KCC Case Book 2014

November 21, 2014

Kellogg Case Book – 2014 Edition
§If you have question or concerns please write to Ryan Mann at: rmann2015@[Link]

This book was originally written, edited, and designed by:

Adam J. Louras (Kellogg Class of ‘11)
Ameed Mallick (Kellogg Class of ‘12)
Uri Kalir (Kellogg Class of ‘12)
Peter Manoogian (Kellogg Class of ‘12)
Craig DePriester (Kellogg Class of ‘12)
Mauricio Atri (Kellogg Class of ‘12)
This book was edited in 2014 by KCC

This book is intended for internal use by members of the Kellogg Consulting Club (KCC). Distribution to individuals outside of
the KCC is forbidden without express written consent by KCC.

Copyright 2014 © by the Kellogg Consulting Club. Copyright Act of 1976, no part of this publication may be reproduced or
distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the
publisher.

2
CONTENTS

How to use this book 1

Typical case flow 2
Fit interview tips 3
KCC 2014 cases 4
Industry primers 5
The title page for each case contains details that will inform
case selection
Using  the  case  book  
Overview of case title page

4
3

1 Case  tracker:          Provides  overview  on  case  including  industry,  format,  and  concepts  
   tested  
2 Status  bar:    Includes  ra=ngs  for  quant  intensity  and  structure  (1  =  low,  10  =  highest),  as  well  
   as  industry  logo,  case  format,  and  concepts  tested    
3 Guide  to  interviewer:    Contains  the  overview  of  the  case  and  allows  users  to  determine  
 whether  they  should  give  the  case  based  on  its  aFributes    
4 Fit  ques=ons:          Contains  3  fit  ques=ons  to  begin  the  interview.  ALer  fit,  then  ask  the  case  
 ques=on  
4
The “Clarifying answers” page contains supplemental
information and a suggested guide to the case’s flow

Overview of clarifying answers and case guide page

1 2

1 Clarifying  answers:  Contains  informa=on  that  is  less  crucial  to  the  main  solu=on  path.  This  is  for  
supplementary  informa=on  such  as:  “we  do  not  know  the  compe==ve  dynamics”  
or  “the  market  has  been  growing  at  GDP.”  
   
2 Guide  to  case:      Lays  out  the  ideal  structure  for  the  case  and  includes  hints  on  how  to  walk  through  
the  interview/handouts,  as  well  as  when  to  show  them  to  the  interviewee.    
 
5
The “Key elements to analyze” page contains the analysis of
the key case concepts

Overview of key elements to analyze page

1 Concept  box:    Includes  the  key  ques=on  or  objec=ve  associated  with  a  main  case  concept  
 tested.  The  interviewee  should  naturally  move  to  asking  or  addressing  the  
 informa=on  in  this  box,  but  you  may  need  to  provide  a  liFle  “push”  at  =mes.  
   
2 Notes  to  interviewer:    Contains  addi=onal  informa=on  that  you  may  provide  to  the  interviewee  during  
 an  inves=ga=on  of  the  par=cular  case  concept.  This  informa=on  is  
 CRITICAL  to  the  interviewee  solving  the  case  both  numerically  and  conceptually.  
6
Industry logos

The following logos will be located underneath the quant/structure

scores on the case title page to indicate the industry being covered

Shipping & Media &

Financial Tech &
Transportati Retail Airline Entertainme Other Healthcare
Services Telecom
on nt

Industrial Consumer Travel &

Energy
Goods Products Leisure

CPG

7
Tips for effective pre- and post-case activities
Interviewer (delivering case) Interviewee (receiving case)
• Ask  the  interviewee  if  they  wish  to   • Inform  your  interviewer  if  you  have  
focus  on  specific:     specific  areas  for  improvement  
Before meeting

– Case  formats  /  concepts  

• Send  the  interviewer  a  list  of  cases  you  
– Levels  of  difficulty  
have  already  done  
– Industries  
• Inform  interviewee  which  case  you   • DO  NOT  read  the  case  ahead  of  Fme  or  
plan  to  deliver  to  confirm  they  have   discuss  the  case  contents  with  peers!  
no  prior  knowledge  of  the  case   • Bring  plenty  of  paper  to  take  notes!  
• Spend  at  least  30  minutes  to  review  
the  case  
 
• Provide  detailed  feedback  (both   • Seek  feedback  from  the  interviewer  
posiFve  and  construcFve)  to   on  your  case  performance  
After the case

interviewee  
• Review  the  case  and  log  your  
• Seek  feedback  from  the  interviewee   performance  in  a  “case  tracker”  
on  your  case  delivery    
• Provide  detailed  feedback  (both  
posiFve  and  construcFve)  to  
interviewer  

8
Additional tips for giving an effective case

While  there  is  no  single  “right  way”  to  give  a  case,  here  are  a  few  suggesFons:  
Take  the  interview  seriously;  pretend  that  you  are  a  real  interviewer  
§ While  your  interviewee  may  be  your  friend,  providing  a  formal  atmosphere  will  be  much  
more  valuable  and  provide  a  more  realisFc  interview  experience  
Learn  to  be  comfortable  with  silence  
§ While  silence  may  be  uncomfortable,  resist  the  urge  to  jump  in  with  pointers,  hints,  or  
addiFonal  informaFon  
Solve  the  case  math  on  your  own  beforehand  
§ Not  only  will  you  gain  pracFce  with  the  math  required,  thinking  through  the  approach  
may  help  you  idenFfy  traps  your  interviewee  may  fall  into  
If  you  are  not  familiar  with  the  industry,  spend  a  few  minutes  quickly  
reviewing  of  the  industry  summaries  (found  in  the  back  of  this  deck)  or  
[Link]  
 

