = $500M + 10*20M = $700M

400 rooms * 350 days/year * 10 years = 1.4M room days

$700M/1.4M = $500 per night

Information to provide up front

Start-up costs are $500M

The hotel would cost $20M a year to operate

Assume that we are evaluating a ten-year horizon

Provide information if asked

Assume 350 days in a year at constant rates

Question 2 - Market Share


What is Zenith’s implied market share?

Overall approach, good shortcuts & solution

400 rooms * 75% occupancy = 300 rooms

300 rooms * 3 people = 900 people at any given time

900 people per week * 4 weeks/month = 3,600 people/month

3,600 people per month/50,000 people per month = 7.2% market share

Information to provide up front

Average occupancy is 75%

Bahamas receives 50,000 visitors per month

Provide information if asked


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Assume 3 people per room

Assume 7 day average stay

Sample Recommendation

Zenith should proceed with the construction of the hotel. As a global hotel chain, gaining a 7%
market share in the Bahamas seems like a reasonable goal.

Risks

It seems overly aggressive to assume that hotel rooms will be occupied 350 days a year for the
breakeven calculation.

Next steps

Examine consumers’ willingness to pay $500/night for a Zenith hotel room in the Bahamas.

+ Practice Case 2

15
Disaster Remediation
Length: Medium (30 Minutes)

Problem Statement:
Your client is a US-based provider of fire and water remediation services, which primarily
provide extensive cleaning in the aftermath of damages related to burning and flooding. The
company is typically hired by insurance companies on behalf of consumers and businesses.
While this existing business is quite profitable, your client has asked for counsel on whether to
enter the US residential cleaning market (traditional housecleaning, which typically takes place
2-4 times per month.)

Pre-Case (Market Sizing Exercise):


How would you go about estimating the size of the residential cleaning market?

Information To Be Provided If asked:

The US market for housecleaning services is roughly $50 billion (see pre-case), with stable

                                                                                                               
15  Haas  Consulting  Case  Book  5.12  
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growth of 4%.

Suggested Answer Scheme to Pre-Case:


• The population of the United States is roughly 300 million people, or about 100 million
households

• These households can be roughly split in half according to whether they earn more than
$75,000 per year

• Estimate the willingness to pay for housecleaning services at 40% of households making more
than $75,000 per year and 10% of households making less than $75,000 per year (interviewer
to confirm)

• [50 million households] x [40%] + [50 million households] x [10%] = [25 million purchases
per year]

• Assumed annual housecleaning fees of $2,000 (interviewer to confirm) = market size of $50
billion

Competition:

• National Players (10% of market) – Includes national housecleaning companies such as “Dial-
A-Maid”

• Regional Players (20% of market) – Includes regional services such as “Joe’s Chicago
Cleaning Service”

• Individuals (60-70% of market) – Includes individuals who are often not part of a formal
organization

Customers:

• Customer purchase criteria generally range along a spectrum with “price” and “quality” on
each end.

• Buyers from National Players typically rate “quality” as most important, buyers from
Individuals typically rate “price” as most important, and buyers from Regional Players consider
a mix of both.

Profitability:

The average price for a 5-hour housecleaning job is $75 (based on data from National Players)
Client labor costs are roughly $10 per hour and one job consumes roughly $5 worth of cleaning
supplies
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Synergy Considerations:

o While significantly “lower impact”, the household cleaning process is similar to


the remediation process.

o The client could leverage its client contacts and customer service ratings in the
cleaning market.

o However, the sales process for cleaning services is quite different (no sales via
insurance companies).

Sample Recommendation:
The US market for housecleaning services is large and attractive, and the client has transferable
skills, client contacts, and customer service capabilities that would facilitate a relatively smooth
market entry.

A preliminary margin analysis suggests that the client could operate profitably against the
National Players for the quality-conscious customer segment: ([$75 price] – [5 hours x $10
hourly labor costs] – [$5 cleaning costs]) / [$75 price] = 27% profit margin.

Despite these favorable indications, the client will need to develop a tailored value proposition to
quality-conscious customers and anticipate likely competitor reactions before proceeding with
full market entry.
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4.4 Competitive Analysis----------------


Basics
Cases involve competitive analysis ask you to use your knowledge of microeconomics,
marketing and even common sense to analyze an industry or market. Examples are as the
following questions: you are a small regional airline considering expanding. What are the key
issues and what options would you suggest? Or tell me about your job before Hass MBA, how
would you describe the ______ market? Describe the market potential to me?

