McCombs 2022

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Texas McCombs Casebook 2022 Dear Future Consultant, We are pleased to present the Texas McCombs 2022 Casebook . Enclosed are 15 cases, newly created by last year’s GCG members, and 2 cases donated by target firms. This casebook is the result of the creativity, hard work, and precision of our case writers and the dedication of our GCG Executive Team, who served as our editors. We want to give a special acknowledgement to EY-Parthenon and Bain for allowing us to share their cases. With their support, we hope to propel forward the next class of future consultants as they prepare for case interviews. To our future consultants, we hope that you find this casebook helpful to you on your journey through recruiting. This was our school’s first casebook since 2017 . Please consider giving back by developing a case for the next year’s class, so we can continue to expand our resources and serve future McCombies and other MBA students. Goo d luck and Hook ‘em! Samantha Pinto & Tyler Joseph ’23, Co - VP’s of Curriculum Thank you to our case writers: Aayush Gupta ‘23 , Satyam Jaitly ‘23 , Mayank Agrawal ‘23 , Andrew Mortensen ‘23 , Daniel Cohen ‘23 , Eduardo Rodriguez Macrillante ‘23, Frank Bowers ’22, Joe Soules ’23, Justine Coven ’23, Katie Wells ’22, Michael Hawkins ’23, Rafael Salcedo ’23, Samantha Pinto ’23, Spruha Kamdar ’23, Anirudh Anand ’23, Shivam Kumar ’23, Stephen Rudh ’23, Victor Hwa ’ 23, Aaron Ramirez ‘ 23 Thank you to our editorial team: Melanie Kepic: Career Consultant, Claire Trammel ’23, Andrew Mortensen ‘23 , Alysha Dixon ’23, Samantha Easley ‘23 , Meghan Patel ’23, Aaron Ramirez ’23
This book is intended for internal use by members of the McCombs Graduate Consulting Group (GCG). Distribution to any parties outside of GCG is forbidden, unless given written consent by the McCombs Career Team or GCG Executive Team.
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Business Concepts Evaluated Quantitative Focus Qualitative Focus Breakeven Analysis Market Entry Strategy Cost Structure Competitive Analysis NPV/ Perpetuity Profit Turnaround Supply & Demand Capabilities Acquisition Analysis Market Sizing Customer Segmentation ROI Synergies/Dyssynergies Pricing Strategy Revenue Drivers
Instructional Manual Case status: Indicates the case type and case difficulties on a scale of 3 (Easy, Medium, Hard). Quantitative indicates the intensity and rigor of math calculations and qualitative measures the difficulty in developing frameworks and industry-driven recommendations. The interviewer should consider case status when selecting which case to deliver to candidate. Clarifying Information: Should be information the interviewer provides to candidate when asked. The candidate should take notes on any new information received after the initial prompt and use it to drive the framework and hypothesis. Suggested Framework: Indicates the MECE-level insight the candidate should strive for when developing a framework. The interviewer should look at the sample framework when evaluating the candidate’s initial insights and hypothesis.
Analysis: Contains the exemplar answer as well as math calculations if the prompt requires quant analysis. This serves as the interviewer reference guide and should not be shared with the candidate during the case interview, until you are ready to review with the candidate. Interviewer Guidance: Presents more detailed information pertaining to what the interviewer should look for when evaluating the candidate’s level of execution. This section may also include hints that the interviewer can share if the candidate has not completely addressed the prompt or is having difficulties reaching an exemplar answer.
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Risks/Next Steps: Contains sample considerations the candidate may propose. The interviewer should evaluate the candidate’s risks and next steps for relevancy to case prompt and final recommendation.
1 Table of Contents Title Type Industry Quantitative Difficulty Qualitative Difficulty Bevo Bank Human Capital Financial Services Medium Medium EFF Charter Schools Market Study Education Easy Medium Fleet Smart Resource Allocation Technology Hard Hard Hill Country Acres Cost Reduction Agriculture Medium Medium KVC Games Profitability CPG/Entertainment Hard Easy Mooford’s Market Entry Restaurant Medium Easy Plainview Energy Profitability Oil and Gas Medium Medium Rapid Transit Profitability Transporation Difficult Medium SaaSy Sasquatch Profitability Tech/Healthcare Easy Hard Santa Profitability Operations Hard Hard Shaved Ice Breakeven CPG Medium Easy SpaceY Profitability Aerospace Medium Medium Stars and Stripes Airways Evaluation/Profitability Transportation Medium Hard Steel, Inc. Profitability Industrial Goods Hard Medium Stinson’s Bro on Demand Market Sizing Technology Easy Medium Telecom 5G Market Entry/Growth Telecom/Tech Medium Medium EYP Sample Case Bain Sample Case
2 Human Resources Reorganization at BevoBank By Victor Hwa (Class of 2023) Behavioral Question Tell me why you would succeed at <insert name of candidate’s dream firm>. Case Prompt Your client is BevoBank, the largest bank in the United States and has a worldwide footprint, employing 300,000 employees. BevoBank’s Human Resources (HR) department is looking to cut costs by outsourcing some of their HR functions and has identified two external HR services providers to choose from, VY’s Human Resources Services and KD’s Human Capital Partners. Which provider should they choose? Quant Level: Medium Qualitative Level: Medium Type: Human Capital Industry: Financial Services
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3 Clarifying Information 1. If the candidate asks questions about the two HR vendors (costs, capabilities, etc.), tell the candidate that they are expected to address this in their framework. 2. If the candidate asks which HR teams the bank is thinking of outsourcing, provide them the list of HR teams and ask the candidate to think about which teams would be easiest to outsource when constructing their framework. • The client is primarily focused on the US but has a global footprint in over 50+ countries. • HR provides support to the bank’s four lines of business: o Consumer (traditional brick and mortar banking, credit cards, etc.) o Corporate and Investment Banking o Commercial Banking o Asset & Wealth Management • HR teams are: o Business Partners (generalist support to employees in all product lines and countries) o Employee Relations o Compensation, Benefits, and Wellness o Diversity & Inclusion o Recruiting o Talent & Leadership Development o HR Service Delivery (processing employee transactions throughout employee lifecycle, such as onboarding and offboarding) o HR Technology (support and delivery of technology solutions to support HR functions) o HR Analytics (reporting metrics such as attrition, D&I, etc.) • The client does not know how long they intend to stick with the selected HR vendor for (i.e. the client might switch vendors next year or stick with this vendor for perpetuity). • The client does not have a specific cost savings target – they want to do wha t’s best for the organization • Employees who work in the departments that will be outsourced will be reassigned to groups that will not be outsourced to alleviate attrition from these non-outsourced groups; the bank does not plan to lay off any employees. All other information, including but not limited to bank profitability information or assets held, is irrelevant and should be deflected. If candidate struggles to ask relevant clarifying questions, ask candidate to brainstorm the function of HR in organizations.
4 Suggested Framework 1. Determining which HR teams to cut a. Current total costs for each of the 9 HR teams b. Team Dynamics for all the HR teams i. Across HR Functions ii. Across Business Lines iii. Inside the US and outside the US (International influences on team dynamics?) c. Teams that are easiest to outsource i. Easier to outsource “back of the house” teams such as analytics and IT functions as opposed to “forward facing” teams such as business partners d. Tradeoffs for outsourcing certain teams on employee satisfaction, employee morale, customer satisfaction, and ultimately the bank’s profit! i. For example – if we outsource employee relations, will this lead to lower employee satisfaction and higher turnover, and negative impact customer satisfaction? ii. There are going to be many tradeoffs – expect the candidate to get creative here! iii. Push candidates to brainstorm here because this allows the interviewer to really assess the candidate’s Human Capital Skillset. 2. Costs to BevoBank a. Fixed, upfront costs b. Variable costs per employee, applicant, or retiree c. Contract Considerations – will one vendor provide more favorable contract terms to BevoBank? d. If there are any costs associated with retraining affected employees (another upfront fixed cost) 3. Information about external HR vendors a. Strength competencies for each vendor (is one better than the other for recruiting? Compensation? DE&I? etc.) b. Track Record for each vendor i. Satisfaction Rates of other major clients, especially major international banks c. International Acumen of each vendor in each of the countries that Bevobank operates in (this is a critical bucket) i. Language Capabilities of each vendor ii. Infrastructure – Do HR vendor services vary from country to country? iii. On-shore or off-shore? I.e. is the vendor located in country or providing the services Cultural differences, both within the firm as well as country cultural differences, is an important consideration!
5 Prompt 1 After a thorough review, the client has identified the four HR functions they wish to outsource: HR Technology (Manage HR Data), Compensation, Benefits, and Wellness, HR Analytics, and HR Service Delivery. Notice that these functions are more “back - end” functions rather than “forward - facing” functions! Show candidate Exhibit A. There are no other costs, such as retraining costs. Calculate the total fixed/upfront cost and annual variable cost for each option. Solution VY KD Function One-Time Upfront (millions) Variable cost per employee per month Total Annual Variable Cost (millions) One-Time Upfront (millions) Variable cost per employee per month Total Annual Variable Cost (millions) HR Tech $1.15 $0.50 $1.80 $0.75 $0.25 $0.90 Comp, Benefits, and Wellness $3.17 $1.50 $5.40 $9.78 $2.00 $7.20 HR Analytics $2.14 $1.00 $3.60 $3.68 $0.35 $1.26 HR Service Delivery $1.87 $0.75 $2.70 $2.40 $0.15 $0.54 Total $8.33 $3.75 $13.50 $16.61 $2.75 $9.90 This is a straightforward math problem: • Upfront Costs are simply added together • Variable costs are added together, then multiplied by 300,000, and then multiplied by 12 to find the total annual cost. Once the bolded numbers have been calculated or provided to the candidate, they should notice that VY has lower upfront cost but a higher annual cost, whereas KD has higher upfront cost but lower annual costs.
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6 Prompt 2 Both VY and KD have a global footprint. • VY is an “onshore firm” – the firm has staff in each of the countries that BevoBank does business in. • KD is an “offshore firm” – the firm conducts business from its call centers in the Philippines and India. This would be a shift from BevoBank’s current HR model, as currently the bank has staff in each of the countries that they do business in. As mentioned earlier, BevoBank is primarily focused on the US but has a global footprint in over 50+ countries. 90% of BevoBa nk’s business is conducted in 4 languages. • VY’s firm has a novel translation technology that allows its staff to communicate in al l languages that the bank employees speak. • KD’s firm lacks this novel translation technology. Based on this information as well as the cost information from the previous prompt, brainstorm the advantages and drawbacks for VY and KD. Analysis Interviewer Guidance As mentioned in the previous prompt, VY has lower upfront costs but higher annual costs whereas KD has higher upfront costs but lower annual costs. Table 1 – Breakeven Table between the two firms (all figures in $millions) VY KD Year Upfront Total Annual Variable Cost Total Upfront Total Annual Variable Cost Total Difference 1 $8.33 $13.50 $21.83 $16.61 $9.90 $26.51 -$4.68 2 $13.50 $35.33 $9.90 $36.41 -$1.08 3 $13.50 $48.83 $9.90 $46.31 $2.52 4 $13.50 $62.33 $9.90 $56.21 $6.12 5 $13.50 $75.83 $9.90 $66.11 $9.72 The candidate should at least articulate that the breakeven cost should be calculated. However, Table 1 can be provided to the candidate in lieu of having the candidate calculate the numbers. After the candidate draws conclusions from the Table 1 numbers, the interviewer should facilitate discussion with the candidate about the human capital aspects.
7 The candidate should realize from Table 1 that VY’s total costs are initially lower than KD’s but the trend reverses by year 3, at which point VY’s total costs are higher and makes it the more expensive option in the long run. VY is an onshore client-facing solution and can communicate in all the languages spoken by BevoBank’s clients and employees, however it is more expensive in the long run. Although KD is less expens ive in the long run, they are not directly facing BevoBank’s employees and lack the translation capability for 10% of Bevobank’s total business. This brings up several issues for discussion, especially since HR Service Delivery is a client-facing HR function: 1. What is BevoBank’s mission statement and what are their core business values? 2. Is it worth to pay more in the long run for a client facing solution as opposed to an HR service provider that provides services from a call center? The impact on BevoBank’s workforce needs to be evaluated: a. Will switching from the current client-facing model to an off-shore model make BevoBank’s employees unhappy? b. What would be the impact on workplace productivity and worker attrition? How would this ultimately affect BevoBank’s customer satisfaction and ultimately, their bottom line? 3. Is it worth it for BevoBank to pay more in the long run for the translation capability? a. For the 10% that the translation capability does not cover: how would this population feel about being excluded? Probably not very good, and the 90% population will likely take note of wh at’s going on as well! What would be the impact on productivity, retention, and ultimately the bank’s customer satisfaction levels and bottom line? b. How would any change line up with the bank’s Diversity, Equity, and Inclusion (DE&I) initiatives? 4. Would any drastic changes bring bad publicity and press to the bank? There are no correct answers to these questions – the candidate needs to take a position and come up with rationale and support to bolster their position!
8 Recommendation Bevobank’s Chief HR Officer is looking for your recommendation on which HR vendor the bank should select. What is your recommendation? Risks/ Next Steps Interviewer Guidance Risks (not specific to either VY or KD): • There may be some disruptions during the transition period when in-house services are being transitioned to the vendor, leading to employee complaints. • The impact of human capital on the bank’s financials can never be precisely measured. Next Steps: 1) Survey to employees to gauge their workplace engagement 2) Managers need to strategize communications to employees regarding any changes being made. The candidate can select either VY or KD – there is no correct answer to this case! However, the candidate must come up with strong rationale and points to back up their selection! The interviewer should ask the candidate: if you were a front-line manager, how would you explain the changes you are proposing to your direct reports?
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9 Other Notes The primary objective of this case is to test the candidate’s qualitative skills as it relates to human capital. The quantitative aspects of this case allow the candidate to practice multiplication and addition skills as a secondary objective. The quantitative calculations can be provided to the candidate based on the preferences of the candidate and/or interviewer.
10 Exhibit A Vendor Costs VY KD Function One-Time Upfront (millions) Variable (per employee per month) One-Time Upfront (millions) Variable (per employee per month) HR Tech $1.15 $0.50 $0.75 $0.25 Comp, Benefits, and Wellness $3.17 $1.50 $9.78 $2.00 HR Analytics $2.14 $1.00 $3.68 $0.35 HR Service Delivery $1.87 $0.75 $2.40 $0.15
11 EFF Charter Schools by Samantha Pinto (Class of 2023) Behavioral Question Tell me about a time in your professional life when you had to handle competing priorities. Case Prompt The client, EFF (Education for the Future), is a centrally operated network of charter schools that serves Kindergarten-12 th grades. The client wants to acquire a new school zone that comprises of 7 schools: 4 elementary schools and 2 middle schools, and 1 high school. They have identified 4 school zones (Zones A, B, C, D) that students are currently attending and enlisted our help in selecting 1 of these options. Clarifying Information Suggested Framework • The client’s mission is to provide innovative education that propels the next generation forward. They believe in their brand and hope to expand this mission into other schools. • Each school zone consists of 4 elementary schools and 2 middle schools that feed into 1 high school. 1. Client capabilities • Synergies o Staff & labor o Course curriculum, including materials o Transportation & supply chain o Operations 2. Financials • Costs Quant Level: Easy Qualitative Level: Medium Type: Market Study Industry: Education
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12 Presently, EFF manages 20 school zones across the country. • At this time, the client is only looking to acquire 1 school zone. They are looking at current school zones in the region and are not interested in building new schools. • EFF is financed mostly through state and federal funding, although a small portion of their funding is channeled through donations and investments. • The client does not have a financial target but has the goal of ensuring enough funds allow for the schools to continue to operate. o Labor (teachers & staff), supplies, transportation, ed technology & learning materials • Funding (revenue) o Taxes (federal, state, local) o Student attendance, donations o Renting out school space for external events 3. Stakeholders • Student body • Teachers & staff • Parents & families • Leadership (the Board of Ed, city officials etc.) • EFF Donors and Investors 4. Other Considerations • Regulatory measures for acquisition • Community/stakeholder buy-in • School culture and alignment to EFF schools Prompt 1- Exhibit A School zones receive funding based on the number of students enrolled in and attending school. Each Zone to consider (Zones A, B, C, D) all currently have 10,000 school-aged children. • For each elementary-school student, schools receive $40,000. • For each middle-school student, schools receive $40,000. • For each high-school student, schools receive $50,000. Distribute Exhibit A to candidate. Please calculate the allocated funds for each school zone based on the information from the exhibit.