9
Case prep scoring: Provide tangible points that "
can be practiced and improved
1.- General feedback Needs Good Strong
improvement

Quantitative: comfort with complex math; shows math and logically lays out data

Qualitative: conveys understanding of big picture takeaways; realistic thinking

Creative: identifies different approaches to solve the problem

Communication: strong listener, openly shares thought process, good body language

2.- Case specific Feedback Needs Good Strong

improvement

Clearly understands and defines the problem/question; breaks problems into

components
Prioritizes analysis; Identifies critical path to the recommendation and most important
issues
Provides a structured and thoughtful approach to solve the problem (e.g. draw issue
tree with critical pieces of analysis)
Summarizes key findings through the solution of the case and translates them into
insights or important takeaways

Pragmatic/ realistic solution that answers the initial question with supporting evidence

Assesses risks and consequences for the recommendation; identifies key next steps to
further prove the solution

10
 Evaluation criteria (1/2)
Case skills and driving the case Communication skills

Problem definition: Clearly understands and defines the Structure: Shares thinking process throughout the case and
problem/ question; summarizes the essence of the issue aligns his communications with the structure of the case

Problem breakdown: Breaks problem into most important

components Focus: Highlights key insights, important findings and critical
issues
Structure: Uses a structured and thoughtful approach to solve
the problem (e.g. draw issue tree with critical pieces of Questions: Ask clear questions related to the case process and
analysis) solution
Prioritization: Identifies critical path to the recommendation
and most important issues/components Engagement: Engages with the interviewer during the solution
of the case
Information: Identifies and addresses key pieces of information
and assumptions needed to solve the problem
Support: Clearly supports any conclusion or important claim
Solution oriented: Formulates hypothesis when needed and with relevant arguments
maintains focus on the recommendation
Business language: Feels comfortable discussing the case with
80-20 approach: Deep dives into identified critical issues to business terminology
develop a recommendation (80% of solution with 20% of
analysis)
Body language: Communicates naturally and uses body
Recommendation: Ends up with a pragmatic/ realistic solution
language to support the communication process
that answers the initial question; supported with the analysis

11
 Evaluation criteria (2/2)
Polish and interpersonal skills Business sense and high level thinking
Creativity: Identifies or uses different approaches to solve the
Self confidence: Shows confidence when solving and attacking problem. Out of the box thinking; uses creative methods and
the case without sounding arrogant arrives at creative solutions

Synthesis: Summarizes key findings through the solution of the

case and translates them into insights or important take-aways
Quantitative skills: Feels comfortable handling complex
calculations and analytics; shows clear calculations and data
Concepts: Clearly understands and uses the key business
framing
concepts to solve the case

“So what” thinking: Clearly addresses and articulates what

Analysis: Deep dives in identified critical issues or components each analysis, conclusion or recommendation means to the
and comes up with a solution for each issue case, solution or the client

Testing: Frequently tests assumptions and conclusions with

reality checks or other quick analysis
Interpersonal skills: Drive a conversation and acts naturally Assessment: Assesses risks and consequences for the
recommendations; identifies key next steps to further prove
the solution
Business sense: Uses common sense and realistic thinking to
Balance: Good balance of quantitative and qualitative analysis get to pragmatic recommendations; has the ability to think
during the solution from different perspectives (e.g. client, competitor, consumer,
etc.)

12
CONTENTS

How to use this book 1

Typical case flow 2
Fit interview tips 3
KCC 2014 cases 4
Industry primers 5
Broad Range of Business Concepts Evaluated

Each case will follow a specific format and cover multiple business concepts

Sample Business Concepts

Quantitative focus Qualitative focus
Accounting Customer strategy
Basic NPV Competitive analysis
Break-even analysis Creativity
Capacity expansion/Contraction Operations
Elasticity Marketing strategy
Investments Organizational changes
Macroeconomics Pricing strategy
Market share Supply/value chain
Market sizing Vertical integration
Microeconomics Brain teaser (rare)

14
Case Topics Vary

The following represent the most common case topics on which a case
interview may be based (ranked in descending order of frequency)
Format Focus
Profit improvement Analyzing causes for recent drop in profits / ways to increase profits
Market entry Analyzing a firm’s opportunity to expand into a new business or segment
Examining the potential purchase / sale of a new or existing
Opportunity assessment
business or installation / abandonment of infrastructure
Increasing sales Identifying ways in which a firm can optimally increase sales
Merger / Acquisition Evaluating whether a firm should merge or purchase another company
Market sizing Determining the size, usually in terms of a firm’s revenue potential, of a market
Industry analysis Evaluating an industry’s structure and/or desirability
Starting a new business Similar to entering a new market; then taking an investment point of view
Growth strategies Determining the optimal ways to grow a company
Developing a new product Assessing a new product offering
Reducing costs Identifying internal or external costs that are out of line
Competitive response Evaluating ways to address a competitor’s action (e.g., new product launch)
Turnarounds Gathering info on why company is failing and then suggesting corrective action

15
A Typical Case Flow (Standard Case)

5-10 20-30
5
min min
min

Intro & Fit Wrap Up/

Case Interview
Interview Q&A

5 -10 min 15 min 5 min

1 2 3 4 5
Structure the Develop Develop
Deep Dive Synthesize
problem Hypothesis Solution