+ Buzzwords & Concepts


1) Switching cost 5) Threat of New Entrants
The negative costs that a consumer incurs as Those industries with high entry barriers will
a result of changing suppliers, brands or have fewer firms entering. With fewer firms,
products. Although most prevalent switching there is less environmental complexity, and it
costs are monetary in nature, there are also is easier for one firm to begin to dominate
psychological, effort- and time-based the industry. Economic rents are usually
switching costs. higher in such an environment. This makes
the industry attractive. For industries with
2) Buyer concentration low barriers to entry, such as the restaurant
The degree to which a small number of industry, new firms come and go with great
customers buy most of a company's product rapidity. This prevents dominance by any
one, or a few, firms. Economic rents are
3) Corporate stakes usually low. This makes the industry
While most firms have revenue from a unattractive. The following elements will
variety of industries, the question here deals help determine the level of threat from new
with the degree of dependence on one entrants.
industry segment. To what extent are firms
dependent on this one industry segment for 6) Economies of scale
revenue? If the percentage of revenue is If economies of scale exist, it represents a
high, then the stakes are high, and this would high barrier to entry. Firms within the
increase rivalry, making the industry industry will have achieved these economies,
unattractive. This requires judgment on the and if we enter, we will have to match their
part of the student, and quantitative support scale size, but without the benefits of the
for the argument. associated learning curve. Since economies
of scale do not exist in any tangible way, you
4) Synergy must prove their existence or non-existence.
The combined power of a group of things Provide two measures related to the basic
when they are working together which is premise that increases in capital investment
greater than the total power achieved by each should lead to lower unit costs.
working separately
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7) Working capital requirements 11) Access to distribution
How much money will we have to tie up to How do firms get their product or service to
keep the doors open? This is money that market? Would we need to duplicate the
cannot be invested in any other way. It will distribution channels, or could we tap into
never earn an income. This is also a barrier existing channels? This is not an obvious
to entry in that if firms must tie up large question, and it requires first determining
amounts of capital for daily operations, this who the buyers are. Kia auto discovered that
will deter smaller firms from entering. lack of a distribution system in the form of
Working capital requirements are usually dealerships limited its access to markets in
provided in the cash flow financial this country. This was a very high barrier to
statements. entry for them.

8) Proprietary product differences 12) Expected retaliation


Do you see that some firms have a secret Do you see indications of retaliation against
process or secret formula? An example prior newcomers? This will require research
would be Coca-Cola. They have a secret through many historical articles about the
formula for their cola soft drink that acts as a industry. An example would be the airline
high barrier to entry. Very few firms try and industry. Midway Airlines, a small regional
compete head-to-head with Coke in the cola carrier, competed head-to-head with
segment of the industry. American and USAir, and went bankrupt.
Southwest has survived nicely by avoiding
9) Absolute cost advantages the markets dominated by larger airlines such
Do you see the presence of patents or as American and United. This is one of the
copyrights? These are legal constraints to high barriers to entry for the major segment
entry created by the government. By of the airline industry.
definition, they constitute a high barrier to
entry. Examples include patents on 13) Suppler concentration
pharmaceuticals and copyrights on software. Are there more or fewer suppliers than firms
in this industry? If suppliers are concentrated
10) Brand identity (fewer of them) this could give them power
Is brand identity important in this industry? over buyers in this industry. For example,
Do buyers make conscious choices based on Intel is one of only a few providers of CPUs
brand identity? If so, this would be a high for the PC industry. This gives them power
barrier to entry. Examples include Viagra, over the PC industry.
Coke, and Intel Pentium processors. You
must prove that brand identity is or is not
important. One way is through an interview
with a buyer. Another is to examine
marketing expenses for the industry as a
percentage of sales across five years. If the
trend is upward, then brand identity could be
important.
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A sample of competitive analysis case:

Bell operating company16

Problem Statement

You are assisting a regional Bell operating company (RBOC) that has been attempting to
diversify its business lines outside of the traditional telephone business. Unfortunately, it has
been unsuccessful in a number of previous new ventures, including real estate, financial services,
and software. This time, the client is considering an opportunity to get into electronic home
security. The attractive features of this industry include:

• Relates well to phone company’s core business (phone lines, operator services, installation
services)

• No big players in the industry (largest five firms have combined total of less than four percent
market share)

• Large potential demand (only ten percent of residences have security systems)

• Long-term customer value is high (equipment is low-margin business, supervision services


high-margin) 

• The Question: Is this a good opportunity? What do we need to know to assess the opportunity?

Interviewer Information & Suggested Answer Scheme

It’s an industry strategy question of the new-opportunity variety. The interviewer here has given
the candidate more complex information about a particular case and wants the candidate to go
through an analysis of the opportunity. Since this involves a new business opportunity, there will
be relevant issues both on the company side and on the market or opportunity side. The key is to
choose a good framework and start sorting through the issues. MBAs would probably be the
most likely to receive this question. However, undergrad and advanced-degree candidates might
receive a pared-down version. Suggested Response Identify a few top-level issues and ask which
to pursue. The interviewer’s question has a good bit of detail in it, but to decide which angle to
pursue, you probably want to ask a few general questions first. Therefore, you might start by
pointing out a few of the key areas you see as most relevant to responding to the question. First
reaction: There are a couple of top-level questions that jump out from this case. First, is the
electronic security business really a good business to get into? What are the underlying
economics? Second, is this a good business for the client to pursue? Does it fit with company's
strategy? Does the client bring anything to the business? Third, given the company’s failure at

                                                                                                               
16  Ace Your Case I Case Question 5  
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other ventures, there is a larger question about whether or not the client is organizationally set up
to handle any kind of new business venture, let alone this one.
At this point, the interviewer will likely offer some indication about which angle to pursue.
Lacking a suggestion, pick the angle that you think will be the most productive to pursue, both
for the value it will yield for the client and for your level of insight into the issue. In this case,
you might start with an assessment of the industry.

Choose a framework: How about supply/demand?