13 Analysis & Guidance ES MS HS Total Funds Zone A 30% x 10K = 3K students 3K x $40K = $120M 25% x 10K = 2.5K students 2.5K x $40K = $100M 30% x 10K= 3K students 3K x $50K= $150M $370M Zone B 30% x 10K = 3K students 3K x $40K = $120M 30% x 10K = 3K students 3K x $40K = $120M 15% x 10K= 1.5K students 1.5K x $50K= $75M $315M Zone C 30% x 10K = 3K students 3K x $40K = $120M 30% x 10K = 3K students 3K x $40K = $120M 25% x 10K = 2.5K students 2.5K x $50K = $125M $365M Zone D 30% x 10K = 3K students 3K x $40K = $120M 15% x 10K = 1.5K students 1.5K x $40K = $60M 15% x 10K= 1.5K students 1.5K x $50K= $75M $255M The candidate should notice patterns in the data and refrain from repeating lengthy calculations. For instance, candidate should notice Zone D has half the number of middle school students as Zone A and thus divide funds by 2. The candidate should notice that the bars do not add up to 100%. If candidate asks say: Not every eligible child attends their designated school zone. • A good candidate will notice that Zones A and C have a difference of funds of $5M and are the top contenders. A good candidate would also want to mention he/she would want to know of any differences in operational costs. • A strong candidate will drive the case forward by asking for non-financial factors that would impact the choice between A & C.
14 Prompt 2- Brainstorm Distribute Exhibit B and ask candidate what they notice about the map and how does it impact initial choice. Analysis Interviewer Guidance Since Zone C is closer to EFF school zone than Zone A, the candidate may change their answer to Zone C, since there is only a 5M difference in funds between the two zones. Other considerations: • Trees in map indicate protected zone, limits future opportunities for expansion • Competition to nearby schools • New housing proposal indicates potential opportunities for expansion Candidate should point out where each Zone is in relation to the EFF school zone, as well as nearby competing schools. A good candidate should point out that Zone C is the closest distance to the EFF schools, and would note that with this additional data Zone C could be a good option along with Zone A, since there is only a $5M difference in funds between Zones A and C. A great candidate would also make the case that the proximity of Zone C to EFF schools could offer the client potential synergies between the two zones and drive down EFF’s total operating costs by increasing economies of scale.
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15 Follow-up Ask candidate to brainstorm other considerations that are important to evaluate which Zone to choose. Internal Factors • Demographics of student population • Student Needs (i.e, English language learners, Special education and services required) • # of teachers and staffing capacities • Operating cost considerations (transportation, technology & supplies, etc.) External Factors • Population growth/change in each neighborhood • Stakeholder buy-in, school culture • Other competing school networks in region (i.e, private schools, magnet schools) Prompt 3 A new STEM-focused specialized high school will open its doors next year, and all students in the region are eligible to attend. The client is concerned about how this might impact student attrition between middle schools and high schools. They estimate a loss of 20% of high schoolers in Zone A and a 30% loss in Zone C. How does this impact your decision in which Zone to choose?
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16 Analysis Interviewer Guidance Zone A: $150M x 20% attrition= $30M projected loss in funds for a total of $340M in operating funds. Zone C: $125M x 30% attrition= $37.5M projected loss in funds for a total of $327.5M in operating funds. The candidate should not estimate the calculations. At this point, the candidate should cut out Zones B & D from consideration. To save time, the candidate should only calculate the operating loss in Zones A & C. If the candidate begins calculating the new operating funds for all 4 zones, redirect the candidate by saying: “ In the interest of time, don’t feel the need to calculate the operating funds of all 4 zones. Since we estimate a 20% loss in high schoolers across all zones, please only calculate the new operating funds of your top two choices.” Recommendation Make a final recommendation for the client. Risks/ Next Steps Interviewer Guidance Risks 1. Student attrition projections could be too high or low, impacting decision 2. Competitive response from other schools, leading to increased attrition 3. Cultivating stakeholder buy-in through enhanced school programming Next Steps 1. Collect additional data, such as polls or surveys to gather project retention rates 2. Create plan to execute on school synergies 3. Use analysis to drive research/ tap into other potential targets The candidate can make an argument for Zone A or Zone C, although Zone C offers potential opportunities for synergies. The recommendation should be driven both by funds, as well as considerations of other factors that may influence student attendance, and should draw on insights throughout the case.
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17 Exhibit A 30% 30% 30% 30% 25% 30% 30% 15% 30% 15% 25% 15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Zone A Zone B Zone C Zone D Eligible School-Age Children Attending by Zone ES MS HS
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18 Exhibit B
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19 FleetSmart by Eduardo Rodriguez Macrillante (Class of 2023) Behavioral Question Tell me about a time that you disagreed with a group decision, how you handled it and what was the outcome Quant Level: Hard Qualitative Level: Hard Type: Resource Allocation/Investment Evaluation Industry: Technology
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20 Case Prompt Your client is FleetSmart. A U.S. based technology firm specializing in logistics software including inventory, fleet management and customer relationship management. Through customer and expert research, they have concluded that to stay competitive in the industry is paramount for them to add a telematics device to their product line. This device would be installed on a client’s assets to get real-time data on their location and performance. This device would provide a wide range of information that could be accessed by their clients through FleetSmart’s software and allow them to increase their fleet’s efficiency. This will be FleetSmart’s first project involving a hardware device as they specialize in software. They have been evaluating how to proceed with the project and have identified 2 potential options: 1. They could build it in-house. Since this is a very different endeavor from their normal operations, they would need to hire a team of hardware engineers for this effort as well as procuring equipment to manufacture them. 2. They could partner with a company that has manufactured similar devices in the past for other applications. This company would adjust their current design to satisfy some of FleetSmart’s requirements and manufacture the devices, so there would not be a need for people and equipment investment if they chose to go with this option They have reached out to us to help them figure out what option would be better for them because they see this new product as a critical piece of their future ecosystem of offerings.
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21 Clarifying Information Suggested Framework • There is a trend in the logistics industry for connected devices, this means competitors are exploring similar opportunities • The company has clients worldwide • They do not have a particular timeline for launch but speed to market is certainly an important factor to consider • If they decided to go with the partnership agreement, the manufacturer would just work as a supplier. They would own the IP and FleetSmart would purchase each device from them (more info on this later) • The logistics SOFTWARE market is worth $10Bn/year. With the IoT revolution, experts believe this market could grow to $20Bn in 5 years (Not really important) • They currently hold 15% of the logistics software market. They believe that this product could allow them to capture UP TO 10% more market share (depending on how fast they can launch) • There is also potential to lose up to 5% of the market to competitors if the product is not a success • The partner product will satisfy with most of the specifica tions, and it will feel more “cheaply” made • The in-house product will be designed to satisfy all their specifications, and it would feel more robust and resistant • Market research also indicates that customers will be relatively price sensitive initially, however, over the long- term better features and integration with the software will be the primary consideration for their choice Make a table comparing the below buckets between the options • Monetary costs - Recruitment - $0 for partnering, higher for in-house - Equipment - $0 for partnering, higher for in-house - Costs per device - potentially higher for partnering (economies of scale could play a role here, lower for in- house) - When would these investment occur? – Larger portion over time for partnering, high capex for in-house • Market Response - How important is it to have a first mover advantage? - Competitors’ response - What are the customer preferences? • Product - How flexible will the product be to allow updates or modifications in the future? - How tailored are the features to customer needs? - Potential for bundle pricing with current software - How will the internal team handle troubleshooting and problems? • Operations - How much capacity can they expect? Can they satisfy the market demand (initially and in the future)? - How dependent are they on the partner for production? How concerning is that in the current environment? - How does the partnership agreement outline each party’s responsibilities? How much trust exists? - How risky is each option to the overall health of the company if they failed? – Partnering has larger sunk costs
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22 • The vendor is currently in the U.S. They haven’t explored potential partners abroad. (One of the prompts below is related to this fact as a hypothetical) Prompt 1 Once the candidate is finished walking you through their framework tell them you were also wondering about the selection of the partner (if they didn’t bring up the location of the vendor in their questions or analysis, m ention here that it’s U.S. based) and that you are aware of several potential manufacturers in East Asia that could potentially do the same work. Before, going to deep in the analysis you would like to brainstorm some pros and cons of having a partner abro ad to see if it’s worth bringing that up to the client Interviewer Guidance Pros: - Potentially cheaper per unit costs - Potentially easier to expand capacity if needed - Diversified over risks that could affect the U.S. - Exposure to a new market - Industry knowledge is very developed in that geographic area
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23 Cons: - More exposed to international trade changes/regulations - Brand perception could suffer - Exposed to risk related to emerging economies - Potential ethical considerations related to labor practices Prompt 2 Provide Exhibit A and ask candidate the following: FleetSmart has done a preliminary study of the costs from each option and has the following estimates. Assuming they operate under these conditions forever, a flat demand (for simplicity), and a discount rate of 10%. Which option seems to be ahead? If they don’t bring it up by themselves in the last portion, what are the most significant costs in each option? What could be done to reduce those?
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24 Analysis Interviewer Guidance Partner (Numbers below in Thousands) Year 0 1+ Investment $0 $0 Fixed Costs $0 $0 Variable Costs $0 $5,000 Total Costs $0 $5,000 Perpetuity $50,000 NPV $50,000 In-House (Numbers below in Thousands) Year 0 1+ Investment $9,500 $0 Fixed Costs $0 $2,100 Variable Costs $0 $2,000 Total Costs $9,500 $4,100 Perpetuity $41,000 NPV $50,500 - Using perpetuity formula (NPV=C/Rate) - They should notice that in the long term the costs under the in-house option are smaller than the partner option - The large investment in the in-house portion is what makes both options almost the same - Potentially financing investment with debt and spreading the payments over time could make it more worth it - Through negotiation on volume discounts, minimum quantity purchases, etc. a lower per unit cost could be achieved with the partner - Is saving 500k worth deciding one over the other? Specially given the fact that we assumed a flat demand and we know that’s will most likely not be the case. The in-house option would do better the more demand increases
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25 Prompt 3 Provide Exhibit B and ask candidate the following: We have been given estimated capacities and demand information. If we are thinking not only about the short-term possibilities, but also at the longer-term plan for the company, what can we information can we obtain from the graph? Interviewer Guidance - If developed in- house they won’t be able to deliver any units until the second year - Capacity in-house would not meet base demand until year 4 and best case until year 6. After that it will easily meet it - Capacity of the partner will be adequate for the base case until year 8 and best case until year 6. However, in the long term it won’t satisfy any of the capacities - So what? Which option would it be better given the market? Capturing it early on using a vendor or developing internal capabilities? – It could be argued either way, depending on how the candidate views the market responding
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26 Recommendation The CEO is about to walk into the room, and he would like to hear our preliminary thoughts on their situation as either option will require significant leg work to happen, and they are ready to act fast either way. Which option would you recommend them follow given what you know so far? Risks/ Next Steps Interviewer Guidance Partner Option Risks: • Larger per unit costs in the long term • Less flexibility in terms of features and less seamless integration with other systems Next Steps: • Perform customer research to further understand feature needs and how these might evolve over the years • Perform market analysis to understand impact of first mover advantage, market adoption rates and how fast they need to go to market • Begin negotiations and drafting an agreement that protects the company’s interest based on 1 and 2 (volume discounts, possibility for FleetSmart to design but not manufacture) They could argue for either option. The important part is that they recognize there are benefits and drawbacks of each option and that they can categorize them as such depending on what they chose.
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27 In-House Option Risks: • Slow speed to market could cost market share to competitors • Large investment costs in equipment and engineers Next Steps: • Perform market analysis to understand impact of first mover advantage, market adoption rates and how fast they need to go to market • Perform financial analysis to better understand the risk of failure to the co mpany’s health • Begin recruiting process and sourcing capital for investment Other Notes This case is intentionally information heavy. Some will be useful, some won’t. Some of the evidence supports one option, some supports the other one, the purpose is to see how much a candidate can commit when there’s not one clear answer in the information given. I think this would be a good case to do possibly midway to the process when the candidate already knows the basics but needs to potentially refine information processing/attention to details. Not a good case to do close to an interview since it’s fairly convoluted and something could be easily missed, which doesn’t really speak to that person’s ability and could impact their morale.
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28 Exhibit A *ALL Numbers in Thousands Partner In- House Equipment Investment (Investment now) $ - $9,500 Engineering team cost (per year at the end of each year) $ - $2,000 Maintenance/Upgrades cost (per year at the end of each year) $ - $100 Average Device Demand (per year, in thousands) 20 Cost per Device (in thousands) $0.25 $0.10
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29 Exhibit B 0 5 10 15 20 25 30 35 40 1 2 3 4 5 6 7 8 9 10 Thousands of Units Years Capacities And Demand Base Case Demand Slow Adoption Demand Fast Adoption Demand Potential In-House Capacity Predicted Partner Capacity
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30 Hill Country Acres by Michael Hawkins Behavioral Question Give an example of when you needed information from a coworker who wasn’t responsive? What did you do? Case Prompt Your client is Hill Country Acres, the top breeder of longhorn cattle in the United States. The company is based in the southwest US on a picturesque ranch and sells the highest quality longhorns available. Recently, Hill Country Acres management has seen a trend of declining profitability and is concerned about what this could mean for the future of the business which is the problem we were brought in to solve. Quant Level: Medium Qualitative Level: Medium Type: Cost Reduction Industry: Agriculture
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31 Clarifying Information Suggested Framework • The client only sells in the continental US • The client wants to see improvement in the bottom line back to 2019’s profits of $1.4M within a year without losing their highest quality position • The client has 2 key consumers, those who show the cattle in competition and those who purchase them as farm pets • Cattle quality is scored on a scale of 100 and HCA longhorns average a 90 • Revenue - Fixed Costs including labor, SG&A - Upfront Costs: cap ex, marketing, patent rights - Variable Costs: distribution, COGS - Price, quantity, advertising, etc. • Costs - Fixed costs: Labor and SG&A - Variable Costs: Distribution and COGS • Could mention but not necessary: Cattle Market - Competition - Market trends
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32 Prompt 1 Start by telling them we have new data about Hill Country Acres competitors. There are three direct competitors, one with an average cattle grade of 81, and the other two at 76 and 73 respectively. Then ask interviewee to consider some new revenue ideas: “The management team of Hill Country Acres would like to hear your ideas for how they can generate r evenue outside of sales of their cattle.” Analysis Interviewer Guidance Interviewee should understand that Hill Country Acres can have a reduction of 9 points on average (difference between their grade of 89 and next competitors of 81) which is a 10% decrease. Interviewee has free reign here and anything that could make money is acceptable. Examples include: Merchandise, ranch tours, petting zoo
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33 Prompt 2 Let interviewee know that while HCA liked their ideas for new revenue channels, revenue doe sn’t appear to be the issue here as it has grown from $14M to $14.7M from 2019 - 2021 (5% growth). The client would like to focus on cost cutting. Ask generally what are ways firms in any industry can cut costs. (Cost cutting framework) Then ask the interviewee for possible costs associated with running this breeding operation. Analysis Interviewer Guidance Interviewee should hit on some or all of the following costs: • Fixed: Sales and Advertising, Land, Labor, Any technical equipment • Variable: Vet costs, Food costs, breeding costs Once they have brainstormed walk them through the costs, they missed so they now have a holistic view. This represents a significant change from the original prompt. If the interviewee asks, allow them some time to recreate their structure to focus on cost cutting. Interviewee should lay out cost cutting framework of: Reduce usage to lower costs, automate processes to lower costs, optimize the process to lower costs, or renegotiate existing contracts. (If they spin their wheels for a while go ahead and give them these.)
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34 Prompt 3 First ask which costs they think would be easily reduced. Then show them Exhibit A. Once they have realized we should focus on Variable Costs tell them that all three variable costs have been increasing at a similar rate, but each affects the quality of the cattle differently. Then show them Exhibit B. Analysis Interviewer Guidance They should realize that we mentioned we had revenues $14.7M in 2021 and have costs of $14M in the same year. To get back to the profit of $1.4M from 2019 we need to have $700K in savings. After analyzing the charts of Exhibit B they should realize there is only one possibility to reduce costs by $700K and keep the quality of cattle above an 81 which is that of the next competitor. That combo is switching to Feed C, using Dr. Baffert, and having the breeder only involved at the time of breeding and birthing. This reduces costs by $700k and only reduces quality by 9% which is clears the maximum of 10% threshold.