• Summarize the • Develop a • Deep dive into • Refer back to • Summarize

essence of the hypothesis priority areas the initial recommendation
problem problem and for client
• Prioritize • Make
your
• Ask clarifying analyses connections • Lay out risks and
hypothesis
questions between next steps
information • Be creative
• Structure
given
thoughts • Ask ‘so what?’
throughout case

16
Structure the Problem Key Skills Tested:
Structured Thinking, Business
Judgement
1
Develop
Structure the Deep Develop Synthesi-
Hypothe-
problem Dive Solution ze
sis

§ Get the facts right – ask clarifying questions

o Make 100% sure that you understand the objective: e.g. if the objective is to be the
market leader, clarify what this means (highest market share, revenue, profit?)
§ Summarize the essence of the problem
o Do not just repeat all of the facts back to the interviewer
§ Draw out your approach to solving the problem (i.e. framework)
o Try to include at least 2 levels of depth in your framework
o Customize your framework to the case
o Be MECE
§ Walk your interviewer through your framework

Remember: since every case is unique, don’t try to force fit standard frameworks!

17
Develop Hypothesis Key Skills Tested:
Hypothesis Driven, Prioritization

2
Develop
Structure the Deep Develop Synthesi-
Hypothe-
problem Dive Solution ze
sis

§ Use the info provided to form an initial hypothesis

o For example, if the case asks you to determine whether to enter a new
market, take a position (e.g., enter), and list out the questions you would
need to answer in order to validate your hypothesis
§ Use your hypothesis to prioritize your analyses
o What is most important to look into first, second, and third?
§ Engage with the interviewer

18
Deep dive into 1 or 2 areas Key Skills Tested:
Quantitative Skills, Business Judgement

3
Develop
Structure the Deep Develop Synthesi-
Hypothe-
problem Dive Solution ze
sis

§ Treat your notes as “slides”

o e.g. separate pages for revenue analysis, cost analysis, profit analysis
§ Link various data points together
o Look at the case holistically and tie together information provided at various
points in the case
§ Structure quantitative data “Excel-style” / in tables
o Before doing any calculations, write out your approach to solving the math
problem (e.g., write the formula in words)
o Turn the page around and walk the interviewer through your math structure
(similar to how you would walk them through your framework)
o Don’t start calculating numbers until you’ve received your interviewer’s buy-in
that your approach will lead you to the right solution

19
Develop Solution Key Skills Tested:
Creativity, Confidence

4
Develop
Structure the Deep Develop Synthesi-
Hypothe-
problem Dive Solution ze
sis

§ Be sure to ask the ‘so what’ questions

o Don’t just state the obvious; explain what each
conclusion means for your client
§ Develop creative solutions
o Pressure test your solution
o If you think the goal is not achievable then
suggest alternatives A good solution is:
§ Always consider implementation implications, 1. Best among
risks and mitigation alternatives
2. Practical
§ Utilize your analysis to make a powerful
3. Based on facts
statement – take a stand, don’t hesitate
§ Always end your case with a succinct
recommendation

20
Synthesize Key Skills Tested:
Ability to Synthesize

5
Develop
Structure the Deep Develop Synthesi-
Hypothe-
problem Dive Solution ze
sis

§ Take a moment to prepare your thoughts

o But be prepared for the “elevator test”(interviewer doesn’t allow you time to
prepare your thoughts)
§ Provide your recommend approach, backed up by facts
§ List out risks that the client should consider when evaluating your
recommendation
§ Recommend next steps for analysis

Tip: Highlight or circle main points as you go through the analysis to facilitate
a concise summary

21
CONTENTS

How to use this book 1

Typical case flow 2
Fit interview tips 3
KCC 2014 cases 4
Industry primers 5
What firms are looking for in a fit interview

§ Gravitas/Confidence  –  Are  you  poised  and  professional?  Can  I  trust  you  in  front  
of  a  client?  
§ Eloquence  –  Can  you  speak  concisely  but  accurately  about  complex  issues?  Do  
you  communicate  with  impact?  
§ Amicability  –  Are  you  friendly  and  easy  to  talk  to?  Are  you  a  good  fit  for  our  
culture?  
§ Engagement  –  Are  you  excited  to  be  here?  Do  you  have  posiFve  energy  and  
presence?  
§ Leadership  ability  –  Can  you  lead  a  team  through  obstacles?  What  kind  of  
impact  can  you  make?  
§ Drive  –  Do  you  take  iniFaFve?  Do  you  persist  to  achieve  your  goals?  What  kind  
of  goals  do  you  have?  
§ Genuine  Interest  –  Do  you  really  know  what  this  job  entails?  Does  your  story  
make  sense?  Do  you  really  know  how  one  firm  is  different  from  another?  