If you want to explore the industry, there are several logical frameworks that would provide a
useful structure for the answer. One easy approach would be to look at demand and supply in the
industry. Only ten percent of the population has alarm systems, but this may be a mature market.
Is demand stable? Are unit sales and customers growing? Are prices going up? At what rate?
What is happening over the longer term? Is the market saturated? Who are the customers, what
makes up demand? How have fears of terrorism altered the landscape? How do customers make
purchase decisions? What about the supply side? What drives supply? How many firms are
competing? What types of firms are competing? How are they competing? What are the margins
in this industry? Is there an opportunity to come in with a differentiated product? Is there an
opportunity to decrease the cost structure through economies of scale? What would be the
reaction to entry by the client?

Or maybe the 3Cs?

Another slightly more complex approach would be to look at the famous 3Cs: Customer,
Company, and Competition. Here you’d want to think about what kinds of people are actually
buying home security systems and how that would affect the opportunity for the RBOC. You’d
also analyze the skills and weaknesses of the client as they relate to the electronic security
business. Finally, you’d need to look at the competition. Who are the other players? Why are
they or aren’t they successful? Is there any consolidation going on?

Let’s try the Five Forces.

Finally, you might be tempted to whip out the BMW of consulting case frameworks, the Porter
Five Forces industry-analysis framework, to analyze this opportunity. As you know from your
recent strategic management course and this Wet Feet Insider Guide, the five forces include:
supplier power, buyer power, threat of potential entrants (barriers to entry), and the availability
of substitute products. All of these feed into the final force, rivalry among firms in the industry.

Porter One

Fragmentation may indicate intense rivalry. You might want to comment first about the fact that
the industry is highly fragmented and therefore seems likely to feature intense rivalry among the
competitors. Why is it that there aren’t any big players? Are there advantages to being small?
One logical possibility is that localized, personal service is very important to customers—not a
promising environment for the likes of the phone company. Another possibility is that there
really aren’t many economies of scale to be gained by a larger operation. In particular, it’s not
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clear that the monitoring (high-margin) portion of the business benefits by centralization and cost
reduction. These factors don’t eliminate this as an opportunity for the client, but they do suggest
that additional questions ought to be asked.

Porter Two

Check to see whether consolidation really makes sense in this industry. On the other hand, we
know that there are sometimes great returns to be made from consolidating a fragmented
industry. To see whether these opportunities exist, we would need to look at general trends that
are taking place today. Is consolidation already occurring? Clearly, the client has the financial
power to compete strongly with smaller operations. However, in the security business, big may
not necessarily be better. Local players will always be coming in and trying to compete, and
many of them may have noneconomic motivations for entering and staying in the business. The
phone company, which will be focused on the bottom line, may have difficulty competing
against such players. Finally, the demand in the industry isn’t clear. Is this market saturated, or
are there significant opportunities to create new demand?

Porter Three

Barriers to entry seem to be low. After looking at the rivalry issues, you’d also want to talk about
the barriers to entry. If the client went into the business, there wouldn’t be a whole lot of things
keeping other competitors out. The business probably isn’t regulated. The technology doesn’t
seem to be proprietary. There aren’t necessarily large capital requirements to get into the
business. It is possible that branding the service would create wider customer recognition and
provide protection against potential competitors. However, the product really doesn’t seem to be
very differentiated right now. Therefore, this raises a question about how defensible a position
the client would be able to create for itself. This would tend to argue against making an
investment here.

Porter Four

Buyer power. For the most part, it seems that buyer power in the industry is relatively weak.
Most customers make one-time purchase decisions at one location. This weakens their power
vis-à-vis suppliers. Customers aren’t going to be able to provide the service themselves, so if
they want to buy electronic security, they will need to acquire it from a provider. And after they
have a service up and running, most people are probably disinclined to change carriers.
However, the buyers aren’t without any power. They have lots of suppliers to choose from, and
their switching costs are probably quite low.

Porter Five

Supplier power. The supply side of the equation doesn’t seem to pose any great problems here.
Security providers basically buy security equipment and monitoring devices and hire staff to
watch them. Although there may be some significant players on the supply side (we’d want to
check out whether or not this is true), it doesn’t seem like the client would be in a weak
negotiating position there. There could potentially be some threat of for- ward integration by
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security-device providers. However, if anything, given the phone company’s resources and
experience with technology and data transmission, it would likely be the most integrated player
in the field. It would also probably have the greatest market power given the large resource base
it has.

Change Gears

How to create a good business here? At this point (or per- haps before this, if your interviewer is
getting bored with the Porter shtick), you will likely be asked to explain one set of issues in
detail. For example, you might be asked to explore the issues of sustainable competitive
advantage in greater detail. “How would the client potentially go about creating a thriving
business in electronic security?” To explore this issue, you probably wouldn’t immediately have
a handy-dandy framework nearby. However, you might start by saying that you like to analyze
three or four different sources of potential competitive advantage and what they would mean for
the client.

First-mover advantage

First, if the industry really is as fragmented as has been described, the client would have a
potential first-mover advantage in establishing a brand name and differentiated service product.
By getting out there first and offering a reputable and recognizable product, the client would be
able to generate word-of-mouth sales and set the service standards to suit its own competitive
strengths. This would be a source of potentially sustain- able advantage for the client in the short
run. However, to develop this business would require a substantial initial investment and
ongoing expenditures to maintain its position. Over the long run, this is not a definitive source of
advantage that would allow significantly higher rents.