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35 Recommendation The head of Hill Country Acres is about to walk in and wants to know what you have found to turn profits around. Recommend switching to Feed C, using Dr. Baffert, and having the breeder only involved at the time of breeding and birthing. This reduces costs by $700k and only reduces quality by 9% which is clears the maximum of 10% threshold. After analyzing the charts of Exhibit B they should realize there is only one possibility to reduce costs by $700K and keep the quality of cattle above an 81 which is that of the next competitor. Next steps could be looking at revenue generation. Also a test phase to test the viability of the new feed, hard to have a test period for a new vet or breeder in this case. Risks/ Next Steps Interviewer Guidance Risks: • Competitor could increase the quality of their cattle becoming the market leader • These cost reductions could have larger effects than what we measured Next Steps: • Create the new contracts • Careful analysis over the next 6 months to confirm quality
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36 Exhibit A
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37 Exhibit B Food Cost Reduction Quality Reduction Feed A $ - 0% Feed B $ 150,000 1% Feed C $ 250,000 2% Vet Cost Reduction Quality Reduction Dr. Hodges $ - 0% Dr. Lee $ 100,000 2% Dr. Baffert $ 175,000 4% Breeder Cost Reduction Quality Reduction Always involved $ - 0% Involved in breeding and birthing $ 275,000 3% Involved in just breeding $ 400,000 8%
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38 KVC Games by Justine Coven Behavioral Question What is a situation in your career that you could have navigated better? What would you have done differently? Case Prompt Your client is KVC Games. They are considering creating a game about kittens and corgis and want to know whether the game will be profitable or not. Should they create this game, and if so, what market should they target? Type: Profitability Industry: CPG/Entertainment Quant Level: Hard Qualitative Level: Easy
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39 Clarifying Information Suggested Framework • The client is primarily focused on the North American market. • The client is targeting either a market with the age group of 6-15, or a market with age group of 16-35. • The client will look at either selling the game in standard two-piece boxes or in magnetic boxes. • The client has future ideas for other card games as expansion packs, such as Parakeets vs Porcupines, and is interested in expanding into merchandise and more. • The client will be launching on Kickstarter first to secure funding and is looking to fund at least $40K (this means the game will only be made if this target revenue number is reached). If $40k is not reached, all those who pledged to the campaign get their money back. This means the campaign was unsuccessful and KVC Games will need to relaunch their campaign. • We are looking at a campaign timeline of 30 days. We only need to consider the costs for 1 year. • We won’t be considering any shipping, packaging, or distribution costs in this evaluation. • We also don’t need to consider any royalties being paid to the artist at this point. • Financials - Fixed Costs including artwork, lawyer fees - Upfront Costs: cap ex, marketing, trademark rights - Variable Costs: COGS - Revenue: price, quantity, advertising, etc. • Customers - Demographics - Price sensitivity - Customer segmentation • Risks/Considerations - Can the campaign hit their fund goal? - Relaunching campaign if the fund goal isn’t hit - Costs that aren’t considered: shipping, packaging, distribution - High royalty percentage being paid to the artist • Other Revenue Streams - Potential Merchandise - Licensing agreements - Book deals - Television show deals
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40 Prompt 1 What is the potential market size for each potential market segment? After candidate gives their potential market sizes, provide them with our calculated market sizes: - Age group 6-15: 10K - Age group 16-35: 24K Analysis Interviewer Guidance Target Market Ages 6 - 15 Ages 16 - 35 Population 12.5% of 320M 25% of 320M Population (estimated) 40M 80M % that like games 25% 20% # that like games 10M 16M % potentially interested in this game 20% 10% # potentially interested in this game 2M 1.6M % likely to buy the game (or have game bought for them) 5% 5% # likely to buy the game (or have game bought for them) 100K 80K % to know about game on Kickstarter and purchase 10% 30% # to know about game on Kickstarter and purchase 10K 24K Candidate should recognize that an age range of 8 years is approximately 10% of the population when doing calculations. They should use 12.5% to calculate the population for an age range of 10 years. Calculating the population for the 16-35 market first will be faster for them.
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41 Prompt 2 Please brainstorm some potential costs. Based on the given information (Exhibit A), please calculate the total costs for a year. Regular boxes can be sold for $20, while magnetic boxes can be sold for $25. Ages 6 - 15 Ages 16 - 35 Potential Market 10K 24K Sell Price Regular Boxes $20.00 $20.00 Potential Revenue $200K $480K Sell Price Magnetic Boxes $25.00 $25.00 Potential Revenue $250K $600K Costs Artwork $20K Animations & Promotional Videos $3K Graphic Design $7K Prototypes $1.5K Marketing & Influencers $2K Accountant/year $2K Trademarking $500 Lawyers/year $2K Total Before Kickstarter Fees $38K Kickstarter Percentage taken from Revenue 15% Analysis Interviewer Guidance Kickstarter Fees - Regular Boxes Ages 6-15 = (200*.15) $30K Kickstarter Fees - Regular Boxes Ages 16-35 = (480*.15) $72K Kickstarter Fees - Magnetic Boxes Ages 6-15 = (250*.15) $37.5K Kickstarter Fees - Magnetic Boxes Ages 16-35 = (600*.15) $90K Total Costs for 1 year Regular Boxes Ages 6-15 = (30+38) $68K Regular Boxes Ages 16-35 = (72+38) $110K Magnetic Boxes Ages 6-15 = (37.5+38) $75.5K Magnetic Boxes Ages 16-35 = (90+38) $128K Candidate should know they are able to start ignoring the ages 6-15 in their math. For Kickstarter fees, Kickstarter takes 15% off the entire revenue that is made from the campaign.
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42 Prompt 3 Are regular boxes or magnetic boxes more profitable? What is the breakeven point in number of units for the most profitable option? Assume the cost is the amount for the quantity closest to the potential market size (Exhibit B). Magnetic vs Regular Box Math QTY Unit Cost Total Pre-production Sample Shipping Total Regular Box 4,032 $9.03 $1,031 $7,453 8,064 $6.06 $1,031 $8,042 16,128 $4.49 $1,031 $8,489 Magnetic Box 4,032 $9.53 $1,031 $7,453 8,064 $6.54 $1,031 $8,042 16,128 $4.96 $1,031 $8,489 Analysis Interviewer Guidance Estimated Math QTY Unit Cost Total Pre-production Sample Shipping Total Actual Total Regular Box 4,000 $9.00 $36,000.00 $1,000 $7,500 $44,500.00 $44,892.96 8,000 $6.00 $48,000.00 $1,000 $8,000 $57,000.00 $57,940.84 16,000 $4.50 $72,000.00 $1,000 $8,500 $81,500.00 $81,934.72 Magnetic Box 4,000 $9.50 $38,000.00 $1,000 $7,500 $46,500.00 $46,908.96 8,000 $6.50 $52,000.00 $1,000 $8,000 $61,000.00 $61,811.56 16,000 $5.00 $80,000.00 $1,000 $8,500 $89,500.00 $89,514.88 Candidate does not need to calculate cost or profit at a QTY of 4,000. Candidate also does not need to calculate for Ages 6-15, as they should have eliminated that target market option
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43 Use Sales Unit Price/Shipping for closest given Total Costs Regular Boxes Ages 6-15 @ 10K sold = (10,000*6.00)+1,000+8,000+68,000 $ 137,000 Regular Boxes Ages 16-35 @ 24K sold = (24,000*4.50)+1,000+8,500+110,000 $ 227,500 Magnetic Boxes Ages 6-15 @ 10K sold = (10,000*6.50)+1,000+8,000+75,500 $ 149,500 Magnetic Boxes Ages 16-35 @24K sold = (24,000*5.00)+1,000+8,500+128,000 $ 257,500 Profit Regular Boxes Ages 6-15 = 200,000 – 137,000 $ 63,000 Regular Boxes Ages 16-35 = 480,000 – 227,500 $ 252,500 Magnetic Boxes Ages 6-15 = 250,000 – 149,500 $ 100,500 Magnetic Boxes Ages 16-35 = 600,000 – 257,500 $ 342,500 Fixed Cost = 38,000 + 1,000 + 8,500 $47,500 Variable Cost = (25*.15) + 5.00 $8.75 Breakeven Point = 47,500/(25-8.75) ~~ 48,000/16 ~~3,000 already. Candidate should be rounding to estimate numbers. We are looking at cost thresholds. For example, any number of regular box games sold in quantities between 8,000 and 15,999 would have a unit cost $6.00 each.
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44 Recommendation The CEO is about to walk into the room. What will you recommend to her? Risks/ Next Steps Interviewer Guidance Risks: • Not able to expand as much with merchandise. TV or book deals could be difficult. • Potential markets could not be estimated correctly. • Market research on those who might buy through a Kickstarter campaign might not be correct • Costs that aren’t being considered such as shipping, packaging, distribution, and artist royalties Next Steps: • Price sensitivity analysis • A/B testing or test launch • Targeted marketing with influencers • Work on merchandising/licensing deals • Can we expect cash flows to continue to the future • Work on getting game into big box stores A good candidate will target the 16-35 age group and magnetic boxes. Candidates that choose the 6-15 age group could argue that this age group is better to target for merchandise/book deals/TV deals which could be more profitable than the card game by itself.
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45 Other Notes A great candidate may know about Kickstarter levels and ask what else is being sold at different levels and what those costs may be. The answer can be an expansion version and some merchandise, but that we don’t need to consider them in this case.
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46 Exhibit A Ages 6 - 15 Ages 16 - 35 Potential Market 10K 24K Sell Price Regular Boxes $20.00 $20.00 Potential Revenue $200K $480K Sell Price Magnetic Boxes $25.00 $25.00 Potential Revenue $250K $600K Costs Artwork $20K Animations & Promotional Videos $3K Graphic Design $7K Prototypes $1.5K Marketing & Influencers $2K Accountant/year $2K Trademarking $500 Lawyers/year $2K Total Before Kickstarter Fees $38K Kickstarter Percentage taken from Revenue 15%
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47 Exhibit B Magnetic vs Regular Box Math QTY Unit Cost Total Pre-production Sample Shipping Total Regular Box 4,032 $9.03 $1,031 $7,453 8,064 $6.06 $1,031 $8,042 16,128 $4.49 $1,031 $8,489 Magnetic Box 4,032 $9.53 $1,031 $7,453 8,064 $6.54 $1,031 $8,042 16,128 $4.96 $1,031 $8,489
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48 Mooford’s Inc. by Daniel Cohen Behavioral Question Tell me of a time when you took a risky decision, and it didn't pay off. Case Prompt A well-established Restaurant/Bar ownership group wants to enter the Austin market. More specifically, they are looking to acquire popular nightlife and day-drinking bars on Rainey, West 6 th and East 6 th . The client has done due diligence on a popular bar known as Mooford’s and has decided to acquire it as its first entry into the market. The client needs help further assessing the Austin market and deciding whether they should continue to acquire new bars and restaurants. Quant Level: Medium Qualitative Level: Easy Type: Market Entry Industry: Restaurant
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49 Clarifying Information Goals: the optimal number of restaurants/bars to acquire within Austin and where to buy them. Ultimate goal is to determine buying strategy for bars in each neighborhood, i.e., which bars to acquire to guarantee highest expected profitability in the Austin Market. Timeline: within the next 1-2 years Status Quo: If we do not enter the market quickly, we lose the opportunity to enter Austin market Suggested Framework 1. Profitability a. Revenue i. Food & beverage sales, merchandise, private events b. Costs i. Upfront (construction, zoning & licensing, marketing) ii. Fixed (labor, overhead) iii. Variable (deliveries & shipments, food & beverage purchases) 2. Customers a. New Customers i. Price sensitivity/ willingness to pay ii. Customer demographics & preferences b. Existing Customers i. Affinity to current establishment and willingness to convert c. Other: tailoring to different customer segments for different bars 3. Competition a. Independently operated bars/franchises b. Other developers seeking to buy c. Bar substitutes (I.e., restaurants, coffee shops)
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50 Prompt 1 The client would like to get your input on their buying strategy for bars in Austin to maximize profitability. Please review the following exhibit that outlines customer-related information about 9 different bars in Austin. [Show interviewee Exhibit 1] - Provide Exhibit 1 and request the interviewee to outline what other, non-financial factors to consider when acquiring bars in Austin
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51 Analysis Area Bar Annual Patrons Average Margin Annual Profit West 6th Mooford's* 200,000 $35 $7,000,000 Big Steelrow's 125,000 $32 $4,000,000 Clean Willy's 100,000 $40 $4,000,000 Rainey Lucille Ball's 100,000 $36 $3,600,000 ImPubible 100,000 $34 $3,400,000 Septemberstine's 85,000 $40 $3,400,000 East 6th Shangri-Lo 120,000 $35 $4,200,000 Difficult Lion 100,000 $36 $3,600,000 Motel Reno 90,000 $40 $3,600,000 Quantitative Observations: W 6 th bars yield highest profits: − Highest overall profit is Moofords (W 6 th ) with $7M − 2 nd highest overall profit is Big Steelrow’s and Clean Willy’s (both W 6 th ) with $4M E 6 th are in the middle Rainey yields lowest profits Mooford’s: 200,000 Patrons * $35 Average Margin = $7M Annual Profit Big Steelrow’s: 125,000 Patrons * $32 Average Margin = $4M Annual Profit Clean Willy’s: 100,000 Patrons * $40 Average Margin = $4M Annual Profit Lucille Ball’s: 100,000 Patrons * $36 Average Margin = $3.6M Annual Profit ImPubible: 100,000 Patrons * $34 Average Margin = $3.4M Annual Profit Septemberstine’s: 85,000 Patrons * $40 Average Margin = $3.4M Annual Profit Shangri-Lo: 120,000 Patrons * $35 Average Margin = $4.2M Annual Profit Difficult Lion: 100,000 Patrons * $36 Average Margin = $3.6M Annual Profit Motel Reno: 90,000 Patrons * $40 Average Margin = $3.6M Annual Profit
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52 Qualitative (other factors to consider): − Alternative Revenue Streams: Food, Arcade Games, Charging Cover for Special Events, etc. − Purchase Price and Up-Front Costs: Purchase price relative to Profits − Potential Cannibalization of buying multiple bars in same neighborhood − Client demographics & customer segment strategies: Different bars target different customers & each bar/neighborhood tailors to different customers’ taste and preferences − Competition: Other Bars & Real Estate Developers Interviewer Guidance Guide them to do the math to calculate profitability (Annual Patrons * Average Margin = Annual Profits) and then ask them to list the other factors to consider. Prompt 2 Unfortunately, the client has run into a potential cannibalization issue when buying multiple bars in the same neighborhood. [Show Interview Exhibit 2] − Provide Exhibit 2 to interviewee and ask them to outline the effects of cannibalization on the profitability of acquiring multiple bars in the same neighborhood and ask which bars they would buy in each neighborhood.
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53 Analysis Area Bar Profits Lost for 2 bars Profits Lost for 3 bars West 6th Mooford's* 50% 60% Big Steelrow's Clean Willy's Rainey Lucille Ball's 20% 25% ImPubible Septemberstine's East 6th Shangri-Lo 5% 35% Hard Lion Motel Reno Area Bar Annual Patrons Average Margin Annual Profit Profit for 2 Profit for 3 Answers West 6th Mooford's* 200,000 $35 $7,000,000 $5,500,000 $6,000,000 Only buy Mooford's Big Steelrow's 125,000 $32 $4,000,000 Clean Willy's 100,000 $40 $4,000,000 Rainey Lucille Ball's 100,000 $36 $3,600,000 $5,600,000 $7,800,000 Buy all 3 ImPubible 100,000 $34 $3,400,000 Septemberstine's 85,000 $40 $3,400,000 East 6th Shangri-Lo 120,000 $35 $4,200,000 $7,410,000 $7,410,000 Indifferent between buying 2 & 3 Difficult Lion 100,000 $36 $3,600,000 Motel Reno 90,000 $40 $3,600,000
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54 W 6 th : 1 Bar: $7M (Mooford’s) 2 Bars: $7M (Mooford’s) + $4M (Big Steelrow’s or Clean Willy’s) = $11M*(1 -50%) = $5.5M 3 Bars: $7M (Mooford’s) + $4M (Big Steelrow’s) + $4M (Clean Willy’s) = $15M*(1 -60%) = $6M Buy only Mooford’s on W 6th Rainey: 1 Bar: $3.6M (Lucille Ball’s) 2 Bars: $3.6 M (Lucille Ball’s) + $3.4M (ImPubible or Septemberstine’s) = $7M*(1 -20%) = $5.6M 3 Bars: $3.6M (Lucille Ball’s) + $3.4M (ImPubible) + $3.4M (Septemberstine’s) = $10.4M*(1 -25%) = $7.8M Buy all 3 bars on Rainey E 6 th : 1 Bar: $4.2M (Shangri-Lo) 2 Bars: $4.2M (Shangri-Lo) + $3.6M (Difficult Lion or Motel Reno) = $7.8M*(1-5%) = $7.41M 3 Bars: $4.2M (Shangri- Lo) + $3.6M (Difficult Lion) + $3.6M (Clean Willy’s) = $11.4M*(1 -35%) = $7.41M Same expected profits for buying 2 or 3 bars (interviewees may have to estimate the $7.41M, so picking 2 or 3 would both be correct)
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55 Interviewer Guidance If interviewee does not immediately understand how to interpret the % of Profits Lost when buying multiple bars in the same neighborhood… guide them to use the following formula: For 2 Bars: (Profit of Bar 1 + Profit of Bar 2) * (1 - % of Profits Lost for 2 Bars) = Overall Profits for 2 For 3 Bars: (Profit of Bar 1 + Profit of Bar 2 + Profit of Bar 3) * (1 - % of Profits Lost for 3 Bars) = Overall Profits for 3 This % of Profits Lost represents the effect of cannibalization on owning multiple bars in the same neighborhood. Additionally, if necessary, indicate there will be different buying strategies in each neighborhood. Prompt 3 The client is also considering the effect of a recent influx of Californians that have moved to Austin. Research indicates that a majority will move to W 6 th , the remainder will move to Rainey and a small portion will move to E 6 th . There is also a 60-floor, luxury condo development being built in North Austin that is equidistant from each neighborhood. How will you use this information to adjust your buying strategy?