23
How to prepare for fit interviews

• Know  your  resume  inside  and  out  

§ Your  resume  is  free  game  –  ALL  parts  of  it  
§ Be  prepared  to  answer  detailed  quesFons  about  any  item  on  it  
§ Have  a  couple  of  favorites  –  you  may  be  given  free  reign  to  talk  about  one  or  
more  specific  bullets  
• Know  your  personal  stories  inside  and  out  
§ Prepare  2  stories  for  each  a_ribute  (see  next  slide)  
§ Memorize  broader  content,  not  a  word-­‐for-­‐word  story  
§ Use  the  STAR-­‐L  (SituaFon,  Task,  AcFon,  Result,  Lesson)  framework  
§ Emphasize  the  decisions  you  made  and  the  impact  you  personally  had  
§ The  be_er  you  tell  a  story,  the  more  memorable  you  will  be  
• Review  lists  of  typical  fit  ques=ons  and  prepare  answers  
• Take  advantage  of  video-­‐taped  CMC  mock  interviews  

24
How to define your stories (illustrative)
Attributes STAR-L

Overcoming
Team Player
Leadership

Intellectual

adversity
Curiosity
Initiative
Drive/
Situation Task Action Results Learning

Started a As a retail I decided to 1. I created a We had 81 I learned how to

banker, I start a non- mission people in the successfully raise
non-profit noticed that profit that statement and first event, 200 funds and
many teaches business plan in the 2nd, and effectively
customers did financial 2. I recruited over 500 in the motivate

ü ü not understand
basic personal
education to
underprivileged
volunteers and
staff
final event.
From these
volunteers/staff. I
also got very
finance adults and 3. I promoted students, comfortable
teens. the non-profit roughly 30% presenting in
and found a went on to buy front of large
venue for a home audiences
seminars.

Built a I owned a Customers 1. I openly While we I learned that I

company were outraged discussed the experienced an must always
value- where the and I had to actions with all initial dip in develop a value-
based overly not only my employees sales, annual based culture
aggressive reprimand and sales staff. sales when building a
culture in
my ü ü sales team
was making
multiple sales
people, but
2. I led an
initiative to
increased by
20% and
team

company promises we recreate create customer

could not keep positive customer value satisfaction
to customers momentum code metrics were
higher than
Strong fit stories are clear, show individual impact, and highlight key ever
learnings
25
Your Stories Template
Attributes STAR-L

1. Situation Task Action Results Learning

2.

3.

4.

5.
1. Story

2. Story

3. etc.

Research your target firms’ most emphasized attributes and fill in purple cells.
Prepare 2 stories for each attribute. Each story should highlight 1 or 2
attributes

26
General tips for fit interviews
§ Use  the  pronoun  “I”…not  “We”  
§ Don’t  be  modest,  now  is  your  Fme  to  highlight  your  
accomplishments  
§ Be  authenFc  
§ Be  energeFc  and  enthusiasFc  
§ Be  specific  and  emphasize  your  decisions,  not  the  context  
§ Make  good  eye  contact  and  watch  your  posture  and  body  language  
(fit  interviews  are  your  first  impression!)  
§ Know  why  you  really  want  to  do  consulFng  
§ PracFce,  pracFce,  pracFce  
 

27
Most frequently asked fit interview questions

§ Idle  chit  chat  (What’s  your  favorite  class  at  Kellogg?  Why?)  
§ Tell  me  about  yourself…  
§ Why  are  you  interested  in  consulFng?  
§ Why  are  you  interested  in  working  at  this  firm?  
§ Why  are  you  interested  in  this  office?  
§ Can  you  tell  me  about  [any  bullet]  on  your  resume?  
§ Tell  me  about  a  Fme  you  exhibited  leadership  skills/influenced  a  
team/worked  through  adversity/failed…  
§ What  makes  you  unique?  
§ Do  you  have  any  quesFons  for  me?  

28
Sometimes asked: Goals, Career Questions

§ Where  do  you  see  yourself  in  5/10/20  years?  

§ Why  did  you  pick  your  prior  job?  
§ What  experiences/skills  do  you  feel  are  transferrable  to  consulFng?  
§ What  kind  of  work  are  you  best  at?  
§ Tell  me  about  your  most  significant  project/experience  at  your  last  
job  
§ What  is  your  most  significant  career  accomplishment  to  date?  
§ What  do  you  think  consultants  do?  
§ What  moFvates  you?  
§ What  would  you  change  if  you  could  start  your  career  over?  

29
Sometimes asked: Team Issue Questions
§ Give  me  a  specific  example  that  shows  you  are  a  good  team  
player…  
§ How  do  you  manage  conflicts  in  teams?  Give  me  an  example…  
§ Tell  me  about  a  Fme  you  influenced  a  group…  
§ What  posiFve  and  negaFve  things  would  your  teammates  and  
colleagues  have  to  say  about  you?  
§ What  was  the  best  construcFve  criFcism  you  received?  How  did  
you  respond?    
§ What  types  of  roles  have  you  played  in  teams?  
§ How  do  you  deal  with  a  difficult  superior?    
§ What  was  your  greatest  team  accomplishment?  What  role  did  you  
have  on  the  outcome?  

30
Sometimes asked: Other Personal Questions

§ How  would  you  friends,  family  and  colleagues  describe  you?  

§ Why  did  you  choose  Kellogg?  
§ What  has  been  your  favorite  Kellogg  class?  Why?  
§ What  has  been  your  most  significant  experience  so  far  at  Kellogg?  
§ What  are  you  passionate  about  outside  of  work?  
§ What  is  your  GPA?  
§ What  is  your  GMAT?  
§ How  are  your  quanFtaFve  skills?  