Low-cost supplier

Second, given its existing capabilities, the client has the potential to occupy a low-cost supply
position. However, this is by no means certain. You’d have to start by analyzing the economics
of the business. Are there equipment supply and installation costs that would drop as volumes
increased? Possibly, but, remember, installation is the low-margin portion of the business. Would
the monitoring portion of the business allow substantial cost savings as scale increases? It’s not
at all clear that it would. The key is probably capacity utilization. How is an operation like this
manned? You need to make sure that you can handle all calls at peak periods. However, you also
don’t want to have fixed salary or other costs that are being carried by a very small number of
customers. That brings up another point. How productive is the phone company staff? It’s
certainly not known for being the world’s most efficient. And given the difficulty of dealing with
union contracts, it may be at a cost disadvantage. How about customer acquisition? It’s possible
that the client could achieve important cost savings here. Since it has a large network of phone
service customers, it has ready access to names and addresses of potential customers. In addition,
it could potentially reach them more cheaply than could the competition. On the other hand, the
typical industry player today sounds like a local operation. Therefore, it might be hard for the
phone company to compete with the local security company whose president goes to the same
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church and plays golf at the same courses as do his clients. On balance, then, low-cost position
offers at best a mixed message about sustainable advantage.

Branding and Reputation

Third, the reputation and name recognition of the client offer greater potential advantages. For a
big-ticket purchase like home security, the customer may be inclined to go with a name brand. In
addition, ease of access is also important. It is probably a significant advantage for the phone
company to sell these services. Everybody knows how to contact the phone company. Not
everybody knows or trusts “Sammy the Security Specialist.” At another level, the phone
company does have access to the latest technology and expertise in handling that technology.
Therefore, it may be able to offer a differentiated product more quickly and easily than many of
the smaller, more localized competitors. Also, the phone company’s reputation and reach are not
things that most competitors will ever be able to match. As a result, this seems to offer the
greatest possibility of developing a source of sustainable advantage.

Implementation issues

With all of these points, there is a basic question about implementation. Since a strategy is only
as good as its implementation, you would need to consider what approach would best fit with the
client’s own organization. What is a phone company good at doing? What are its particular
strengths and weaknesses? What resources does it have that potential competitors don’t? What
liabilities does it have?

Strengths and Weaknesses

At this point, the interviewer might turn to you and ask you to go into more depth about the
company’s strengths and weaknesses. What kinds of things would you need to look at as you
develop a strategy? In response, you might do a brief run-through of what you imagine the
various strengths and weaknesses of the client to be. In particular, you might mention anything
that would offer a particular advantage or difficulty to your client in accomplishing their
strategy.

Labor issues

One example that could work either way is the use of phone company labor. Although the phone
company has a potential advantage in its large cadre of maintenance and service people, this may
also be a problem on the cost side. In particular, most workers are probably on union contracts
and therefore would likely be very expensive. In contrast, most of the small competitors would
undoubtedly be nonunion.

How to deal with labor issues

The interviewer might then ask you what kinds of strategies would allow you to overcome this
difficulty. In response, you might mention several possibilities, such as acquiring a number of
smaller local firms, setting up a separate organization outside the phone company superstructure,
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or even something more creative, such as developing a joint worker-owned and -managed entity
with fewer work rules and a different salary structure. The disadvantage of something like this is
that it might take a long time to set up. Another alternative would be to use a more highly auto-
mated process. However, you’d have to explore the capabilities of the technology to determine
the opportunities here.

What else?

After the above analysis, you would have touched on many of the issues that the interviewer was
hoping to hit. However, there are other things that might have been discussed. For example, you
might have talked about how marketing challenges for a business like home security would be
very different from those required for the traditional phone business. This would present a
potential hurdle to your client. However, by tying up with another firm that specialized in
breakthrough marketing the client might be able to over- come its weakness.

Another issue you might have talked about concerns the ultimate size of the business
opportunity. Compared with the phone company’s core business, the electronic security business
will always be small potatoes. There is a question about whether or not it is even big enough to
be of interest. If it could be done profitably, it probably is. However, the client would probably
want to set up a separate operating unit or structure that wouldn’t be overwhelmed by the
comparison with the core phone business.

Finally, you might have chosen to explore some of the issues about the client’s previous failed
investments. There may be some core issues around its ability to identify and successfully pursue
new business opportunities that are much more important to the future of its organization than a
small home security business ever would be.