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56 Analysis − Competitive Response for bar owners − Change in Demographics over time – and how demand will change − Potential Future Competition – Restaurant Groups and Real Estate Developers − Any plans for more luxury high-rise condos? And in what neighborhoods? Recommendation Please deliver your final recommendation. Risks/ Next Steps Risks: • Competitive Response • Further escalation of cannibalization • Poor Brand and Reputation Management Next Steps: • Acquire more bars in North Austin and other neighborhoods • Prospecting different up and coming neighborhoods • Research local Austin real estate development • Create alternative revenue streams for each bar
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57 Exhibit A Area Bar Weekly Patrons Average $ Spent West 6th Mooford's* 2000 $35 Big Steelrow's 1250 $32 Clean Willy's 1000 $40 Rainey Lucille Ball's 1000 $36 ImPubible 1000 $34 Septemberstine's 850 $40 East 6th Shangri-Lo 1200 $35 Difficult Lion 1000 $36 Motel Reno 900 $40 Exhibit B Area Bar Profits Lost for 2 bars Profits Lost for 3 bars West 6th Mooford's* 40% 60% Big Steelrow's Clean Willy's Rainey Lucille Ball's 20% 25% ImPubible Septemberstine's East 6th Shangri-Lo 5% 35% Hard Lion Motel Reno
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58 Plainview Energy by Stephen Rudh, McCombs Class of 2023 Behavioral Question Tell me about a time when you encountered a problem at work that derailed your planning. What was the problem, and how did you react to the situation? Case Prompt Your client is Plainview Energy, an oil and gas producer with operations in the United States. The company has recently been awarded 10-year leases to drill and develop two oil prospects in the Gulf of Mexico, offshore Louisiana. Plainview has hired you to help it determine which prospect it should invest in to develop. Quant Level: Medium Qualitative Level: Medium Type: Profitability Industry: Oil & Gas
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59 NOTE: The candidate should come to the realization that neither oil project will meet the target ROI, due to the expensive pipeline and platform cost. However, the purpose of this case is for the candidate to discover that investing in both projects can make sense if both oil prospects share the same platform and pipeline, although there are risks involved. Clarifying Information Suggested Framework • Plainview only drills for oil in the United States. The company has prior experience drilling in the Gulf of Mexico • There are no competitive concerns for this project • Building a production platform and pipeline will be required to transport the oil to land • Plainview sells the oil once it reaches land • The leases were granted by the Federal Government. After drilling, Plainview will have production rights for 10 years. • Due to the risky nature of the oil business, Plainview is targeting a 10-year ROI of 100% • For this case, no depreciation, abandonment, or salvage values will be considered in the calculations • Assume all oil production and expenses end after 10 years • First Prospect - Revenue (= oil rate x price of oil) - Upfront costs (drilling, pipeline, platform) - Operating costs (pumping, processing, transport, etc.) - ROI calculation • Second Prospect - Revenue (= oil rate x price of oil) - Upfront costs (drilling, pipeline, platform) - Operating costs (pumping, processing, transport, etc.) - ROI calculation • Other Considerations - Regulatory concerns - Environmental risks/concerns - Oil price concerns (global conflicts, etc.) - Industry specific concerns (cost uncertainty, oil rate uncertainty)
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60 Prompt 1 - After the candidate discusses his or her framework, the candidate should ask for information about costs and/or revenue of the two oil prospects. After the candidate asks for this, give the following information: - To produce oil from an offshore oil field, Plainview must drill oil wells, install a production platform to gather and process the oil, and build a pipeline to transport the oil to land. A platform capable of processing 75,000 barrels of oil per day costs $1.0 billion. A pipeline costs $3.0 million per mile. Both oil fields are 500 miles from land. - Oil Prospect A will require drilling 10 wells at a cost of $150 million per well. Each well will produce an average of 5,000 barrels of oil per day for 10 years. Operating costs consist of pumping costs of $30 per barrel and processing & transportation costs of $20 per barrel. - Oil Prospect B is less risky. It will require drilling 10 wells at a cost of $50 million per well. Each well will produce an average of 2,500 barrels per day for 10 years. Operating costs consist of pumping costs of $20 per barrel and processing & transport costs of $20 per barrel. - The candidate should ask for the price of oil before starting calculations. If he or she does not ask, nudge them towards asking for it. The forecasted price of oil is $80 per barrel. - The candidate may assume 360 days per year to simplify calculations. - The candidate may assume that 10 years is the life of each project and that there are no depreciation, abandonment, or salvage value considerations.
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61 Analysis Interviewer Guidance Prospect A: Drilling cost: 10 wells x $150 million/well = $1.5 billion Pipeline cost: 500 miles x $3 million/mile = $1.5 billion Platform cost: $1.0 billion Total upfront costs: $4.0 billion Oil volume: 10 wells x 5,000 barrels/day x 360 days x 10 years = 180,000,000 barrels Operating profit = $80-$30-$20 = $30 per barrel 10 year operating profit = 180M x $30 = $5.4 billion ROI = (5.4-4.0)/4.0 = 35% The candidate should realize that, while Prospect A has a positive ROI of 35%, it is less than the client’s target ROI of 100%. Prospect B: Drilling cost: 10 wells x $50 million/well = $500 million Pipeline cost: 500 miles x $3 million/mile = $1.5 billion Platform cost: $1.0 billion Total upfront costs: $3.0 billion Oil volume: 10 wells x 2,500 barrels/day x 360 days x 10 years = 90,000,000 barrels Operating profit = $80-$20-$20 = $40 per barrel 10 year operating profit = 90M x $40 = $3.6 billion ROI = (3.6-3.0)/3.0 = 20% The candidate should realize that, while Prospect B has a positive ROI of 20%, it is less than the client’s target ROI of 100%. The candidate should realize that neither prospect will meet the client’s target.
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62 Prompt 2 - Show the candidate exhibit A. Ask if the candidate sees any possibility for cost saving potential or synergies. The candidate should realize that there is potential to save costs and add synergies by developing both oil prospects but building only one platform and pipeline that both prospects can use. If he or she does not make the connection, nudge them toward that consideration. Ask the candidate what the new ROI will be in this scenario. Analysis Interviewer Guidance Drilling both oil prospects: Drilling cost: $1.5 billion + $500 million = $2.0 billion Pipeline cost: $1.5 billion Platform cost: $1.0 billion Total upfront costs: $4.5 billion 10 year operating profit = $5.4B + $3.6B = $9.0 billion ROI = (9.0-4.5)/4.5 = 100% The candidate should be able to pull data from previous calculations to make this quicker. The candidate should realize that, by saving on upfront costs, the company can develop both oil prospects to meet its target ROI. However, the ROI barely hits the target and does not include any risk considerations.
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63 Prompt 3 What are some risks that the client should consider when deciding whether to proceed with this project? Analysis Interviewer Guidance -Prospect risk: Less oil than predicted -Operational risk: Drilling costs, platform and pipeline construction costs, operating costs, supply chain problems, environmental risks -Macro risk: commodity prices (changes in oil demand), regulatory risk, natural disasters such as hurricanes A good candidate should hit several of the major risk factors. A good candidate should realize that, although the project meets the client’s ROI of 100%, there are many risks inherent with drilling that the client should quantify before moving forward.
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64 Recommendation The CEO, Daniel Plainview, just landed on the roof in his helicopter. He is ready to hear your recommendation. Risks/ Next Steps Interviewer Guidance Risks: • Oil prospect may contain less oil than predicted • Oil price changes could greatly impact the ROI • Drilling and operating costs could be higher than predicted Next Steps: • Further geological studies to fine tune size of oil reserves • Look at hedging oil production at $80/barrel • Look at synergies/deals with service providers to save on drilling costs. Economy of scale by developing two fields instead of one Since the calculated ROI of 100% is right at the client company’s threshold, the candidate can make an argument for either continuing or abandoning the project. A good candidate will understand the riskiness of oil drilling and will only recommend moving forward after employing a risk mitigation tactic, such as hedging the oil price.
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65 Exhibit A
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66 Rapid Transit by Aaron Ramirez Behavioral Question Tell me about a time you disagreed with your boss, and how the issue was resolved. Case Prompt Your client is Rapid Transit, Inc., a $6bb railway company headquartered in Europe. RTI is planning to enter the American railway market by introducing high-speed train routes in various geographical regions of the US, some with existing infrastructure able to support high-speed, and others with no such existing infrastructure. The CEO has come to you to develop an analysis of potential markets and the profitability of any potential project. Quant Level: Difficult Qualitative Level: Medium Type: Profitability Industry: Transportation
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67 Clarifying Information Suggested Framework • RTI currently operates in mainland Europe and in East Asia • There are no competitors from the high-speed rail market, but standard railway operators do exist in this market, as do robust airlines and automobile manufacturers • Potential markets are a California rail line, a Texas rail line, and an Eastern Seaboard rail line • RTI is capable and willing to retrofit existing rail lines to accommodate high speed transit • City/state governments with little/no infrastructure are willing to subsidize any potential project • No specific timeline, but safe to assume RTI would start on any project as soon as possible • No ulterior goals outside of profitability and establishing a footprint in a new geographic region • Freight railroads own most of existing right-of-way but have agreed to cooperate with RTI • Market Analysis - Demographics, population changes/density - Price sensitivity and affluence of population - Customer segmentation - American two car family culture + robust airline industry • Financials - Product mix - Upfront Costs: cap ex, design, all other - Variable Costs: service costs, COGS - Fixed Costs: electricity, maintenance, SGA, labor - Revenue: price, quantity • Other Considerations - Entry strategy - Threats/risks - Competitive Landscape
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68 Prompt 1 Candidate should want to start with identifying which potential market to enter first before financials; if they choose a different route, guide them this way and show them Exhibit A: “RTI would first like your help in deciding which market they should e nter based upon preliminary research done on 3 potential sites. What insights can you gain from this graphic?” Analysis Interviewer Guidance Candidate should notice that the Texas line is the most attractive of the three options. There is little to no competition with rapid population growth. If candidate is choosing based off existing infrastructure / market desirability, prompt them to think about future prospects of potential business in the future towards Texas market; if unable to, proceed and tell them Texas is the desired market • Market desire = how badly citizens in each market want a high- speed rail (5 = desperately want it) • Existing infrastructure = how robust the rail lines are currently (5 = ready for highspeed use with minimal retrofit) • Population growth = outlook on how quickly each region is growing (5 = massive and rapid population growth) • Affluence = how wealthy a region is / how much disposable income (5 = extremely wealthy population) • Competition = degree of competition in each market (5 = little/no competition)
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69 Prompt 2 FTI has chosen to enter the Texas market with rail lines connecting the three cities of Dallas, Houston, and Austin. We would like your help calculating the present value of the proposed project. Please take a moment to brainstorm what potential costs and revenues might look like. Once brainstormed, take note of what they listed and then provide with Revenues data. (Present Exhibit B) Analysis Interviewer Guidance • 12% discount rate & 7% growth rate (12% - 7% = 5% effective) • Candidate should brainstorm a handful of potential revenues and costs; focus on product mix for revenues; focus on capex and operating costs for costs • A great candidate will connect the dots between lack of infrastructure and gov’t subsidy
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70 Prompt 3 Thanks for calculating the forecasted revenues. We would like to take a look at potential costs. (no exhibit; read out values to test candidates organizational skills when preparing for calculations) ((Provide non- up front costs first, allow candidate to ask about up front costs and then provide; if question not raised, provide)) Costs: Service costs are $25/passenger COGS for Food/Bev are $5 per passenger that purchased Energy costs are $2.25mm per year Maintenance costs are $1.125mm per year Overhead/SGA costs are 15% of total revenue Labor: There are 10 conductors making $100,000 per year, 50 mechanics making $75,000 per year, and 100 other employees making $40,000 per year Upfront costs: Cost to retrofit the existing railways is $20mm Design costs for the highspeed train amount to $7mm An additional $3mm is comprised of all other up front costs
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71 Analysis Interviewer Guidance Upfront costs Labor Costs Total costs (except upfront) • 12% discount rate & 7% growth rate (12% - 7% = 5% effective) • Candidate should drive the case forward into costs after calculating revenues; if not, read the above. • Allow for inquiry about any up front costs; if they do not come up with up front costs themselves, then provide them • Candidate should use perpetuity formula to calculate NPV and then subtract upfront costs
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72 Total NPV Recommendation The CEO is about to join us to go over our findings. Please take a moment to craft a recommendation for FTI executive team.
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73 Risks/ Next Steps Interviewer Guidance Risks: • Population growth trends could shift; desirability is a subjective metric and may not be accurately represented • Should expect fierce competition from airlines and other railways to defend their positions within transportation segment • Projections for passengers could be off • People will not adopt rail transport with such a heavy two-car family culture; Texas is heavily dependent and accustomed to car travel • No marketing currently budgeted, how will we attract customers Next Steps: 1) Expansive and continued due diligence is necessary to ensure passenger projections, population growth trends, and “want” from individuals are accurately measured 2) Reach out to operators/maintainers of current rail infrastructure to start negotiations/talks on retrofit plans 3) Develop plans for a robust marketing campaign to raise awareness and buzz around the project 4) Explore potential game scenarios to see what competitors may or may not do in response to a new entrant in transportation market • A good candidate should recognize risks around projections and subjective data compiled in the market analysis and provide next steps to counteract these • A great candidate will bring in outside information such as two- car family culture in America/Texas, and notice things that may be missing from this analysis such as no marketing; they should provide solutions to these things in next steps
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74 Exhibit A
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75 Exhibit B Cost/passenger # of passengers Revenue Coach Tickets $160 62,500 Preferred Tickets $175 40,000 1 st Class Tickets $400 7,500 Concierge Services $40 50,000 Food/Bev $20 75,000 Government Subsidy N/A N/A $1,500,000 Total • These are figures for an entire fiscal year • Total passengers is sum of 3 ticket types; concierge services and food/beverage passengers are those who choose to purchase from existing passenger pool
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76 SaaSy Sasquatch Raffy Salcedo Behavioral Question What makes you proud? Case Prompt Sasquatch Health is a leading SaaS (Software as a Service) healthcare analytics software. Sasquatch integrates with a medical provider’s Electronic Medical Record (EMR) system and produces predictive analytics on patient outcomes based on a patient’s record. Despite the recent industry trend of digitization, profitability has come under scrutiny. What factors should the client consider? Quant Level: Easy Qualitative Level: Hard Type: Profitability Industry: Tech / Healthcare
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77 Clarifying Information Suggested Framework • Client currently only sells 1 product on a monthly subscription basis • No particular profitability goal. Management thinks they could be more efficient with customer acquisition. • Sasquatch did $200 MM in Annual Recurring Revenue (ARR) last year • The client currently only does business in the US • If asked, patient outcomes include but are not limited to: Readmission rates, complication rates, safety, patient satisfaction. • Financials - Subscription Price - Annual Recurring Revenue (ARR) - Customer Lifetime Value (CLV) - Customer Acquisition Cost (CAC) - Fixed Costs including labor, SG&A • Customers - Segments - Existing/Future Customers - Churn Rate - Geography (Region, Rural/Urban) • Competitors - Direct and Indirect Competitors - Competitor Market Share - Product Feature Benchmarking • External Factors - Global Pandemic - New Research - Privacy Regulation (HIPAA, etc)
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78 Prompt 1 Brainstorming: Who would buy this product? Analysis Interviewer Guidance Sample Brainstorming Customers Providers: Hospitals, Outpatient Clinics, Physician Groups, Outpatient Clinics, Veterans Affairs Hospital Payers: Private Insurance Companies, Medicare/Medicaid, Health Plans Other: Researchers, Scientists, Employers Value Provided (Optional) Providers: Cost management and efficiency, Enhanced treatment plans, Better patient outcomes Payers: Population risk management, Insurance underwriting, Provider pricing negotiations Good candidates should recognize that there are customers and stakeholders beyond medical providers. If not mentioned, prompt the candidate to think about healthcare payers. Sasquatch offers a unique value proposition to both customer segments. If asked, please explain that: Providers: Those who provide and render medical services (hospitals, physicians, etc) Payers: Health insurance companies. Set service rates, process claims, pay provider claims
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79 Prompt 2 Show Exhibit A. What can we infer from last years annual recurring revenue (ARR)? Analysis Interviewer Guidance First Level Insights: -Segment C has the highest share of total ARR, but lowest ARR per customer -Segment B has the highest ARR per customer -Missing Costs (Customer Acquisition, Fixed Costs) Second Level Insights: -This does not consider non-recurring revenue sources (if any) -This ARR is only provided for one year. Additional context would be able to determine trends in top-line growth Candidate should recognize that ARR for Customer Segment C is missing and should calculate based on total ARR given in the clarifying questions. Candidate should also calculate the average ARR per customer in each segment (ARR / # Customers) to enable comparison. Good candidates will recognize that revenue information is not enough to examine profitability. Segment A: $60 / 12 = $5.00 Segment B: $50 / 8 = $6.25 Segment C: $90 / 20 = $4.50
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80 Prompt 3 Show Exhibit B. We’ve reached our max market share for Segment A. Which segment would you focus on? Assume fixed costs are uniform across all segments. Analysis Interviewer Guidance First Level Insights: -Segment C is making Sasquatch unprofitable. The cost to acquire the customer is greater than the value that the customer brings -Segment B has the highest CAC and highest ARR per customer -Segment A has the best CLV:CAC ratio Second Level Insights: -Segment C has an unfavorable ratio that hurts profitability, but they bring in the largest share of revenue (45%). Sasquatch could focus on decreasing CAC to be more in line with Segment A -Segment B has the lowest revenue share and highest costs which makes it a suitable segment to drop. However, the high ARR per customer could provide long-term growth potential. Good candidates will recognize the relationship between Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC) and calculate CLV:CAC ratio (e.g. Customer A $50 / $15 = 3.33). If not stated, prompt the candidate to explain what this ratio represents and drivers of both CLV and CAC. Interviewee should eliminate candidate A and focus on either B or C; a candidate should weigh the tradeoffs of each segment and identify the implications of focusing on one segment over another. Customer Lifetime Value (CLV): the amount of money a customer brings in over the duration of doing business. Often assumed in perpetuity Customer Acquisition Cost (CAC): Cost to acquire a customer – Usually cost of sales + marketing expense CLV:CAC Ratio (Generally, >3 is good for SaaS) Customer Segment A: $50 / $15 = 3.33 Customer Segment B: $63 / $63 = 1.00 Customer Segment C: $45 / $50 = 0.90
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81 Prompt 4 Show Exhibit B. What strategies should Sasquatch employ to improve profitability? Analysis Interviewer Guidance Levers of the CLV:CAC Ratio Drivers of CLV: # of Customers and Customer Churn à Incentivize customer retention through feature enhancement, new functionality, etc Drivers of CAC: Cost of Sales, Marketing à Prioritize appropriate customers, reframe customer segments, alignment of sales force Other Strategies: -Consider fixed costs -Sasquatch only sells 1 product. Consider tiering or specializing product to tailor customer segment needs This question is purposefully open-ended however, candidates could start with the drivers of LTV and CAC. Good candidates will recognize that Sasquatch only sells one product for a diverse customer base which could be a cause of increased customer acquisition costs.