31
CONTENTS

How to use this book 1

Typical case flow 2
Fit interview tips 3
KCC 2014 cases 4
Industry primers 5
Table of Contents
Kellogg Cases 2004-2010 2011-2012 Case Competition Winners
1. GoNet 18. DigiBooks
2. Maine Apples 19. After School Programming
3. Orrington Office Supplies 20. Dark Sky
4. Syzygy Supercomputers
21. Health Coaches
5. Winter Olympics Bidding
22. Wine and Co
6. Rotisserie Ranch
23. Healthy Foods Co
7. Tarrant Fixtures
8. Vindaloo Corporation 24. High Q Plastics
9. Zephyr Beverages 25. Salty Sole Shoe Co
10. A+Airline Co. 26. Plastic World
11. Bell Computer 27. Zoo Co
12. Shermer Pharma 28. Money Bank Call Center
13. Hospitality Co. 29. Thompson Healthcare
14. Rock Energy
15. Orange Retailer
16. Vitality Insurance
17. Chic Cosmetology

33
Case 1: GoNet Internet Service Provider
By: Adam Borchert and Joep Knijn (Tuck Class of ‘04), Edited By: Mauricio Atri (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client,  GoNet,  is  a  US-­‐based  Internet  Service  Provider  (ISP)  that  is  considering  entering  the  European  market.  They  
are  currently  the  dominant  player  in  the  US  with  two  revenue  streams:  a  subscripFon  access  fee  and  by  taking  a   8
percentage  of  all  e-­‐commerce  transacFons  from  subscribers.     Quants.
§ Examining  the  European  market,  GoNet  has  found  that  the  market  is  highly  fragmented  and  ripe  for  entry.  You  are  going  
into  a  meeFng  with  the  CEO  and  have  been  asked  to  perform  some  quick  “back  of  the  envelope”  calculaFons  to   4
determine  the  potenFal  profitability  of  entering  Europe.   Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

Market
entry,
§ Industry:    Technology   Spend  first  15  min  on  fit   § This  is  a  very  quanFtaFve  case  that  requires  the   market
interviewee  to  run  the  numbers  on  European  
§ Level  of  Difficulty:   § How  compeFFve  are   share
profitability.    
Medium   you?  
§ The  candidate  will  need  to  ask  for  addiFonal  informaFon  
§ Case  format:    Market   § What  do  you  believe  is  
to  solve  the  problem.  Aner  geong  the  iniFal  calculaFons  
entry   your  greatest  strength?  
right,  there  will  be  a  number  of  market  changes  that  the  
§ Concepts  being  tested:   § What  sorts  of  things   interviewee  will  have  to  react  to.  
irritate  you  the  most  or  
- Market  share   § Aner  the  quanFtaFve  porFon  is  completed,  there  are  
get  you  down?  
- Profitability   some  open-­‐ended  quesFons  for  the  candidate  to  answer.  
 
 
   
34
Clarifying answers and case guide

Clarifying  answers  to  provide   Guide  to  case  

(Provide  this  informaFon  on  request)   Part  1  –  QuanFtaFve  discussion  

CompeFFve  dynamics   - This  should  be  the  meat  of  the  case  and  should  be  completed  before  
discussing  any  general  or  qualitaFve  responses.  
- Highly  fragmented  industry  
 
- No  informaFon  about  market  leaders  or  
trends   Part  2  –  QualitaFve  discussion  
  - Aner  navigaFng  the  math,  ask  the  candidate  the  following  quesFons:  
European  industry  overview   - 1)  How  could  we  reduce  the  fixed  costs  of  investment?  
- GoNet  plans  to  capture  a  base  of  10   - 2)  Would  there  be  any  reason  to  conFnue  with  the  investment  even  if  
million  subscribers   it  looks  like  it  will  lose  money?  
- SubscripFons  will  cost  $20/month   - 3)  Are  there  are  any  other  risks/benefits  that  GoNet  should  consider?  
- The  average  GoNet  subscriber   - 4)  How  would  you  sum  up  the  situaFon  and  what  is  your  
purchases  $1,800  of  goods  on  the   recommendaFon?  
internet  annually  
- GoNet  receives  3%  commission  
- Fixed  costs  are  $1  billion  annually  
- Variable  costs  are  $110/subscriber  
annually  

35
Math questions (1 of 2)
Math  ques=on  

1)  Please  determine  the  annual  net  income  (before  taxes)  in  Europe,  given  the  current  revenue  model  and  set  of  assumpFons.  What  is  
the  annual  gross  mark-­‐up,  in  percentage?  
2)  GoNet  just  found  out  that  a  new  entrant  is  charging  $10/month  and  capturing  market  share.  Can  we  lower  our  fee  to  $10/month?  

Math  solu=on   Math  informa=on  

1)  Revenues  each  year  will  be  $2.4B  for  subscripFon  (10  million  subscribers  X  $20/month  X  12  months)   • 10  million  subscribers  
and  commissions  will  be  $540M  (10  million  subscribes  X  $1,800/year  X  3%  commission)  for  a  total  of   • $20  month  subscripFon  
$2.94B.     fee  
• Fixed  costs  are  $1B  and  variable  costs  are  $1.1B  (10  million  subscribers  X  $110/year)  for  a  total  of   • $1,800/year  of  online  
$2.1B  each  year.  Profits  are  $840M  and  the  annual  profit  margin  is  ~29%  ($840M/$2.94B)   spending  @  3%  
2)  Annual  revenues  drop  to  $1.2B  (10  million  subscribers  X  $10/month  X  12  months)  from   commission  
subscripFons,  while  commissions  remain  constant  at  $540M.  Total  revenues  are  $1.74B.  Because  total   • Fixed  costs:  $1  billion  
costs  remain  $2.1B,  we  lose  $0.36B  by  halving  subscripFon  charges,  making  the  answer  “No.”    
• Variable  cost:  $110/year  
• At  this  point,  ask  the  interviewee  what  the  elasFcity  of  demand  is  in  this  market  and  the   per  subscriber  
implicaFons  for  GoNet.  The  market  should  be  highly  elasFc,  meaning  that  GoNet  will  not  win  over  
enough  subscribers  at  $20/month.  