+ Useful frameworks
Four C’s

Porter’s Five Forces

1) Barriers to Entry

• Economies of scale
• Proprietary product differences
• Brand recognition
• High switching costs for the customer
• Capital requirements
• Difficult to access distribution channels
• Cost advantages of incumbents
• Government regulation, restrictions on entry
• Expected retaliation
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2) Buyer Power increases with

• Bargaining leverage
• Buyer concentration
• Low buyer switching costs
• Buyer information
• Availability of substitute products
• High price elasticity
• Low product differentiation
• High brand recognition of buyers products
• Low impact on buyer’s quality

3) Rivalry increases with

• Industry growth
• High fixed costs + low variable costs
• High value addedIntermittent over capacity
• Low product differentiation
• Low brand recognition
• Low switching costsNumber of competitors
• Corporate stakes
• High fixed costs or high specialized assets
• High barriers to exit

4) Supplier Power increases with

• Differentiation of inputs
• Importance of suppliers product/ service in cost
• Structure of industry
• Lower Switching costs of suppliers
• Higher impact of inputs on costs or differentiation
• Lower Number of substitute inputs
• Higher threat of forward integration
• Lower importance of volume to suppliers
• Lower Supplier Concentration

5) Threat of substitute increase

• Relative performance of substitutes


• Low switching costsHigher buyer propensity to substitute
• *Government:
• Regulation shift
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Associated questions:

Step 1: Ask probing questions--------------------------------------------------------------------------------


What is the competitor’s new product and how does it doffer from ours?
What has the competitor done differently?
Have any other competitors picked up market share?

Step 2: Choose a response action------------------------------------------


Examples: Acquiring the competitor or another player in the market, merging with a competitor,
hire the competitor’s top management away, use marketing and public relations to increase your
profile.
Step 3: Apply the useful tools-
Porter’s five forces
Four Cs

+ Practice Case 1
CASE 1: VIDEO GAMES

Industry Analysis

Problem Statement

The CEO of a large diversified entertainment corporation has asked a McKinsey 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 McKinsey 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 continued investment and why?

Interviewer Information

Market share

• Division is third largest manufacturer of hardware in the industry with 10 percent market
share. Top two producers have 40 and 35 percent market share. Remainder is divided by small
producers.

• 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.
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. Top two competitors also develop, manufacture and sell software/games though division
sells only licensed, software.

. Industry growth of software continues to increase. 

Product

• The industry leaders have established hardware standards.

• Product features constantly developed (e.g., new remote joy stick), to appeal to market
segments.

Sales

• Division sales have increased rapidly over last year from a relatively small base. Current
estimate is annual sales of 500,000 units.
• Division sells to broad range of consumers.
• Division remains less than 20 percent of parent company sales.
• Division’s current sales price for the basic unit is $45 per unit. Costs
• Division estimates current cost is $30 fully loaded. Requested expansion should reduce the
cost by 5 to 7 percent and triple production of the hardware units.
• Top two computers are estimated to have a 10 to 15 percent cost advantage currently.
• Main costs are assembly components and labor.
• Division currently exceeds corporate return requirements; however, margins have recently
been falling. 

Customers

• Division estimates much of initial target market (young families) has now purchased the video
game hardware.

• No large new user segments have been identified.

Distribution

• Primarily outlets of distribution are top end electronics stores.

Note to the Interviewer

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.
Consulting  Club  at  Berkeley   64  
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If 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 which 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 identify other issues which must be examined.

Suggested Answer Scheme

Minimum Requirements

The following issues would need to be covered for the candidate to have done an acceptable job:

• What is future market potential? 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.

• What is the competitive outlook? Should at least recognize the need to examine competitive
dynamics. Issue areas might included: concentration of market shares; control of retail channels;
and R&D capabilities (rate of new product introductions, etc.).

• What will be the price/volume relationship in the future? Issues of prices need to be
considered.

Outstanding Answers

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 shifting mix of product purchases, in this case from hardware (player unit) to
software (video cassettes).

• Seek to look at buyer behavior in key buyer segments, i.e., "fad" potential of product. 

Software

• Recognize technology standards are set by industry leaders. In this situation, the division as a
secondary player will have to follow these standards.

• Recognize that different distribution needs may exist for different products (In this case,
hardware versus software).
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• Discuss the effect capacity additions can have on overall industry price/volume relationships
and on industry price levels.

Company’s 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 reason for poor profit performance of division

4.4 Competitive Analysis----------------


Advanced
.

+ Practice Case 1

Merger Candidate in Chemical Industry

Industry Analysis

Problem Statement

A major chemical producer has retained McKinsey to evaluate another major participant in the
industry. Both companies are bulk commodity chemical producers. We have been asked to begin
our work by analyzing the future prospects of the target company's major product line, a bulk
chemical used in the production of plastics.

How would you structure an analysis of the target company's future prospects in this product
line?

Interviewer Information

• Production of this chemical has slowly declined over the last five years - Prices have declined
rapidly
• There are 7 to 8 major producers
• The largest producer has a 30 percent share
• Number two has 20 percent: out target company has 15 percent
• The rest is divided among other competitors
• The two largest competitors earn a small return
Consulting  Club  at  Berkeley   66  
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• The target company is probably at break-even.
• The rest are operating at break-even or loss
• The largest competitor has just announced construction plans for a major new plant.

Suggested Answer Scheme

Minimum Requirements

The candidate should, at a minimum, address the following issues:


• What markets use this chemical, and what has been the nature of growth in these markets?
(End-use markets are largely automotive-related.)

• How much overall capacity exists now? (Far too much.)

• What has been relative capacity utilization of competitors in the industry? (60 to 70 percent for
last 3 years).

• What are relative cost positions of competitors? (related to size/efficiency age of plant; target
company has reasonably "good" position.)