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82 Recommendation The CEO, Mr. Bigfoot, is almost back from lunch and seeks your recommendation. Risks/ Next Steps Interviewer Guidance Risks: • CLV:CAC “Whack -a- mole” - Improving one customer segment could harm another • Healthcare landscape changes quickly. Customer needs and segments will continually evolve. Next Steps: • Deep dive into CAC drivers for Segments C/B • Re-think customer segmentation • Explore additional product lines A good candidate will recognize that Segment C is the largest driver of unprofitability. While there is no dominant strategy, a good candidate will weigh the trades offs and strategies of focusing on one or more segments. Given that Sasquatch only sells 1 product for a diverse customer base, launching segment- specific products may improve product- market fit.
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83 Exhibit A *Total Annual Recurring Revenue (ARR): $200 MM Total Annual Recurring Revenue ($ MM) # Customers in Segment Customer Segment A $60 12 Customer Segment B $50 8 Customer Segment C ---- 20
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84 Exhibit B CLV: Customer Lifetime Value CAC: Customer Acquisition Cost
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85 Santa Ops by Frank Bowers Behavioral Question Tell me about a time that you asked for help. Case Prompt Your client is Santa Claus, and he has hired your firm to help him out for this holiday season. To say it has been a rough year for Ol’ St. Nick would be an understatement. First, there was a massive data breach that wiped out all his lists, which included his naughty or nice list and all his supplier information. Second, his longtime Operations Director left the North Pole for better work-life balance and better climate. This loss of institutional knowledge is a tremendous blow, especially coupled with the data breach. Additionally, the current team has an expertise in present selection but is lacking in operations and logistics. Finally, Santa is not immune to the supply chain issues that are plaguing the world economy right now. Santa has two main KPIs to meet every Christmas season – 1. complete distribution to naughty and nice at or under budget and 2. 90% accuracy of present delivery. If either of these two metrics (budget and accuracy) are not met, the magic of Santa Claus is ruined forever! Santa needs your help getting his operations back on track. It’s 10 weeks before Christmas, and all the children around the world are counting on you. Quant Level: Hard Qualitative Level: Hard Type: Profitability Industry: Operations
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86 Clarifying Information Suggested Framework • Global population of children 18 and younger • No direct competitors, but Santa does compete for supplies around the holiday season • Santa receives royalties from Mall Santa likenesses, Christmas songs, etc. totaling $30B/year • Christmas gifts are delivered to the North Pole and then distributed centrally from North Pole headquarters • Currently, Santa uses his in-house reindeer fleet to handle delivery of presents For example: • Financials / Santa’s budget - Revenue: royalties, appearances, - Costs: fixed (reindeer food and care, north pole maintenance, elf overhead) and variable (gifts) • Market - World population under 18 - Naughty (coal production, behavior improvement plans) - Nice (wish list, regions, • Logistics - Re-establish relationships with key present suppliers - Find new data storage software / cybersecurity - Assess current reindeer fleet - Pursue new distribution partners - Find ways to improve op efficiency at drop-off
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87 Prompt 1 Let’s start by determining the number of children under 18 in the world. Walk me through how you would get to an estimate. Analysis Interviewer Guidance World Population: 7.9 Billion World Life Expectancy: 70 years 18 years / 70 years expected = ~25% ~25% * ~8 Billion = 2 Billion 2 billion children under 18 years old
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88 Prompt 2 - Naughty Since Santa’s naughty and nice lists have been wiped and gift orders will have to be placed before we can research kid behavior, how might you proxy naughty kid counts? Santa uses school suspension rates as a proxy for his naughty or nice list to figure out an estimate to help plan. Please look at Exhibit 1. Analysis Interviewer Guidance 200M* 10% = 20M 1,000M* 5% = 50M 300M* 15% = 45M 500M* 20% = 100M Total = 215M Santa did note that some teachers would unfairly suspend students, so he would reduce this estimate by 15M to account for this. 215M naughty kids -> 200M naughty kids Short brainstorm, followed by quick math
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89 Prompt 3 - Naughty cont’d Each naughty kid receives 1.5 pounds of coal. Through Heat Miser, Santa can purchase coal at a rate of $6.00/pound. Analysis Interviewer Guidance 200M kids 1.5 lbs. coal $6 $1.8B 1 kid 1 lb. coal $1.8B spent on coal gifts for naughty kids Should move quickly through this section
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90 Prompt 4 - Nice Candidate should ask about cost to serve market of nice. 2B total market – 200M naughty = 1.8B nice kids There are 4 different suppliers – show Exhibit 2 Analysis Interviewer Guidance See below table Candidate should calculate total cost and choose Under The Tree Trading since it exceeds 90% goal mentioned in prompt. Note the flat transport costs are negligible and ToysR4U can immediately be eliminated based on Delivery Confidence TOY SUPPLIER TOTAL TOY COST TOTAL TRANSPORT COST TOTAL COST DELIVERY CONFIDENCE CHILD HAPPINESS Stocking Stuffrz $7 * 1.8B = $12.6B $600K $12.6B 98% 100% Pop Lock & Wrap $6 * 1.8B = $10.8B 10% *$10.8B = $1.08B $11.9B 90% 100% Under The Tree Trading $5 * 1.8B = $9B $300K + 15% *$9B = $1.353B $10.4B 95% 100% ToysR4U $5 *1.8B = $9B 20% *$9B = $1.8B $10.8B 85% 100%
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91 Prompt 5 - Total Operating Cost Candidate should calculate total gift cost and ask about other fulfillment costs. If they do not, prompt candidate to think of other costs to operate, then share fulfillment costs listed below. Reindeer Feed $1.3B Reindeer Vet Care $1.2B Additional Sleigh Fuel $3.6B Elf Labor $4.2B Elf Housing $2.7B Analysis Interviewer Guidance Naughty + Nice = Total gift cost $1.8B + $10.4B = $12.2B in total gift costs Reindeer Feed $1.3B Reindeer Vet Care $1.2B Additional Sleigh Fuel $3.6B Elf Labor $4.2B Elf Housing $2.7B Total Fulfillment $13B Gift costs + Fulfillment costs = $25B
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92 Prompt 6 - Logistics Opportunity [if time] With the setbacks mentioned earlier, the Head Elf believes fulfillment will actually be 82% with current logistics (vs. a desired 100%). There is an opportunity to partner with the Easter Bunny to increase projected fulfillment by a flat 2% every week his team is employed. The team will cost $500M per week. Is this feasible for Santa and his team? Analysis Interviewer Guidance 100% - 82% = 18% / 2% per week = 9 weeks 9 weeks * $500M = $4.5B $30B in royalties - $25B gift costs - $4.5B Easter Bunny JV $0.5B to spare Yes – it’s feasible! State that Santa generates $30B in revenue if not already shared. Santa’s not in the business of making money, but he doesn’t want to lose it. The goal is to breakeven or better.
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93 Recommendation Santa is about to walk into the room, can you please offer him a recommendation for how to proceed for the next holiday season? Risks/ Next Steps Interviewer Guidance Risks: • Fewer naughty kids suspended due to COVID • Elf collective bargaining agreement increases costs • Easter Bunny doesn’t deliver on promises • Fuel prices increasing • Reindeer health and weather are variable Next Steps: • Price sensitivity analysis for licensing of Santa name • Service level agreements with partners • Kid behavior report for following year • Cybersecurity threat analysis • Explore exclusivity agreement with supplier
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94 Exhibit 1 School Suspension Rates by Region
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95 Exhibit 2 Toy Supplier Options Toy Supplier Avg Toy Cost Transport Cost Delivery Confidence Child Happiness Stocking Stuffrz $7 $600K 98% 100% Pop Lock & Wrap $6 10% 90% 100% Under The Tree Trading $5 $300K + 15% 95% 100% ToysR4U $5 20% 85% 100% * Transport costs are represented as a flat fee and/or a % of Total Toy Cost
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96 Shaved Ice Truck by Katie Wells Behavioral Question Insert your behavioral question here. Case Prompt Our client is a gourmet shaved ice company, launching their first trailer in the spring. They have asked us to conduct a breakeven timeline analysis. Quant Level: Medium Qualitative Level: Easy Type: Breakeven Industry: CPG/Retail
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97 Clarifying Information Suggested Framework If asked to clarify: o Opening in Austin, TX; no current trucks in operations o A couple old snow cone trucks, no “gourmet” ▪three products: small, large, and a flight (4 small cups) o Launch is 6 months away o Founders planning to work truck at beginning, so no labor costs o Breakeven timeline in number of weeks o Only revenue source at launch will be selling shaved ice o Planning to park where rent would need to be paid Good candidate will split into two main buckets: costs & revenue. Costs: fixed, variable, upfront investment Revenue: price per item They will explain how to calculate breakeven with that information: Find weekly profit: = (Item Price – Item Variable Costs) – WklyFixed Costs Breakeven # Weeks:= Upfront Investment / Profit
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98 Prompt 1 Candidate should suggest we look into costs or revenue. If costs, ask them to specify what types of costs, then ask for examples in that bucket. If they do not drive, ask to start at one of the cost categories. o Upfront: trailer, certification, website backend, technology, launch advertising o Fixed: rent, labor o Variable: cups, spoons, syrup Upfront Costs: Read the list from the next slide. Fixed Costs: o Rent: $640/month o Insurance: $320/month Variable: Show itemized cost exhibit
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99 Analysis Interviewer Guidance Upfront investment details: Trailer $14,500 TX Certification $300 Website/Social $400 Ice Maker + Supplies $1,500 Ordering Technology $800 Launch Advertisement $500 Sum of upfront costs = $18,000 Ask the interviewee to list potential examples of items that might be included in the upfront investment. (Goal is to get to at least 4 items.) Then read off the list from the chart to the right. Do not share screen for this exhibit. Interviewee should add all costs: $18,0000 upfront investment value. From here, a good candidate should ask for fixed (rent + insurance) or variable (show exhibit)
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100 Exhibit A Itemized Variable Cost Cost of Cups Cost of Syrup Cost of Spoons Small $0.80 $0.10 $0.02 Large $0.14 $0.14 $0.02 Flight $0.16 $0.17 $0.02
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101 Prompt 2 After determining costs, the candidate should move to calculating revenues. Analysis Interviewer Guidance Item Sold Customer Price Small $4.20 Large $6.30 Flight $7.35 Profit per item: Small: $4.20 – ($0.08 + $0.10 + $0.02) = $4 Large: $6.30 – ($0.14 + $0.14 + $0.02) = $6 Flight: $7.35 – ($0.16 + $0.17 + $0.02) = $7 Demand considerations should be considered next to determine weekly profit. The client only generates revenue through shaved ice sales of 2 products: small, large, and a flight (4 mini cups). When asked for pricing information: “A small is $4.20, a large is 50% more than a small, and a flight is 75% more than a small. Assuming you have already discussed Variable Costs, the candidate should recognize the ability to get to profit per item from this info.
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102 Prompt 3 Next, the candidate should think about demand (i.e. how many are sold at these prices). Ask them to brainstorm ways the client could think about demand. A good candidate will mention weekend spike and seasonality. They could also hypothesize which item will be sold the most. Option: push candidate to brainstorm alternative revenue generation options. Interviewer Guidance Drive to weekly demand and show Estimated Demand Exhibit. Analysis Math should drive to total weekly profit of $3,240. Weekday Demand Weekend Demand Weekday # Weekend # Weekday Total Weekend Total Overall Total Item Profit Total Profit Small 30 60 4 3 120 180 300 $4 $1,200 Large 20 40 4 3 80 120 200 $6 $1,200 Flight 15 20 4 3 60 60 120 $7 $840 Next step is to tie it all together with the final breakeven timeline calculation.
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103 Exhibit B Estimated Demand 60 30 30 30 30 60 60 40 20 20 20 20 40 40 20 15 15 15 15 20 20 0 20 40 60 80 100 120 140 Sunday Monday Tuesday Wednesday Thursday Friday Saturday Small Large Flight
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104 Prompt 4 Breakeven Calculation: Candidate should recognize they can now quantify how many weeks it will take the client to breakeven. Analysis Interviewer Guidance Weekly Profit = Item Profit – Fixed Costs = $3,240 - $240 = $3,000 Breakeven Wks = Upfront Invest ¸ Wkly Profit = $18,000 ¸ $3,000 = 6 Weeks Breakeven Wks with 30% Change in Demand = (Item Profit * 70%) – Fixed Costs = ($3,240 * 70%) – $240 = $2,268 – $240 = $2,048 $18,000 ¸ $2,048 = approx. 9 weeks à so timeline would increase by 50% In preparation for the recommendation, ask the following: “If demand was 30% less than estimated, how would that change the timeline?”
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105 Recommendation Once completed, prompt candidate to give a final recommendation to the founder. Risks/ Next Steps Good recommendation should include risks and ways to mitigate.
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106 SpaceY Launch Systems by Joe Soules Case Prompt Our client, SpaceY Launch Systems, is an aerospace company that is choosing whether or not to invest in the design and development of a re-usable, super heavy launch vehicle and wants our help to assess the profitability of the venture and to decide on whether or not to proceed. Quant Level: Medium Qualitative Level: Medium Type: Profitability Industry: Aerospace
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107 Clarifying Information What are SpaceY’s goals? • Wants to access how introducing the new rocket will impact profitability over the next ten years. • Other long-term goals of increasing access to space and of supporting interplanetary travel. About SpaceY and their products. This company delivers cargo, typically satellites, to space for both government and commercial customers. Their focus on rocket reusability has allowed them to bring their prices to the lowest in the industry. They currently only operate one type of rocket known as the Raven-9. Raven-9 is currently the cost leader in bringing cargo into orbit and has helped them capture a huge market share. They are considering developing a new product, known as Bigger Faster Raven, or BFR. BFR will essentially be a much bigger version of Raven, and the company believes that they can further reduce costs by replacing its lithium-alloy body with a more durable stainless steel. About SpaceY’s customers . SpaceY’s customers are broken into two primary groups. Commercial customers who launch communications satell ites and for whom the cost of launches is a major impact on project viability. Commercial launches tend to be for Low Orbit. The second group is Government customers launching high-cost satellites for defense and for space exploration. Compared to a high the cost of the satellites, launch services are not a major cost concern for this customer group. These launches tend to be for High Orbit. About SpaceY’s c ompetitors. There are several large legacy competitors as well as dozens of small firms that are still developing their first viable rockets. Both the old and new firms are trying to replicate our business model and are attempting to develop reusable rockets and drive down their costs. We estimate that they are still years away from being able to match our pricing. [If the interviewee asks about NASA-owned rockets, tell them that the government is currently relying on private launch companies and will continue to rely on them for as long as it is the cheapest option]. Status Quo. If we do not pursue this new vehicle, we estimate that we will continue to maintain current annual profitability. Plans for the old vehicles. [ Only if addressed by the interviewee at this point] If the new rockets are developed, the old Raven-9 fleet will be launched in expendable-mode, meaning that they can carry much more cargo but will not be recovered. Because of the increased cargo capacity, we expect to be able charge much more for this one-time launch.