36
Math questions (2 of 2)
Math  ques=on  

3)  With  high  market  elasFcity,  GoNet  will  not  be  able  to  charge  more  than  $10/month.  How  much  would  each  subscriber  have  to  buy  
on  the  Internet  to  keep  profits  at  the  same  level  as  $20/month  subscripFon  fees?  
4)  How  much  would  each  subscriber  have  to  buy  on  the  Internet  to  enable  us  to  break  even?  
5)  Given  that  we  cannot  charge  more  or  realisFcally  increase  shopping  significantly,  how  many  subscribers  would  we  need  in  order  to  
maintain  the  same  level  of  expected  profits  (at  $10/month)?  

Math  solu=on  

3)  To  keep  profits  at  $840B,  we  know  that  costs  remain  at  $2.1B  so  revenue  will  need  to  be  $2.94B.  SubscripFon  revenue  will  be  $1.2B,  
so  commissions  need  to  be  $1.74B.  There  are  10  million  subscribers,  so  each  subscriber  need  to  bring  in  $174/year  of  commission.  At  
3%,  they  will  need  to  buy  $5,800/year  in  goods  ($174/3%).    
• Ask  the  candidate  if  this  realisFc.  The  answer  should  be  “No”.  
4)  To  breakeven,  we  will  need  commission  to  be  $900M  over  10  million  subscribers.  That  is  $90/year  per  subscriber  ($900M/10M),  
which  means  $3,000/year  in  goods  purchased  online  ($90/3%).  The  candidate  should  idenFfy  that  this  is  also  unrealisFc,  represenFng  
more  than  a  50%  increase  from  last  year.    
5)  To  find  the  answer  here,  we  need  to  find  incremental  revenue  per  subscriber.  Each  subscriber  brings  in  $174/year  ($10/month  X  12  
months  +  $1800/year  X  3%)  at  a  cost  of  $110/year  for  a  profit  of  $64/year.  These  profits  must  cover  the  fixed  costs  of  $1B/year,  so  we  
must  bring  in  15.625  million  customers  ($1B/$64)  
• Note:  many  people  forget  the  variable  costs  during  the  compleFon  of  this  case.  

37
Solution and recommendations

Solu=on  &  Recommenda=ons  

1)  Some  potenFal  ways  (not  exhausFve)  to  reduce  fixed  cost:  outsourcing  capacity,  leasing  networks,  working  in  specific  
geographies,  etc.  
2)  GoNet  may  sFll  be  interested  in  this  move  as  a  way  to  break  into  Internet  retailing  and  expanding  its  subscriber  base.  Based  on  
the  math  though,  this  should  not  be  an  a_racFve  opFon  long-­‐term  either.  
3)  Very  open  ended  and  reliant  on  candidate’s  creaFvity.  
4)  This  is  very  open-­‐ended  and  should  be  evaluated  based  on  the  candidate’s  argument,  not  answer.  Based  on  iniFal  esFmates,  this  
is  a  very  a_racFve  market  to  enter,  but  with  price  pressures  and  high  elasFcity  the  market  is  far  less  a_racFve.  If  we  are  to  
undertake  this  iniFaFve,  GoNet  needs  to  find  ways  to  convert  a  much  higher  number  of  customers  or  differenFate  its  product,  
which  both  require  market  research.  There  is  also  potenFal  to  reduce  costs  or  establish  this  foothold  as  a  loss  leader,  but  these  
require  strong  arguments  from  the  candidate.    

Bonus/Guide  to  an  Excellent  Case  

§ This  case  tests  two  things  –  the  interviewee’s  comfort  with  numbers  and  ambiguity.  An  excellent  case  interview  will  result  in  an  
intuiFve  grasp  on  what  is  being  asked  quickly  and  solid  execuFon  on  the  quanFtaFve  porFon  of  the  case.  
§ UlFmately,  the  best  interviewees  will  make  a  very  strong  argument  using  the  facts  provided  and  support  the  decision  to  invest/
not  invest  with  a  strong  business  sense  about  the  costs  and  implicaFons  of  the  project.    
§ CreaFve  soluFons  beyond  those  listed  are  possible  and  encouraged,  though  should  be  done  within  the  framework  of  the  
informaFon  available.  

38
Case 2: Maine Apples
By: Adam Borchert and Joep Knijn (Tuck Class of ‘04), Edited By: Peter Manoogian (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client  is  a  Korean  conglomerate  named  Danut  that  has  acquired  a  small  Boston-­‐based  biotechnology  firm  
§ The  biotech  firm  acquired  has  developed  a  chemical  that  helps  control  the  ripening  of  produce.  Aner  tesFng,  this  
chemical  appears  to  work  especially  well  with  apples:  it  allows  apple  orchards  to  harvest  earlier  and  it  improves  the  
overall  quality  of  the  harvest.   8
Quants.
§ Danut  tradiFonally  uses  a  test  market  to  determine  commercializaFon.  Given  proximity  to  Boston  and  average  apple  
yields,  Maine  has  been  chosen.    
6
§ Danut  would  like  to  know  if  they  should  a_empt  to  commercialize  this  chemical.    
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer   CPG