Better Answers

• How rational is pricing? (Prone to self-destructive cuts to gain temporary share points.)
• Are there niche or value-added uses for chemical? (Not really.)
• Does the chemical have a major by-product or is it a by-product? (Not of significance.)
• How often have companies entered/exited, and how expensive is entry/exit? (Entry expensive;
exit cheap for most because older plants are fully depreciated.)
• How important is this product line to each of the competitors? (Most producers are diversified.)

Outstanding Answers

• Reasons for announced capacity expansion. (It is a bluff to try and get smaller competitors to
shut down.)
• Is regulation important? (Yes: all competitors have installed pollution control equipment.)
• What is nature of operational improvements that the target company could make? (Lots.)
• How is product sold and distributed? (Economies of scale in marketing and transport are
critical.)
• Is there synergy between our client and target? (Not really.)

+ Practice Case 2
Consulting  Club  at  Berkeley   67  
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MEAT PACKING INDUSTRY17

Industry Analysis

Problem Statement

Your client is a US firm which owns a meat packing plant in Spain. Over the last few periods,
profits have steadily declined, despite growing sales. You have been hired to figure out why.

Information to be provided if asked

Porter's five forces are useful.

Suppliers

Independent farmers have little power against your client. Therefore, the costs of your raw
material cannot be the issue.

Market

The market is fairly regional; hence transportation costs and competition have not changed
dramatically.

No introduction of a substitute product. 

Costs

Production costs have remained stable.

Sample Recommendation

Since there are stable costs, and strong sales, the only other alternative is the price of your
product. Investigate this avenue, and you will discover the buyer link. Your margins are being
squeezed due to the increasing concentration and buying power of your customers.

 
 
 
 
 

                                                                                                               
17  Ace Your Cases series  
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4.6 New Business-------------------------


Basics
 
In a nutshell, this type of case asks you to recommend a strategy for introducing a new product.
This type of question is designed to assessanalytical ability, understanding of brand management,
supply chain, communication, industry knowledge. Useful concepts and frameworks include
Four Ps, market analysis, competitor analysis, product portfolio assessment.

+ Useful frameworks
The Four Ps
This is a useful framework for evaluating marketing cases. It can be applied to both products and
services. The Four Ps consist of:

Price

The price a firm sets for its product or service can be a strategic advantage. For example, it can
be predatory (set very low to undercut the competition), or it can be set slightly above market
average to convey a “premium” image. Consider how pricing is being used in the context of the
case presented to you.

Product

The product or service may provide a strategic advantage if it is the only product or service that
satisfies a particular intersection of customer needs. Or it may simply be an extension of already
existing products, and therefore not much of a benefit. Try to tease out the value of the product in
the marketplace, based on the case details you have been given.

Position/Place

The physical location of a product or service can provide an advantage if it is superior to its
competition, if it is easier or more convenient for people to consume, or if it makes the consumer
more aware of the product or service over its competition. In the context of a business case, you
may want to determine the placement of the product or service compared to its competition.

Promotion

With so much noise in today’s consumer (and business to business) marketplace, it is difficult for
any one product or service to stand out in a category. Promotional activity (including advertising,
discounting to consumers and suppliers, celebrity appearances, etc.) can be used to create or
maintain consumer awareness, open new markets, or target a specific competitor. You may want
to suggest a promotional strategy in the context of the case you are presented.
Consulting  Club  at  Berkeley   69  
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+ A Sample Case
Popcorn Supplier

Manufacturing

Problem Statement

Our client is a supplier to the microwavable popcorn industry. They supply popcorn makers (e.g.
Act II, Orville Redenbacher’s, etc.) with the grease resistant paper used to package popcorn
kernels in a variety of serving sizes. In this industry, the quality of the paper is determined by
placing a bag of freshly micro-waved popcorn on a napkin and measuring the amount of grease
that seeps through the paper packaging and is absorbed by the napkin.
The R&D department of our client recently developed a new type of paper that doubles the
performance of the paper. A new type of coating is applied to the paper that virtually eliminates
any seepage of grease in the napkin test.

Interviewer Information & Suggested Answer Scheme

This case challenges one to consider the steps a firm must take in deciding whether to introduce
a product innovation into the market. It requires you to analyze the overall market and supply
chain for instant popcorn before drilling into specifics about the effects of a new product
introduction for a supplier to the popcorn market.

Question 1: Should our client introduce this new product into the market?

Information to be provided if asked

• What is the overall market size? Overall volume in the market is 100 million sheets of grease
resistant paper per year.

• What is the competition in this market? There our 4 players who supply paper in this market.
Our client holds the largest market share (i.e. 50%), and with rest of market share split evenly
among the rest of our competitors. Market share for all players has been stable over the last
decade.

• How did our client achieve the larger market share? They were the first mover into the market.

• Is there any difference between the paper supplied by our client and our competitors? All
players have been producing and supplying essentially the same type and quality of paper since
microwavable popcorn was introduced.

• Is there a history of innovations in the grease-resistant paper market? All players have been
producing and supplying essentially the same type and quality of paper since microwavable
popcorn was introduced.
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• Is there any threat of the popcorn makers vertically integrating? Not really, popcorn makers
differentiate on brand and are not really interested in entering production of what is essentially a
commodity product.

• Is there pricing pressure evident in this market? Prices have been relatively stable over the last
decade, though recently there has been some increasing pressure as the retail price for
microwavable popcorn has been dropping.