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108 Suggested Framework Cost Side • Upfront Costs o R&D o Manufacturing Facility o Launch Facility o Closeout/Salvage Costs of Raven-9 Fleet o Cost of Rockets (Upfront b/c reusable rockets) ▪ Number of Rockets x Manufacturing Cost Per Rocket • Yearly Fixed Costs o Yearly Overhead Costs x 10 Years • Variable Cost Per Launch o Fuel o Refurbishment/Maintenance (To counteract depreciation) o Launch Day Operations (certifications, additional staff, vehicle recovery, etc) Revenue Side • Either: o Number of Launches per Year o Price per Launch • Or: o Amount of cargo delivered o Price per unit of cargo Status Quo ▪ The interviewee should note that the final profitability of the new product should be compared to the status quo
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109 Prompt 1 Our client would like to get our assistance on their pricing strategy with the goal of maximizing revenue. Our customers can be broken out into Commercial Customers and Government Customers, and our rockets can either deliver a large amount of cargo Low Orbit or to a small amount of cargo to High Orbit. Our goal instead is to set the price based on the mass of the cargo delivered and on the destination orbit. For now we are only considering two potential prices for each orbit. [Show the candidate Figure 1 and ask them for their observations] Analysis Key Observations: ▪ Demand is greater for Low Orbit than High Orbit ▪ We are able to charge much more for High Orbit delivery than Low Orbit Delivery ▪ Commercial demand is much more price sensitive ▪ They will need to sum Government and Commercial Demand, and multiply by price to determine revenue ▪ At some point they will need to know how much cargo can be carried per launch
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110 Quantitative Analysis: For Low Orbit Demand: ▪ The candidate should first sum the Commercial and Government Demand: o Low Orbit Demand @ $4k/kg: 360k + 40k = 400k o Low Orbit Demand @ $6k/kg: 168k + 32k = 200k ▪ An astute candidate should realize that a 50% price increase led to a reduction in demand by half, and that $4k/kg must be the optimal choice for revenue maximization. (150% x 50% = 75%) o $4k/kg * 400k kg = (4 * 400) * (1000 * 1000) = 1,600 * 1M = $1.6B in Revenue ▪ This is the price/quantity that should be chosen o $6k/kg * 200k kg = (6 * 200) * (1000 * 1000) = 1,200 * 1M = $1.2B in Revenue ▪ Calculation not necessary if they recognize that this will result in less revenue For High Orbit Demand: ▪ The candidate should first sum the Commercial and Government Demand: o High Orbit Demand @ $30k/kg: 30k + 20k = 50k o High Orbit Demand @ $40k/kg: 28k + 12k = 40k ▪ An astute candidate may realize that a 33% price increase led to a reduction in demand by 20%, and that $40k/kg must be the optimal choice for revenue maximization. (133% x 80% > 100%) o $30k/kg * 50k kg = (30 * 50) * (1000 * 1000) = 1,500 * 1M = $1.5B in Revenue ▪ Calculation not necessary if they recognize that this will result in less revenue o $40k/kg * 40k kg = (40 * 40) * (1000 * 1000) = 1,600 * 1M = $1.6B in Revenue ▪ This is the price/quantity that should be chosen
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111 Key Takeaways: ▪ For Low Orbit o We should charge $4,000 per kg o We should expect the demand to be 400,000 kg o Revenue from Low Orbit will be $1.6B ▪ For High Orbit o We should charge $40,000 per kg o We should expect the demand to be 40,000 kg o Revenue from High Orbit will be $1.6B ▪ Total Revenue will be $3.2B
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112 Prompt 2 Each launch will be able to carry either: ▪ 40,000 kg per launch to Low Orbit; or ▪ 8,000 kg per launch to High Orbit How many rockets will we need to manufacture in order to service yearly demand? Analysis Low Orbit: ▪ 400,000 kg per year / 40,000 kg per launch = 10 launches per year ▪ 10 launches per year / 5 yearly launches per rocket = 2 rockets needed High Orbit: ▪ 40,000 kg per year / 8,000 kg per launch = 5 launches per year ▪ 5 launches per year / 5 yearly launches per rocket = 1 rockets needed
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113 Prompt 3 Now let’s look at costs. What cost categories do you think we need to address? Analysis Fixed Research and Development o The engineering team currently believes the design of the BFR will cost $2B Manufacturing Facility o Current manufacturing and refurbishment facilities for the Raven-9 will be converted to the new design at a cost of $1 billion Launch Facility o Launches are currently being conducted from leased facilities at Cape Canaveral. A new launch site for the BFR will be created at an upfront cost of $1.5 billion Manufacturing of BFR Fleet o BFR rockets will each be able to conduct 5 launches per year. Each rocket will cost $500 million to manufacture. o We know from the demand section that we will need to be able to perform 15 launches per year. This will require 3 rockets, which will in turn cost $1.5 billion Closeout Costs o If the new rockets are developed, the old Raven-6 fleet will be launched in expendable-mode, meaning that they can carry much more mass but can’t be recovered. We expect to earn $3 billion in profits through these launches. Overhead o Launch staff, maintenance workers, launch sites, and other fixed costs are estimated to be $400 million per year.
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114 Variable Fuel o Each launch will use about $4 million dollars of fuel, coolants, ect Refurbishment o Each rocket will require approximately $16 million dollars of work after each launch in refurbishment, quality tests, and retrofitting for the new payload. Recovery o We plan on having the rockets land back at the launch facility, so assume zero costs there. Total Fixed Costs Category Cost Salaries and Overhead (10 Years) $4.0B R&D $2.0B Manufacturing/Refurbishment Facility $1.0B Launch Facility $1.5B Rocket Development $1.5B Income from Disposal of Raven-9s -$3B (Profit) Total Net Fixed Costs $7.0B Total Variable Costs Category Cost Fuel per Launch $4.0M Refurbishment Costs per Launch $16.0M Total Cost Per Launch $20.0M Launches per 10 Years (15 per year * 10Y) 150 launches Total Variable Costs Over 10Y $3.0B
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115 Total Revenue Over 10 Years From Revenue Side: (1.6 billion for Low Orbit Revenue + 1.6 billion for Low Orbit Revenue)*10 Years = 3.2B * 10 =32 Billion Profitability Over 10 Years Revenue – Costs = Profit 32 billion (Rev) – 10 billion (Costs) = 22 Billion Status Quo Option (Based on $2B of yearly profitability) 2 billion per year x 10 years = $20 Billion Taking on the project will increase profitability by $2B over 10 years.
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116 Prompt 4 [Can be skipped if short on time.] Let’s take a moment and brainstorm what other factors we may need to consider. Can you talk about any risks, uncertainties, opportunities, or anything else you think we should consider as we move forward? Analysis This is a general brainstorming activity. Potential risks/ further considerations could be: Risks - Volatility of demand o Do we need excess capacity? - New tech ventures are inherently risky o W hat if it doesn’t work, is way over budget, falls behind schedule, etc? o Reputational risk if product fails - Deterioration of new rockets as they age - Risks of competition (govt and commercial) Opportunities - Potential economies of scale - Will the lower cost access to space create new industries and increase demand? - Staying on the cutting-edge of tech may increase brand value. - This would get SpaceY closer to its secondary goal of interplanetary travel. - Opportunities for government funding of R&D. - Possibility of additional revenue lines (astronaut transportation or space tourism).
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117 Recommendation The CEO is about to walk into the room. Can you take a moment and compile your recommendation? Risks/ Next Steps Interviewer Guidance The risks and opportunities that were compiled in Prompt 4 should be re-addressed here in an organized fashion that support the candidate’s decision to invest in the new rocket or not. Next steps could include testing out different price points for delivery prices, estimating how these prices will effect growth trends, and better estimating the costs and risks associated with development. The candidate should pick one position and provide rationale for their answer. Arguments for supporting the new rocket could include but are not limited to: • Cash flows past the 10 years evaluated • Innovation necessary to stay ahead of competition • Demand will likely grow over the next 10 years • Brings company closer to their secondary goals of space colonization Arguments against supporting the new rocket could include but are not limited to: • $2B over ten years represents a very small improvement • High risks of R&D efforts could result in higher costs or delays that jeopardize the profitability curve
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118 Exhibit A 360,000 168,000 40,000 32,000 - 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 $4,000/kg $6,000/kg Demand (kg) Delivery Price per Kilogram Low Orbit Delivery Demand Commercial Demand Govt Demand 20,000 12,000 30,000 28,000 - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 $30,000/kg $40,000/kg Demand (kg) Delivery Price per Kilogram High Orbit Delivery Demand Commercial Demand Govt Demand
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119 Stars & Stripes Airways by Andrew Mortensen Behavioral Question Tell me about a time you had to lead a team toward an unfavorable decision? Case Prompt Stars and Stripes Airways, S&S, is a major airline headquartered in the U.S. serving nearly 350 destinations around the world. In 2014, they impressed customers with the launch of a highly modified Airbus A321 jet dubbed the A321 “ Coast-to-Coast ” (C2C) model, which S&S outfitted with significantly fewer seats to allow room for amenities such as a walk-up espresso bar, in-cabin dog kennels, and lie-flat sleeper seats. The C2C model with 100 seats was designed specifically with the lucrative New York-Los Angeles and New York-San Francisco markets in mind. The standard Airbus A321 seating 190 passengers flies to any other US, Mexico, and Canada destinations in range. While the C2C launch and early years were highly successful, the model’s profitability has decl ined markedly in the last year. CEO Robin Parker (she/her), has hired your firm to evaluate their next decision: convert the C2C fleet to a traditional aircraft layout or use the C2C on new routes? Quant Level: Medium Qualitative Level: Hard Type: Opportunity Evaluation/Profit Industry: Transportation
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120 Clarifying Information Suggested Framework After candidate reads back the prompt, confirm key information and offer information below if asked: • Target: S&S is primarily interested in converting the C2C fleet to a traditional layout to use on more routes or identifying new routes for C2C aircraft. Any outcome where operating margin is greater than existing is acceptable . (Candidate will calculate this in next prompt) • Business: Despite flying to exotic international destinations like Tahiti, Tel Aviv, and Saigon, 75% of the carrier’s profits come from domestic flights (destinations inside the U.S.). Among these, their transcontinental routes are the most lucrative. • Geography : S&S operates major hubs in LA, New York, Dallas, Chicago, Washington, D.C., and Miami. • Competitors: JetPink and Alpha Airways recently reconfigured several airplanes with similarly posh amenities and started flying them on JFK-LA and JFK-San Francisco routes late last year • Product: S&S owns 12 A321-C2C aircraft, of which 2 are considered spare (i.e. they sit idle in case of mechanical, weather, or other operational disruptions). Candidate should evaluate each of the two possible opportunities mentioned. Let them drive and then guide them towards the first prompt around retrofitting. • Retrofit - New profit vs. existing (rev x seats x # passengers) – costs (fuel, maintenance, catering, crew, landing fees) - Upfront costs for retrofit / payback period - Out of service time - Customer sentiment/downstream effects of pulling premium product • New Routes - New profit vs. existing - Existing competitors/share - Other considerations like runway length, maintenance, training, etc. at new location • Other Options - Pricing adjustments - Marketing - Selling off assets/exiting market - JV/strategic partnership - Opportunities for spare aircraft
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121 Prompt 1 After framework, guide towards analyzing the retrofit option. Probe the candidate to ask for specific pieces of information if they don’t. “ S&S is open to converting their existing C2C fleet to a traditional layout. The Fleet Analytics team provided P&L data on the existing C2C model as well as a forecast for switching to the traditional layout. ” - Provide Exhibit A and ask candidate the following: “ What insights can you draw from this new information? ” - If asked, there are costs for conversion (unknown at this time), but no costs for adding new routes.
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122 Analysis Interviewer Guidance C2C Model First Business Economy Average Fare, roundtrip: $5,000 $3,000 $500 # Seats 10 20 70 Average booked %: 60% 80% 90% Total revenue $30,000 $48,000 $31,500 $109,500 <-Total rev Operating Profit Margin %: 30% 20% 10% Margin $ $9,000 $9,600 $3,150 Total profit/ flight $21,750 Operating Profit Margin % 20% Allow the candidate to round Retrofit First Economy Average Fare, roundtrip: $1,500 $500 # Seats 20 170 Average booked %: 90% 90% Total revenue $27,000 $76,500 $103,500 <-Total rev Operating Profit Margin %: 20% 20% Margin $ $5,400 $15,300 Total profit/ flight $20,700 Operating Profit Margin % 20% Allow the candidate to round -Candidate should have # seats from prompt, but if not, they can count by multiplying (rows * # seats.) -Candidate should drive to exploring pros/cons of retrofit (next Q) -An excellent candidate would notice margins are better in economy on the standard model due to fixed costs being spread out over more passengers -Candidate should run through calculations and notice the margin % is roughly same (~20%)
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123 Prompt 2 You just bumped into a VP in the elevator who asks which way you’re leaning at this point and why: what do you say? Analysis Interviewer Guidance Retrofit -Pros: market share, commonality with rest of Airbus fleet, more sustainable -Cons: time out of service, customer disappointment, loss of marquee product, loss of premium market share, cost of retrofit Candidate should list pros/cons of each option. There is no right answer, but their response should include a cogent argument in favor of one or the other - An excellent candidate would note that the profit figures are a point in time, rather than trend and that with more competition, fares are likely to drop even more in the case of sticking with the C2C After the elevator trip, let them drive or guide them to the next option: new routes
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124 Prompt 3 The Network Planning team has prepared a forecast and detailed analysis for potential new routes for the C2C. They are open to moving C2C aircraft away from existing routes to test a new market. How would you go about analyzing the data? Analysis Interviewer Guidance Candidate should synthesize various data points and walk through why/why not each route in a logical manner. Candidate should consider the competitive landscape given and integrate that with the original prompt: the C2C doesn’t perform well in saturated markets. Therefore, London or Miami-Los Angeles based on margin are the logical choices. With margins above the retrofit option and minimal competitors, Miami-Los Angeles or New York to London City should be the go-to option, but arguments can be made for the others. An excellent candidate would call out the wide gross to operating margin variances and mention possible reasons for the differences; higher indirect costs stemming from things like landing fees, maintenance, ground staff, etc.
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125 Recommendation Robin is approaching with her team and wants an update: what do you recommend? Risks/ Next Steps Interviewer Guidance Risks: • Moving assets to a new market leaves a void in the existing market • May invite competition • May be confusing to have a market “mixed” with prestige product and existing • If London, 90 minute fuel stop might upset business travelers Next Steps: • Socialize with key stakeholders/get buy-in • Product launch/tracking results • Explore other opportunities outside retrofit/new routes, i.e. partnership with JetPink or other airline Recommendation: forego retrofit and launch aircraft on new route (London or Miami). A good candidate will recognize this is the easiest/most profitable option.
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126
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127
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128 Steel Inc. By Anirudh Anand, Shivam Kumar & Spruha Kamdar Behavioral Question Tell me about a time when you had a disagreement with a colleague in which you did not find an amicable outcome. How did you manage this situation? Case Prompt Our client is a steel manufacturing company which uses raw materials like coal, coke, iron ore, lime etc. This is further processed using industrial gases, primarily oxygen, in a blast furnace to produce final steel products. The Company produces both upstream products, specifically, both long and flat products and downstream products like ingots, pipes, billets, tubes etc. Our client has historically been profitable but has been facing declining profits over the last few years and they require our help in addressing this issue. Quant Level: Hard Qualitative Level: Medium Type: Profitability Industry: Industrial Goods
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129 Clarifying Information Suggested Framework Geography: US Market in multiple cities Open to expansion internationally: No Goal: Get back to profit levels in FY19 Customers: Push candidate to brainstorm on this & then give the answer = US based companies in the automobile sector, construction sector etc. & also the Government. I Distribution: Through own railroad systems that they own and operate Raw material sourcing: Client owns the coal and coke mines on a contract basis & other raw materials are from their regular suppliers Competition: Competitive landscape has been stable Costs / Revenue: We will get into that a bit later in the case Industry-wide or firm specific: Firm specific Change in management: No Historic profit numbers: Will be provided in the exhibit Timeline: ASAP Framework considerations could potentially include: Revenue: • Price per tonne & tonnes produced per annum (for each of the product segments, potential other sources of revenue) • Other potential sources of revenue (eg. Sale of scrap) Costs: • Raw Material consumed • Labour • Power • Rent / Lease • S&D • Depreciation • Interest payments • Inventory costs Other considerations: • Potential geographical expansion • Change in product mix • Demand & supply of this commodity • New players? / Competition (in case have not covered in clarifying questions) • Changing trends in the market in end user segments • Any environmental impact / regulatory impact After the framework, the candidate is expected to suggest where to start tackling the issue from, ideally the costs.