§ Industry:    Consumer   Spend  first  15  min  on  fit   § Aner  hearing  the  prompt,  the  interviewee  should  be  able  
Goods   to  develop  a  variant  of  the  following  quesFon:  
§ Tell  me  about  a  recent   Mkt. Size
Is  the  market  size  large  enough  and  the  es5mated   Price Stgy
§ Level  of  Difficulty:   posiFve  team  experience  
profitability  high  enough  for  Danut  to  a;empt  to   Invest.
Medium   § How  would  you  describe   commercialize  this  chemical?  
§ Case  format:   your  learning  ability?  In   § Key  case  steps:  
Developing  a  new   what  kinds  of  situaFons   1. Confirm  market  a_racFveness  (size)    
product   are  you  fast  or  slow  to   2. Evaluate  orchard  revenue  and  cost  structures  
learn?   3. Project  farmers  margins  and  pricing  for  Danut    
§ Concepts  being  tested:  
§ Describe  the  last  Fme   4. IdenFfy  qualitaFve  issues  (Risks)  to  consider  
- Market  sizing    
you  “put  your  foot  in  
- Investment   your  mouth.”    
- Pricing  Strategy  

39
Clarifying answers and case guide
Clarifying  answers  to  provide   Guide  to  case  /  Guide  to  handouts  

Product  Benefits   1. Calculate  Market  Size  (determine  aFrac=veness)    

― Reduced  costs  through  earlier   ― Share  market  size  informaFon  with  interviewee  aner  probing  
harvesFng   quesFons  are  received    
― Improved  apple  yields   ― Is  the  market  large  enough  to  conFnue?    
― Improved  juice  yields  (with  higher    
quality  apples)    
  2.  Evaluate  orchard  profitability  –  Share  product  benefit  details  –  i.e.  
Client  CharacterisFcs   10%  increase  (from  calculaFon  page)    
― Only  concerned  about  a  “test-­‐
market”  in  the  state  of  Maine   ― How  much  incremental  profit  does  our  product  create  for  an  
apple  orchard  owner?        
― Next,  the  interviewee  should  determine  the  profit  margins  for  
CompeFFve  Dynamics  
― No  other  compeFFve  products  on   the  farmers  given  the  costs  of  purchasing  the  product.  
AddiFonally  the  interviewee  should  determine  a  reasonable  price  
the  market  currently  
for  the  product  
Local  industry  CharacterisFcs/Economics    
― Growing  at  the  rate  of  GDP  
3.  Risks  &  Other  Considera=ons  –  Guide  the  interviewee  to  consider  
qualitaFve  risks  and  issues  before  moving  forward  with  
commercializaFon  

40
Key elements to analyze
Market  sizing   Cost  savings   Revenue  increase  

§ How  big  is  the  apple  market  in  Maine?     § What  are  the  cost  savings  from  using   § How  much  addiFonal  revenue  will  
§ Does  this  seem  potenFally  large   the  chemical?   farmers  be  able  to  generate?    
enough  to  conFnue  invesFgaFng  this   § The  chemical  allows  the  farmer  to   § What  is  the  total  profitability  increase  
product?   harvest  10  days  sooner   (including  cost  savings)?  

Note  to  interviewer   Notes  to  interviewer   Qualita=ve  Assessment  

§ When  asked,  provide  the  following:   § When  asked  to  quanFfy  the   § When  asked  to  quanFfy  addiFonal  
- Maine  has  200  orchards   improvements,  provide  the  following:   revenue,  provide  the  following:  
- Avg.  annual  orchard  revenue  is   - It  costs  $1.5K/night  to  maintain   - Our  client’s  product  improves  the  
$30K/acre   crops  for  100  acre  orchard   consistency  of  red  apples  and  
- Avg.  orchard  has  100  acres  of  land   - With  the  chemical,  farmers  are  able   improves  the  yield  by  10%  
- Only  one  apple  harvest  per  year   to  harvest  crop  10  days  sooner   - The  sweetness  factor  is  esFmated  to  
    improve  the  juice  yield  by  5%  
§ Interviewee  should  calculate  the   § Interviewee  should  calculate  cost   - 25%  of  revenue  comes  from  whole  
market  size  based  on  info  provided:   savings  per  year  using  this   apple  sales,  75%  from  juice  sales  
($30K/acre  x  200  orchards  x  100   informaFon:   § Improved  yield:  ($30K/acre  x  25%  x  
acres/orchard  =  $600M)   § ($1.5K/day  x  10  days  /  100   10%  =  $750/acre/  year)  
  acres  =  $150/acre/year)   § Improved  sweetness:  ($30K/acre  x  
§ This  is  a  significant  market  and   75%  x  5%  =  $1,125/acre/year)  
warrants  further  invesFgaFon   § Total  improvement  (with  cost  
reducFon)  =  $2,025/acre/year  

41
Key elements to analyze (cont.)

Product  Profitability  

§ If  our  product  costs  $100K  per  200  acre  farm,  what  will  the  farmer’s  profit  margin  be  if  they  buy  
it  at  cost?  
§ What  should  our  client  sell  the  product  for?  Is  a  50%  margin  realisFc?  
 