• Will our client’s customers be able to differentiate themselves by using the new paper with
increased grease resistance? Will they derive a competitive advantage? They have not had direct
conversations with the popcorn makers. They did however run some initial focus groups with
end-customers (i.e. buyers of popcorn), and found the amount of grease that seeps through paper
is not a concern for buyers and introducing the new paper will not necessarily sway consumer’s
buying decision.

• Will producing the new paper require a large capital investment? The cost of setting up the
new production will be minimal.

• Will the new paper increase our client’s raw material costs (e.g. thicker paper, more coating,
etc.)? It currently costs our client $0.10 to produce each sheet of paper for an individual package
of popcorn. The chemicals in the coating of the new paper increase the cost of a sheet by 20% to
$0.12.

• Will our customer’s clients incur any additional costs to setup their production process to
accommodate the new type of paper? They will not incur any extra costs in the
production/packaging process. In fact, they will actually be able to save some money by using
the new paper. The old paper required that popcorn makers to glue two sheets of paper together
before packaging in order to achieve the desired grease resistance. The new paper allows
popcorn makers to eliminate this step in the production process that previously added $0.12 to
their total packaging costs.

Total Packaging Costs for Popcorn Makers

Old New
Grease Resistant Sheets 2 1
Needed
Cost per Sheet $0.20 ?
Cost to Glue Sheets $0.12 $0.00
Total Packaging Costs $0.52 ?
Consulting  Club  at  Berkeley   71  
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Sample Recommendation

Question 1
• Interviewee should identify that talking to your client’s customers (i.e. popcorn makers) would
be the first step.

• Realize that increasing the total packaging cost for popcorn makers to utilize the new paper in
their packaging operations is not an option.

• Realize that introducing the new paper will cut our client’s volume by 50%.

• Come up with a pricing strategy that will allow our client to maintain existingprofitability, or
potentially increase profitability by reducing total packaging costs for popcorn makers and
increasing market share.

A good answer includes

Identifies that seeking input from your client’s customers is a critical stepRecognizes that the
new paper adds minimal value to the end customer and thus will not help popcorn makers
differentiate themselvesAnalyzes the supply chain to come to the conclusion that a the new paper
will lead to a 50% drop in volume if our client maintains the same market share

A better answer includes

• Recommends a specific price that our client should set to maintain profitability at current
volume (i.e. $0.52)

• Highlights that our client will have to pre-sell this innovation with clients over time as they will
probably not be amenable to what they may perceive as a $0.32 price increase

A superior answer includes

• Recommends a specific price range that will allow the client to increase its market share and
profitability by lowering the total packaging cost for popcorn makers in a retail market with
increasing pricing pressureIdentifies additional steps our client will have to take to ensure it can
capitalize on this opportunity (e.g. patent protection, sales and marketing, etc.)

• A superior answer should also quickly realize that the rationale for the product introduction is
driven by cost reductions for popcorn makers vs. demand creation in the retail market.
Consulting  Club  at  Berkeley   72  
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+ Practice Case 1
Only you can prevent accidents!

Technology

Problem Statement

A friend of mine at MIT has come to us for help. He was given a $20 million grant to think of a
cool, yet socially responsible, technology. After some time, he has finally created a product that
is on the brink of commercialization. It’s a GPS device that is placed into a car and senses the
typeand severity of a car accident. It immediately transmits this information back to
emergencyservices, which then deploys resources to the accident scene. This service is most
valuable for the more severe accidents, otherwise known as “Type A” accidents. At this point,
my friend is considering a pilot in the Chicago area. Before he moves forward, he would like us
to help him answer the following questions.

Interviewer Information & Suggested Answer Scheme

Question 1: How large is this market opportunity?

Information to be provided if asked

• 1 million cars in Chicago


• 1% of cars get into Type A accidents per year
• The average Type A accident medical claim is $100,000
• The new device should save $50,000 per claim
• Info to be given as case progresses:
• “Market opportunity”= the size of the potential market
• Market does not equal (# of sales x sale price). It is a measure of the “potential” opportunity
(read: if the product reached 100% market saturation and extracted 100% of the value of the
product).
• Focus on medical claims only. The interviewer should let the interviewee be creative and
suggest other ideas for a bit (i.e. device may result in other savings); however, suggest that the
candidate size the market based on medical claims Hopefully, interviewee keyed in on “Type A
accidents” statement in the opening. For simplicity, he/she should focus on Type A accidents.
• Focus on Chicago market opportunity only.

Question 2: How would you price this device?

Information to be provided if asked


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• Fully-loaded device costs $400 (this is not price—but cost of making device)
• Info to be given as case progresses:
• Don’t give but rather ask the interviewee to think about the following:
• Who is the customer? Who are the stakeholders (who is interested in it):
• End user (car driver)
• Other individuals (family, other party in accident, community)
• Insurance companies (primarily health, but also life and P&C) Government
• OEM’s (i.e. Ford)
• Mechanics
• Medical community, including emergency services Competitors
• Investors
• Etc.

Once interviewee has listed them, ask him to think about the impact of some of the stakeholders.

Examples include:
• Government: makes it mandatory
• OEM’s/mechanics: installing devices in new/used cars
• Community: social mandates
• Investors: need for return (Potential) competitors: imitation (is this a defensible patent?)