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130 Prompt 1 Provide Exhibit A if candidate asks for historical data. Analysis Interviewer Guidance Historic Data (in Millions) FY21 FY20 FY19 Sales 1045 1044 1174 Other Revenue 255 166 116 Total Revenue 1300 1210 1290 Total Operating Cost 1440 1160 1020 Net income -140 50 270 Next levels insights a strong candidate should ideally say: Revenue has decreased then it increased Cost increasing YoY, hence profit declining Need to get 410M profit to reach previous levels (FY19) ( We need to have an additional profit of 410M as currently we are at -140M and need to reach FY19 level of profitability, which is 270M)
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131 Prompt 2- Costs "We believe a next step for our client is to dig deep into the cost breakdown. Can you calculate what the two biggest costs drivers have been?" If the candidate doesn’t steer towards costs, the above prompt can be used to drive the discussion.
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132 Analysis Interviewer Guidance Cost Breakdown (in Millions) FY21 FY20 FY19 Cost of materials 1150 900 800 Labour 80 80 60 Power 70 80 70 Distribution 110 80 70 Other Opex 30 20 20 Total Operating Cost 1440 1160 1020 Cost of materials (28% increase from FY 20) & Distribution (38% increase from FY 20) are the 2 main costs which have gone up the most YoY Note – Sentences in italics should be conveyed by the interviewer to the candidate Candidate should ideally want to drill down on those costs. A strong candidate would realize that the distribution and cost of materials have gone up over the last three years and should dive deep into it. Once the candidate mentions this, the below prompt can be provided. The Company has conducted analysis and have realized that by utilizing different rail routes they can cut down distribution spend by 30%. Interviewer notes - The candidate should calculate the cost reduction of 33 M through this. "Also, the company has found a different supplier and can source materials for 20% cheaper than FY 21. Interviewer notes - Candidate should calculate cost reduction of 230 M. Candidate should realize that this mitigation of costs leads to increase in profit by just 263 M (230M from materials and 33M from distribution), falling short by 147 MM to meet profitability of 410 M.
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133 Prompt 3- Brainstorm Push Candidate to brainstorm on why the costs have increased and provide suggestions to tackle them. Analysis Potential Responses • Changing supplier arrangements • Ownership of more mines / Checking if mine leases have expired • Improving operating efficiencies of current rail route system • Synergizing distance between customer & production locations Prompt 4- Revenue Since we cannot reach profitability any more through cost reduction, the next step is to devise ways to increase revenue. Take a look at Exhibit B and provide your initial insights.
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134 Analysis Interviewer Guidance Revenue Breakdown (in Millions) FY21 FY20 FY19 Carbon Flat Specialt y Metals Carbon Flat Specialty Metals Carbon Flat Specialty Metals Revenue Volume (tonne) 900,000 130,000 800,000 120,000 900,00 0 130,000 Price per tonne 800 2,500 900 2,700 900 2,800 Total Revenue 720 325 720 324 810 364 Next levels insights that a strong candidate should mention, if not, provide the below to the candidate: Inferences: 1. Volume of Carbon Flat has reached FY19 levels, but price has come down from then 2. Volume of Specialty Metals has reached FY19 levels, but price has come down YoY Solution: Candidate should realize that through this, revenue can be increased to 1215 M, hence increasing profit by 170 M. This, along with the profit increase from cost reductions, would put them at a total profit increase of 433 M enabling them to hit the required profit number of FY19. A good candidate would realize that they can better utilize their production capacity and can redirect resources from the Carbon Flat segment to the Specialty Metals segment, allowing them to produce 100k tons more of Specialty Metals but 100k less of Carbon Flat products. Current FY21: Revenue from Carbon flat = Volume*Price 900K*800 = 720M Revenue from specialty metals: Volume*Price 130K*2500 = 325M Current total revenue for FY21 : 720+325 = 1045M Going forward, change the volume mix of carbon flat to 800K tons from 900K tons, and use the spare capacity obtained by reducing carbon flat volume for specialty metals. Therefore, specialty metals volumes increase from 130K to 230K tons. A strong candidate would simplify the math by: Volume Increase * Price Differential = 100K * (2500 – 800) = $170M Alternatively, they can do: 800K*800 = $640M for carbon flat And, 230K*2500= $575M Therefore, total revenue = $640M+$575M = $1215M, which is $170M more than previous revenue.
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135 Prompt 5- Brainstorm Push Candidate to brainstorm on how the revenue can be increased. If candidate doesn’t mention it, push the candidate towards changing product mix. Analysis Potential Responses • Expanding to other geographical markets • Increasing quantity • Changing product mix • Making new products Price cannot be increased for either product because it is a commodity, and the prices are determined by the overall market. Hence no scope to increase prices.
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136 Recommendation Please deliver your final recommendation. Our client should look at reducing their distribution and raw materials cost as well as changing their product mix which will result in a 433M increase in profits, helping them achieve their goal of FY19 profit levels. Risks/ Next Steps Risks • Changing distribution routes could lead to some disgruntled customers • Changing supplier can lead to negative impact of current relationship & can adversely impact their costs • Logistical and technical issues with changing the product mix • Overestimated demand for Specialty Metal Products • Legal issues Next Steps • Market Analysis to determine consumer demand • Deploy a 3-month pilot product mix change & analyse the results • Due diligence on new suppliers before entering a contract with them
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137 Other Notes The case is meant to be interviewee-led so look for the candidate to direct the case in a specific direction. Ultimately, the candidate should tackle every prompt in the exhibits, so redirect if needed.
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138 Exhibit A Cost Breakdown (in Millions) FY21 FY20 FY19 Cost of materials 1150 900 800 Labour 80 80 60 Power 70 80 70 Distribution 110 80 70 Other Opex 30 20 20 Total Operating Cost 1440 1160 1020
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139 Exhibit B Revenue Breakdown (in Millions) FY21 FY20 FY19 Carbon Flat Specialty Metals Carbon Flat Specialty Metals Carbon Flat Specialty Metals Revenue Volume (tonne) 900,000 130,000 800,000 120,000 900,000 130,000 Price per tonne 800 2,500 900 2,700 900 2,800 Total Revenue 720 325 720 324 810 364
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140 Stinson’s Bro on Demand by Eduardo Rodriguez Macrillante Behavioral Question Thinking about your preferences on a manager, do you prefer to have someone closely follow and guide you, or someone that provides minimal instructions and check-ins? Why? Case Prompt Your client is Barnabas Stinson, a world-renowned entrepreneur and author. He has contacted our firm in need of assistance for the launch of his new idea: Bro on Demand. Bro on Demand would be a mobile application that would allow users to request a wingman/wingwoman to assist them on a night out or a double date when their friends are not available. Users would create a profile describing themselves and Stinson’s Bro on Demand experts would study your profile and come to your aid when needed, making you look great in any occasion. Barnabas is starting the process of raising capital in a few weeks. As he was starting to work his pitch, he realized he needed help figuring out what would be the potential market size for his new idea. To quote him, he wants us to: “guarantee that his pitch will be legen… wait for it… dary.” Quant Level: Easy Qualitative Level: Medium Type: Market sizing Industry: Technology
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141 Clarifying Information Suggested Framework • The app would be available for adults over 18 years old • The app would be available for people of any gender • The app would be launched in the U.S. initially, if proves successful, then it would explore other markets • Currently interested in the number of potential users Break down the estimates as follows (using top-down approach): • # of people in the US: ~300MM • # of adults in the US: ~3/4 = 225MM • # of single adults (assuming singles for now, point for discussion later): ~1/3 = 75MM • # of single adults that would use the app (assuming a market penetration similar to tinder*): ~10% = 7.5MM *Probably not a value that people would know, and the actual value is not important. They just need to recognize that not all those people would actually use the app and argue how they came up with their number. As long as it’s logical that’s good enough. Prompt 1 In our estimate we used single as a factor to figure out the final number, however, do you think married people would use the service? Are there any other potential uses for such a service?
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142 Interviewer Guidance It’s a strange question but just looking for creativity in brainstorming. It’s a very re al scenario that dating apps have to consider. Uses for married people - Polyamorous relationships - Impressing in-laws/parents - Cheating (Not ideal but it happens. Should the app check for this?) Other potential uses - Impressing work colleagues/boss - Meeting friends in a new city - Someone to hype you up when feeling down - Just as a companion to hang out when no one is available Recommendation Mr. Stinson just walked through the door and after high fiving you he asks you whether you have figured out what the potential market for his app is. What would you tell him?
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143 Risks/ Next Steps Interviewer Guidance Risks: • Are there consequences if someone you went out with finds out you had a Bro on Demand? Is it OK to hire someone for this purpose? • Possible negative network effects, if too many people use the app and know about it, it could become a stigma Next Steps: • Conduct deeper market research into other potential markets that would benefit from a Bro on Demand beyond a wingman/wingwoman • Conduct market research to evaluate the potential for adverse consequences if a Bro was exposed as a paid assistant • Conduct a pricing analysis and begin the development of a formal business model Candidates should consider the possible moral considerations of such an app at some point, if nothing else as a potential risk Other Notes This is supposed to be a straightforward case in terms of the market sizing. Its intention is to get people familiarized with the format of an interview and to evaluate creativity in a strange context that most people don’t consider on their day to day.
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144 4-to-5G by Satyam Jaitly, Aayush Gupta, and Mayank Agrawal Behavioral Question During one of your cases as a consultant, you are asked by the client to change the scope/deliverables of the project. How will you respond to such request(s)? Case Prompt Your client is an Indian business tycoon, CEO of Reliant Industries- founded 40 years ago. With the increasing demand for data and digital services, the client wishes to disrupt the Indian telecom market with the launch of 5G services as the market for 4G is saturated. The client has no prior experience in this industry and has hired you to understand the attractiveness of this opportunity. How would you advise the client? Quant Level: Medium Qualitative Level: Medium Type : Market Entry / Growth Industry : Telecom / Technology
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145 Clarifying Information Suggested Framework • Target : The client wishes to breakeven in 5 years • Location : The client is focused on the Indian market • Investment / Financing : No limit on funds; estimated initial investment cost is $8B • Current business operations: The client operates the largest business empire in the country with businesses in Retail, Petrochemicals and Oil & Gas and an annual revenue of $50B • Revenue Model: The client aims to undercut the current monthly data plans (includes calls, text, and data) to capture a large market share • Competition – The existing players are only offering 4G services and exploring upgrading to 5G services • Total Population of India: 1.4 bn Bucket-1: Market/Economic Factors - Ease of doing business - Market Growth - Competition & Market Segmentation - Customer Segmentation and WTP - Purchasing Power - Availability of manpower Bucket-2: Revenue drivers - Annual/Monthly Data plans - Value-added services (VAS) such as caller tunes, voice mail services, phone insurance, - Data monetization with social media platforms - Packaging & bundling with OTT (Netflix, Prime Video) subscriptions Bucket-3: Financials/Cost Drivers Upfront cost: - Research and Development - Tower infrastructure & Real estate acquisition Fixed Cost: - Spectrum & License fees - Leasing of Telcom sites (antenna) - Manpower cost for sites Variable Cost: - Marketing expenses - SG&A - Repair & Maintenance of sites Bucket-4: Other Considerations - Government regulations/Policies - Technology (speed, bandwidth, latency, availability) - GTM (rollout timing, marketing, crew training, ad sales) - Operations (Distribution) and Capability (Capacity)
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146 Prompt 1 Question #1 : Total Addressable Market Size? What are some factors that you would consider when estimating the number of potential subscribers for the new 5G service? How large do you think it could be in India? Notes to Interviewer: Candidate should brainstorm in a structured manner on the important factors and try to get a reasonable estimate of how big the 5G market is. Suggested parameters a good candidate can use to estimate the market size are as under: 1. Population of the country 2. Age-group – to assign different weights for the population 3. Smartphone users and Y-o-Y growth rate 4. Income level of the population – to identify willingness to switch to new technology 5. Demographics (Rural / Urban) – infrastructure availability for 5G services 6. Availability of substitute services in the form of fiber service / home broadband plans In case, the candidate jumps into market sizing below is the illustrative marketing sizing solution. If the candidates touches upon the above important factors, you can give the figure of 900Mn and move forward with the case. Factors/Age 0-14 15-64 Above 65 Population % Distribution 30% 60% 10% Population Size (in Mn) 420 840 140 % Who owns smartphones 75% 100% 50% Smartphone owners (in Mn) 315 840 70 % Who will likely upgrade from 4G 75% 75% 50% Total Addressable Market (in Mn) 236 630 35 Total Population (in Mn) Ask candidate to round-off at 900 Mn
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147 Analysis Interviewer Guidance Total Addressable Market= ~900 Mn Potential market size is huge, and this represents an attractive business opportunity for the client. A good candidate should note that the client is a new entrant and must account for the existing competition in the market. Also, it is important to understand the willingness of customer to switch for the new services. Great candidate will drive the case forward and thus, seek for information on the existing customer base and how it is captured by the existing players .
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148 Prompt 2 Question #2 : The client has collected some data (share Exhibit A ) on what the current customer base is for the 4G services. Look at the data and let me know your thoughts on the opportunity for the client. Analysis Interviewer Guidance Candidate should focus only the customers who are willing to switch to 5G. Out of those customers, our client can capture the below customers: Air-Toll: 60% of 300=180Mn Videophone: 60% of 200 = 120Mn BCNL: 100Mn (All) Total - 180+120+100 = 400Mn Candidate is expected to calculate the expected market share for the client using the information in the exhibit. A good candidate will comment on the overall market size and the competition type (small number of players). Also, candidate should take note of the footnote and quickly come up with the number of 400M. Make sure the candidate catches that competitor ‘B CNL ’ will lose all its customers in case of new entrant and thus add total customer base of 100M in the market share calculation. A great candidate will draw useful insight that the market is attractive to enter and if competitive pricing is adopted, our client can become the market leader in the Indian telecom sector (400Mn out of the existing user base of 900Mn) . To drive the case, candidate should now look for the possible pricing options and seek for information on the current practice adopted by the competitors.
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149 Prompt 3 The client has conducted market research on the current data plans (share Exhibit B). How do you think our client should price the new services to enter the market? Analysis Interviewer Guidance Pricing will be based on the customer’s willingness to pay, and the cash flow calculation can be done as under: Economy: (20-20) *(35% of 400) = 0 Regular: (30-24) * (50% of 400) = $1200Mn Advance: (40-30) *(15% of 400) = $600Mn Total annual cash flows = $1800 Mn = $1.8B Initial investment = $8B (shared in the clarification information) Breakeven Period = Initial Investment / Annual Cashflows = $8B/$1.8B = ~4.44 years (less than target of 5 years) A good candidate will use the information given to determine the pricing strategy for the client which would be equal to the customer’s WTP . Furthermore, with the cost data candidate should calculate the cashflows / profit under each plan. A great candidate will tie the above profit calculation with the market share calculated using the previous exhibit. Since the target is to calculate break even period, candidate should proceed with the calculation with minimum guidance. After the calculation, the candidate should comment on the attractiveness of the opportunity for the client given the initial target.
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150 Prompt 4 ( provide based on the candidate’s performance) What if the client wishes to launch the services as free for the first year? Think about some of the pros and cons for the client with such a launch strategy? Suggested Pros: a. Opportunity to test the services and improve the quality of the services in the initial trial period. b. Attract a large customer base to try the new 5G technology at no additional cost c. Serve as a good marketing /PR activity to gain initial traction of the customers. E.g., advertise as a digital revolution for the masses and uplifting the overall standard of living Suggested Cons: a. Client will fail to achieve the break even in the target period of 5 years considering the given information. b. Customers may switch back to the existing players at the end of the trial period c. Offering free service may create a customer perspective that the client has sub-standard service to offer and thus, impact the brand image in the long term
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151 Recommendation The CEO is about to walk into the room and would like to understand whether he should go ahead with the launch. What is your recommendation? The client should launch 5G services in the country because of the following arguments: 1. Break even period is within the target period of 5 years and it represents an opportunity to generate $1.8B as annual cashflows 2. Potential to capture a significant portion of the market share (40%+) 3. Opportunity to bundle digital services with the telecom service Risks/ Next Steps Interviewer Guidance Risks: • Price war - Adopting competitive pricing may lead to similar action being adopted by other players. Thus, this may impact the projected cash flows • Unpredictable customer behavior – Market share calculation was based on the predicted % of customers switching to new tech. Without sufficient motivation the same may not hold true. • Availability of 5G ecosystem in the country – To successfully provide 5G services, customers must also have access to 5G compatible devices. Next Steps: • Price sensitivity analysis to stress test the projected cash flow projections in the light of pricing plans and user base • Partnership with cell-phone manufacturers to provide affordable / low-cost 5G compatible devices. • Bundling digital services such as OTT subscription to create a competitive advantage • Liaison with the government and local authorities to facilitate setting up of telecom infrastructure. While commenting on the risks/next step, it is important for the candidate to keep in mind that the client has no prior experience in this industry and the project involves introducing new technology in the country and thus, it is important to comment on the overall feasibility of the plan.