Sample Recommendation

Question 1

Market Opportunity = Device Savings Per Claim * Type A Accidents/Year

Device Savings Per Claim = ($100,000- $50,000)


Type A Accidents/Year = (1,000,000 * 1%)
Market Opportunity = $50,000 * 10,000 = $50,000= 10,000= $500 million

A good answer will get to the $500 million number


A better answer will get to the $500 million number using a structured framework
A superior answer will also talk about one or several of the following: 

New product diffusion curve (the product will be adopted over time)
Other values of the device (beyond claims savings)
Device compatibility: can this device be used in any car?

Things to avoid: Getting stuck on the definition of “market opportunity” 

Question 2

A good answer will discuss various aspects of the pricing framework


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Pricing strategy framework:

1. Prepare marketing analysis:


a. Customers
i. Segments
ii.Targeting
iii. Positioning
b. Competitors/substitutes
2. Make marketing mix decisions
3. Estimate demand curve
4. Calculate cost
5. Understand environmental factors

6. Set pricing objective, which may be one of the following:

• Profit maximization
• Revenue maximization
• Profit margin maximization
• Quality leadership
• Partial cost recovery
• Survival

7. Pricing methods:

•Cost-plus
•Target return pricing
•Value-based pricing
•Psychological training
•Competitor pricing
•Marginal pricing

A better/superior answer will delve into various aspects of the aforementioned framework in
some detail:

•Customer: Who is it? Are there multiple ones (i.e. end user, insurance companies)?
•Environmental factors: Is it a defensible patent? Should the government make it
mandatory?
Consulting  Club  at  Berkeley   75  
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4.6 New Business-------------------------


Advanced

Ricks American Café

RCC Original

Problem Statement

It has come to your attention that the historic Rick’s American Café is up for sale. Should you
purchase it?

Interviewer Information

Rationale for Purchasing:

1. Profit potential
2. You may assume you are like every other sketchy collegiate club owner – you enjoy lurking
around students

Information to be provided if asked:

There is another Rick’s in East Lansing, but it is not a franchise; you are buying the rights to the
brand name in Ann Arbor.

Assume the bar serves only college students – both


undergraduate and graduate (no local population)
Rick’s is a 21 year old and over establishment

Question 1: Market Sizing

Before we jump into profitability, let’s do a quick market sizing estimation. What do you think is
the total weekly student demand in Ann Arbor for bar visits?

Information to be provided if asked:

There are 40,000 students at the U of M –


• 26,000 are graduate students
Consulting  Club  at  Berkeley   76  
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• 15,000 are undergraduate students• Again, only students demand, do not account for the local
population

Sample Response

I will assume 30% of the undergrads are over 21, and 100% of the graduate students are. That’s
7,800 undergrads, of whom I would think 60% go out on a regular basis, or 4,680 undergrads. I
think the graduate students go out less, so I’d say only 40% or 6,000, of them go out regularly.
On average, each bar-going student will go out twice a week. That puts the number of weekly
bar visits in Ann Arbor at about 21,360.

Question 2: Profitability Analysis - Revenue

Now let’s return to the profitability analysis. What is Rick’s annual revenue?

Information provided upon request:

• Avg. male drink purchase/night: 6 drinks


• Avg. female drink purchase/night: 2 drinks
• Avg. drink price: $5
• Cover charge (only on Thurs – Sat): $5
• Weeks open per year: 38 (due to the summer months, etc.)
• Percentage male clientele: 60%
• Percentage female clientele: 40%
• Nightly demand Mon – Wed: 150
• Nightly demand Thurs – Sat: 1000

So what is the total revenue for Mon-Wed?

ANS: (150)( .6)($5)(6) + (150)(.4)($5)(2) = $3,300 * 3 nights = $9,900


And for Thurs – Sat?

ANS: (1000)( .6)($5)($5)(6) + (1000)(.4) ($5)($5)(2) = $110,000 * 3 nights = $330,000

Which makes the annual revenue?

ANS: ($330,000 + $9,900)(38 weeks) = $12,916,200 (student may round total weekly
revenue to $340,000)

Question 3: Profitability Analysis - Cost


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What does Rick’s annual cost structure look like?

(Student should brainstorm various costs. Monthly data should be provided, and the student
should annualize everything.)

Information to be provided if asked:

Cost Monthly Annual


Insurance $75,000 $900,000
Rent (Monthly) $400,000 $4,800,000
Maintenance $150,000 $1,800,000
Alcohol $225,000 $2,700,000
Labor $150,000 $1,800,000
Total Costs = $1,000,000 $12,000,000

Purchase Price (lump sum) = $7,000,000

Question 4: Profitability Analysis - Perpetuity

Ok, good. So now we have both annual revenue and annual costs. Let’s assume that you
absolutely love Ann Arbor and that you are investing for the long run. What do you think of this
investment?

(Note: Student should realize that this is an NPV question given the lump sum purchase price
and annual profitability numbers. If they only provide annual profitability, ask for the NPV.)

Information provided upon request:

Calculations:

Total Annual Revenue = $12,916,200


Total Annual Costs = $12,000,000
Total Annual Profit = $916,200
Perpetuity= $916,200/.1= $9,162,000
Purchase Price =$7,000,000

NPV = $2,162,000 => Positive NPV. Buy it!