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152 Exhibit A Note: With launch of 5G service at a competitive pricing, a. BCNL is expected to become bankrupt and lose all its subscriber base to the 5G low-cost entrant b. Air-toll and Videofone will lose 60% of willing customers who are ready to switch under competitive pricing 300 200 50 200 100 50 0 100 200 300 400 500 600 Air-toll Videofone BCNL Current 4G subscriber base (in millions) Willing to switch to 5G Not switching
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153 Exhibit B Current Pricing Plans Particulars Economy Plan Regular Plan Advance Plan Competitor Price (4G) 15 25 35 Expected Price (5G) 25 35 50 Apportioned costs per subscription 20 24 30 Customer ’s willingness-to-pay (5G) 20 30 40 % of customers expected under each plan 35% 50% 15% Note: Assume that all competitors offer similar plans and rates under 4G
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Page 1 Practice case interview: Craft Co. Read to candidate: Our client, Craft Co., is a subscription service that will send customers kits for adult crafting and DIY projects (e.g., watercolor painting, woodworking) Customers pay a monthly fee based on the number of kits they would like, Craft Co. sends them a box with craft supplies Craft Co. had grown its customer base rapidly during the COVID-19 pandemic, but has seen a dip in recent quarters as new competitors have entered the field Management is looking to assess the business’s current performance and identify whether it can grow profitably and regain market share in the next ~3-5 years If candidate asks: Craft Co’s products are typically marketed towards young adults ages 18 -35 Craft Co. was seen as the first major player in this market, but new competitors began to enter by the end of 2020 There is no specific ROI or objective that our client is aiming to achieve related to this analysis, but they are most interested in short-term strategies in the next 1-3 years as opposed to longer-term opportunities Craft Co. is currently focused solely on the U.S. market Read to candidate: Our client would like our help in answering two questions (i) how has Craft Co. performed recently? and (ii) what strategies can it implement to grow profitability and increase share? Candidate should prepare and walk the interviewer through an initial framework that includes information on profitability (costs and revenues), market considerations (e.g., market share), products, and execution strategies (e.g., increasing growth, reducing costs) Allow the candidate to walk you through their framework, noting that we do not have information on product opportunities, guiding them to the profitability exercise Situation Background information Question Interviewer only
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Page 2 Practice case interview: Craft Co. 1. Based on exhibit 1, how would you estimate Craft Co.’s monthly profitability in Q4 2020? Answer should include: – Accurate calculation of revenue, cost, and profit – Craft Co. is operationally unprofitable, largely driven by marketing costs – Individuals purchasing 1 kit per month are breaking even and do not need to be calculated to find profit 2. How can Craft Co. become more profitable? Interviewer should brainstorm with candidate to cover various methods through which profitability can be improved: Brainstorm ideas: – Revenue growth • Increase revenue from existing customers • Enter new geographic markets • Expand into new channels (e.g., children's kits, cooking kits) – Cost control • Analyze marketing mix and effectiveness to reduce spending without losing subscribers Questions Takeaways and insights Current profitability Market considerations Profitability Revenue Cost # of sub- scribers Monthly sub- scription # of sub- scribers Cost Fixed Cost (Segmented by usage) 1 2 1 kit 2 kits Total Revenue Customers (k) 45 30 75 Price $50 $80 n/a Months per quarter 3 Total revenue ($m) $7 $7 $14 Costs Variable costs $50 $60 n/a Months per quarter 3 Total variable costs ($m) $7 $5 $12 Total fixed costs ($m) $2 + $8 = $10 $10 Profit ($8)
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Page 3 Practice case interview: Craft Co. 3. Based on Exhibit 1, how would you describe Craft Co.’s pattern of subscriber growth? 4. Based on Exhibit 2, what do you notice about Craft Co.’s performance? 5 . How might Craft Co. stabilize its subscriber decline? Instructions Takeaways and insights Subscriber growth considerations Subscriber levels have seen a steady decline in 2020, even though interest in crafts likely increased due to the pandemic Earlier growth could be due to strong investment in marketing and lack of initial competitors and/or pandemic-related demand increase across the market Craft Co. performance Craft Co. outperforms competitors on price and quality, but underperforms on delivery and convenience Exhibit 2 in context with profitability analysis suggests Craft Co. has likely lost customers to higher- priced competitors positioned as “premium”, therefore there may be opportunity to increase price to restore profitability since Craft Co. is perceived as high-quality Stabilization levers Better differentiating its product relative to new entrants Loyalty incentives Acquiring one of its competitors Current profitability Market considerations
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Page 4 Practice case interview: Craft Co. Exhibit 1 Source: Internal company data Candidate materials 60 70 90 85 100 95 85 75 Q1 2019 Q4 2019 Q3 2019 Q2 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 +67% -25% Average number of monthly subscribers, in thousands, 2019 – 2020 Revenue for Craft Co. (Q4 2020) Price Percentage of subscribers 1 kit per month $50 60% 2 kits per month $80 40% Cost and revenue information for Craft Co. Costs for Craft Co. (Q4 2020) Cost Percentage of subscribers 1 kits per month $50 60% 2 kits per month $60 40% Operating costs per quarter (3 months) $2m Marketing costs per quarter (3 months) $8m
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Page 5 Practice case interview: Craft Co. Exhibit 2 Craft Co. performance against service selection factors Consumer survey data Candidate materials Source: Survey of recent craft kit purchasers Craft kit selection factors Importance in decision Perception of performance on key factors (1-5, 5 = best) Craft Co. Average of all others Price 4.3 2.4 Delivery speed 2.5 3.8 Craft kit quality 3.7 3.2 Time required for craft 2.3 3.1 Variety of craft types 3.4 3.6 Variety of experience levels required 3.1 3.0 … Low High
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D R AF T McCombs Practice cases
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2 McCombs Practice case DAL Case summary: Shoe Co. Key questions Key components For interviewer/ facilitator only Industry Primary Issue Other topics Situation Complication Answer • Consumer Products / Retail • Declining profit • Same store sales, regression, customer preferences • Small “affordable luxury” women’s shoe retailer; brand is “classic” and “fun” • Industry is growing, competitors are growing • Recent decline in Same Store Sales (SSS) • What is the root cause of the decline in SSS? • How much can the client improve by determining and fixing the problem? • Suggested framework: Unit price, avg. $ per transaction, # of transactions • Quantitative: EBITDA impact (Gross margin impact of increase in design) • The decrease in SSS is driven by a decrease in transactions; customers are coming in to stores, but not buying. Decrease in transactions driven by customer dissatisfaction with product assortment. Increase design spending to improve product assortment.
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3 McCombs Practice case DAL Background: Shoe Co Situation • Small affordable luxury shoe retailer – Brand is classic and fun • Average price point is $300 per pair Complication • Facing a recent decline in Same Store Sales, while SSS of leading competitors’ is growing What is the root cause of the client’s SSS decline?
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4 McCombs Practice case DAL Suggested framework: Drivers of Same Store Sales (SSS) Average # of Transactions (volume) Same Store Sales Average $ per transaction Unit price* * Average price per pair
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5 McCombs Practice case DAL What could cause each driver to decline? • Lowering of prices • Mix shift to lower priced goods • Increased use of promotions • Fewer units purchased per transaction • Less traffic to the store (fewer customers come in the door) • Lower conversion of traffic to sales (lower percent of customers actually purchase) Average # of Transactions (volume) Same Store Sales Average $ per transaction Unit price* * Average price per pair How will you prioritize your approach? Where do you focus first?
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6 McCombs Practice case DAL Focus on the most important drivers Average # of Transactions Same Store Sales Average $ per transaction Unit price* * Average price per pair Interviewee: Interviewer: • Need data about trends in these metrics to see what is changing • Using that data, identify the specific drivers that are causing the change in order to focus the approach • We have analyzed some data supplied by the client
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7 McCombs Practice case DAL Regression of SSS metrics on SSS change -20 -10 0 10 20 30% -10 -5 0 5 10 15% Unit Price change (06-07) SSS change (06-07) R² = 0.04 -20 -10 0 10 20 30% -20 -10 0 10 20% Average $/ transaction change (06-07) SSS change (06-07) R² = 0.04 -20 -10 0 10 20 30% -20 -10 0 10 20 30% Average # of transactions change (06-07) SSS change (06-07) R² = 0.82 Average # of Transactions Average $ per transaction Unit price* * Average price per pair
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8 McCombs Practice case DAL Dig deeper into the most important driver Average # of transactions Interviewee: Interviewer: • There are three main drivers of number of transactions • What is your hypothesis about what is causing the decline? Customers Market dynamics Competitors • We know that this is not a market issue, since the leading competitor is growing • Need to investigate customer trends and preferences • A survey could tell us why consumers are not purchasing • Need to investigate recent competitive actions • Need to understand what they do differently (e.g., marketing, store locations)
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9 McCombs Practice case DAL Develop a hypothesis that you can prove or disprove Hypothesis: Transactions are declining due to a change in customer trends and preferences, not a competitive move Interviewee: • Start by investigating customer trends and preferences to test the hypothesis Average # of transactions Customers Market dynamics Competitors Interviewer: • We have the results from a customer survey
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10 McCombs Practice case DAL Consumer survey results (1 of 3) 0 20 40 60 80 100% Familiarity (spend) Aware of Shoe Co Not aware of Shoe Co Purchase Shoe Co Do not purchase Purchase Reason for not purchasing Store issues Not my style Price too high Product issues Percentage of respondents
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11 McCombs Practice case DAL Consumer survey results (2 of 3) Shoe Co customers 0 20 40 60 80 Percentage of responses (all recent Shoe Co purchasers) Spending change over last three years Decreased Stayed the same Increased Reason for decrease Prices too high Not my style Less income Store dissatisfaction Reduction in product purchases Reason for reduced purchases Missed a key trend Lower quality than I desire Value for money Design does not update My style has changed 100% Design driven (~75%) Quality driven (~25%)
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12 McCombs Practice case DAL Consumer survey results (3 of 3) Affordable luxury shoe consumers 0 20 40 60 80 100% Percentage of responses Familiarity with Shoe Co Not familiar Familiar but don't buy Reasons for not purchasing Product Store Not my style Pricing Product drivers Product specific Design Quality Purchase
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13 McCombs Practice case DAL Shoe Co. has high awareness among consumers, but converts few to buyers 0 20 40 60 80 100% Familiarity (spend) Aware of Shoe Co Not aware of Shoe Co Purchase Shoe Co Do not purchase Purchase Reason for not purchasing Store issues Not my style Price too high Product issues Percentage of respondents ~70% awareness ~20% conversion
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14 McCombs Practice case DAL 30% of consumers who decreased spending did so because of product design reasons 0 20 40 60 80 Percentage of responses (all recent Shoe Co purchasers) Spending change over last three years Decreased Stayed the same Increased Reason for decrease Prices too high Not my style Less income Store dissatisfaction Reduction in product purchases Reason for reduced purchases Missed a key trend Lower quality than I desire Value for money Design does not update My style has changed 100% Design driven (~75%) Quality driven (~25%) ~40% decreased spend due to fewer # of purchases ~30% (75% of 40%) decreased purchases for design reasons
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15 McCombs Practice case DAL For non-customers, product design presents a large hurdle to conversion 0 20 40 60 80 100% Percentage of responses Familiarity with Shoe Co Not familiar Familiar but don't buy Reasons for not purchasing Product Store Not my style Pricing Product drivers Product specific Design Quality Purchase ~40% of those familiar with Shoe Co. do not buy because of product issues The wrong product assortment* is keeping customers away * Assortment is defined as the mix of products available for purchase
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16 McCombs Practice case DAL Revisit your hypothesis and decide how to proceed Hypothesis: Transactions are declining due to a change in customer trends and preferences, not a competitive move Interviewee: Average # of transactions Customers Market dynamics Competitors Interviewer: • Design problems seem to be driving a decrease in transactions • Need to understand what industry standards are for design. Are we under- investing? • We have industry benchmarks
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17 McCombs Practice case DAL Design spending as a percent of sales 0.0 2.0 4.0 6.0 8.0 10.0% Design spending as a % of sales Leading competitor 8.0 Competitor B 7.5 Competitor C 7.2 Shoe Co 6.5 $1,200M $1,100M $900M $800M Sales We are lagging the industry in design spending
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18 McCombs Practice case DAL Synthesize what you learned • The root cause of the decline in Same Store Sales is a decreasing number of transactions • Transactions are decreasing due to customer dissatisfaction with product assortment – The leading competitor is growing SSS, so this is not a market-driven problem – Shoe Co. has high awareness among consumers, but conversion is low • Shoe Co. is under-investing in design versus competitors
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19 McCombs Practice case DAL Make sure you have the information you need to make a recommendation Interviewee: Interviewer: • It appears that Shoe Co. should increase its spending on design to match industry benchmarks • Yes, but we also need to understand the expected impact on profitability before we can make a concrete recommendation • To understand the EBITDA impact, we need to understand: – Required increase in annual design spend – Expected resulting increase in sales and gross margin Interviewee:
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20 McCombs Practice case DAL EBITDA impact calculation Industry benchmark: design as % of sales Current Shoe Co. spend ~8% 6.5% Increase in design spend as % of sales 1.5% Shoe Co. sales x $800 M Required increase in design spend $ 12 M Design spending increase Expected gross margin lift From interview From data slides Expected sales increase from assortment Shoe Co. sales 5% $ 800 M Expected sales lift $ 40 M Gross margin 40% Contribution margin increase $ 16 M “Getting assortment right can be worth between 5-10% in sales lift for the average retailer.” Bain Retail Expert Expected Lift – Increase Spend = + $4M EBITDA
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21 McCombs Practice case DAL Other profitability considerations Interviewee: Interviewer: • It appears that making an investment in design could increase profitability • Yes, but what other quantitative or qualitative questions would you want to consider if you were Shoe Co? • To understand the full impact on profitability we would want to look at the costs and benefits of the investment over time – Ramp-up costs (i.e. hiring designers, expanding facilities) – Payback period – NPV • Some qualitative questions to consider are: – Investing in-house versus outsourcing design – is this a capability that Shoe Co should have internally? – Scale of investment – given Shoe Co’s small size, will this investment based on % of sales be big enough to be meaningful? Is there a minimum dollar threshold above which they must invest to reap benefits? Interviewee:
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22 McCombs Practice case DAL Synthesize what you learned • The root cause of the decline in Same Store Sales is a decreasing number of transactions • Transactions are decreasing due to customer dissatisfaction with product assortment – The leading competitor is growing SSS, so this is not a market-driven problem – Shoe Co. has high awareness among consumers, but conversion to actual purchases is low • Shoe Co. is under-investing in design versus competitors – Shoe Co. invests 6.5% of sales; leading competitor invests 8% • Fixing product assortment could increase sales by 5-10% – Even under conservative assumptions, investing in design to fixing product assortment could have a positive EBITDA impact of $4 M in a steady state environment Key insights
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23 McCombs Practice case DAL Recommend a practical course of action to achieve results • To reverse the trend in falling Same Store Sales, the client should do the following: – Increase spending on design to match industry leader . Increase spending on design from 6.5% to 8% to match spending by the industry leader – Improve assortment to stop losing customers and convert non-buyers > Customers have decreased spending due to dissatisfaction with the products and designs available > While Shoe Co. has high awareness, its low conversion rate is driven by a dissatisfaction with product assortment > Improving assortment can bring a 5-10% increase in sales (steady state) Key recommendations
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24 McCombs Practice case DAL Questions?
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25 McCombs Practice case DAL Contents • Data slides
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26 McCombs Practice case DAL Regression of SSS metrics on SSS change -20 -10 0 10 20 30% -10 -5 0 5 10 15% Unit Price change (06-07) SSS change (06-07) R² = 0.04 -20 -10 0 10 20 30% -20 -10 0 10 20% Average $/ transaction change (06-07) SSS change (06-07) R² = 0.04 -20 -10 0 10 20 30% -20 -10 0 10 20 30% Average # of transactions change (06-07) SSS change (06-07) R² = 0.82 Average # of Transactions Average $ per transaction Unit price*
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27 McCombs Practice case DAL Consumer survey results (1 of 3) 0 20 40 60 80 100% Familiarity (spend) Aware of Shoe Co Not aware of Shoe Co Purchase Shoe Co Do not purchase Purchase Reason for not purchasing Store issues Not my style Price too high Product issues Percentage of respondents
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28 McCombs Practice case DAL Consumer survey results (2 of 3) Shoe Co customers 0 20 40 60 80 Percentage of responses (all recent Shoe Co purchasers) Spending change over last three years Decreased Stayed the same Increased Reason for decrease Prices too high Not my style Less income Store dissatisfaction Reduction in product purchases Reason for reduced purchases Missed a key trend Lower quality than I desire Value for money Design does not update My style has changed 100% Design driven (~75%) Quality driven (~25%)
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29 McCombs Practice case DAL Consumer survey results (3 of 3) Affordable luxury shoe consumers 0 20 40 60 80 100% Percentage of responses Familiarity with Shoe Co Not familiar Familiar but don't buy Reasons for not purchasing Product Store Not my style Pricing Product drivers Product specific Design Quality Purchase
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30 McCombs Practice case DAL Design spending as a percent of sales 0.0 2.0 4.0 6.0 8.0 10.0% Design spending as a % of sales Leading competitor 8.0 Competitor B 7.5 Competitor C 7.2 Shoe Co 6.5 $1,200M $1,100M $900M $800M Sales
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