Note  to  interviewer  

§ Farmer’s  incremental  revenue/cost  savings  =  $2,025/acre  

§ Product  costs  =  $100K/200  acres  =  $500/acre    
§ Profit  margin  =  ($2025-­‐$500)/$2025=  75%    
§ The  interviewee  should  note  that  this  is  an  extremely  high  profit  margin  for  the  farmer  and  
realize  that  there  is  a  significant  opportunity  for  profits  with  this  product.  
- How  much  of  this  benefit  can  we  capture  in  our  pricing?  
- Interviewee  should  provide  a  percentage  between  25%  and  50%.  Anything  higher  than  50%  
should  be  quesFoned  due  to  the  novelty  of  the  product  and  resulFng  lack  of  social  proof.  
§ A  50%  profit  margin  for  our  client  would  also  realize  a  50%  profit  margin  for  farmers.  This  is  
absolutely  a  realisFc  price  to  set,  if  not  a  li_le  low.  
- Given  the  costs  provided,  will  we  make  a  profit?  Yes  
- Interviewee  should  calculate  profit:  ($100,000  /  200  acres  =  $500/acre).  Assuming  $1,000  
price  per  acre,  gross  margin  will  be  50%.  [($1,000  -­‐  $500)  /  $1,000]  

42
Solution and recommendations
Solu=on  &  Recommenda=ons  

§ Overall,  our  client  should  commercialize  this  chemical  and  price  it  at  approximately  $1,000  per  acre  to  make  a  50%  
margin.    
§ Ask  the  interviewee  if  there  are  other  non-­‐financial  risks/benefits  that  our  client  should  consider.  
§ A  potenFal  answer  would  note  that  the  client  should  consider  several  qualitaFve  issues:  
— DifferenFaFon:  What  is  our  posiFoning?    
— Environmental  issues:  Is  there  a  risk  of  backlash  and/or  boyco_  from  the  general  public?  Could  the  U.S.  
government  a_empt  to  regulate  our  product?  
— OperaFonal  reality  check:  Does  the  company  have  the  resources  to  do  this?  
— PatenFng:  Is  the  product  already  patented?  If  yes,  then  when  does  it  expire?  If  no,  then  is  it  possible  to  patent?  
If  not,  then  can  we  patent  the  manufacturing  process?  
—  RepresentaFveness  of  test  market:  Does  it  cost  less  to  cover  apples  in  other  states?  
— Strategic  fit:  Is  this  opportunity  too  small  relaFve  to  the  size  of  the  client?  

Bonus/Guide  to  an  Excellent  Case  

§ Excellent  interviewees  need  to  address  value-­‐based  pricing:  the  need  to  quanFfy  added  profits  that  our  client’s  
product  will  make  for  its  clients  and  how  much  of  that  money  our  client  can  capture.  
§ AddiFonally,  a  strong  interviewee  will  share  several  qualitaFve  issues  listed  above  to  supplement  the  
recommendaFon  to  enter  the  market.  

43
Case 3: Orrington Office Supplies (OOS)
By: Andy Grieve (Kellogg Class of ‘01), Edited By: Peter Manoogian (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client,  OOS  is  a  leading  manufacturer  of  office  products  in  1992,  with  sales  of  $275M  in  1991.  They  have  strong  
brands,  invest  heavily  in  markeFng  /  adverFsing,  and  have  grown  through  prod.  line  extensions  and  four  key  acquisiFons  
§ OOS  is  organized  into  5  autonomous  divisions,  but  shares  manufacturing  and  markeFng  funcFons.  Shared  costs  (45%  of   6
total)  are  allocated  on  a  %  of  sales  method.  There  are  three  plants  running  at  a  current  capacity  uFlizaFon  is  50%   Quants.
§ Analysts  predict  OOS  is  a  potenFal  acquisiFon  target  given  its  strong  balance  sheet  but  weakening  earnings.  They  are  
7
publicly  traded  and  have  li_le  long-­‐term  debt.  As  a  potenFal  investor,  how  would  you  improve  its  profitability.  
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer   CPG

§ Industry:    Consumer   Spend  first  15  min  on  fit   § This  case  combines  public  math  with  key  qualitaFve  
Products   insights.  At  its  core,  this  is  a  case  about  rapidly  declining  
§ Name  a  Fme  when  you   Profit Imp.
profitability  and  finding  ways  (i.e.  plant  consolidaFon)  as  
§ Level  of  Difficulty:   have  caved  under   Cap. Exp.
a  way  to  improve  its  future  performance.    
Medium/Hard   pressure.  How  did  you  
§ The  interviewee  should  recognize  that  this  is  a  
recover?  
§ Case  format:  Improving   performance  improvement  case  and  will  look  for  ways  to  
profitability   § Describe  a  Fme  you  have   improve  profitability.  They  will  have  to  use  the  
disagreed  with  your   informaFon  provided  up  front  to  determine  that  capacity  
§ Concepts  being  tested:  
supervisor.   contracFon  is  the  prime  means  to  improve  profitability.  
- Capacity   § Because  there  are  many  potenFal  avenues  to  explore,  
§ How  do  you  keep  
expansion  / the  interviewer  may  need  to  nudge  along  the  
abreast  of  current  
contracFon   interviewee.  
events?    

44
Clarifying answers and case guide
Clarifying  answers  to  provide   Guide  to  case  /  Guide  to  handouts  

Industry  trends   A  sample  case  structure  would  include  the  following:  

- U.S.  Office  supplies  market  grew  at  5%   1) ExaminaFon  of  OOS’s  recent  performance  to  deep-­‐dive  declining  
CAGR  historically.  In  1990  and  1991,  the   profits.  
market  declined  at  5%/yr.   2) Discussion  of  potenFal  for  potenFal  for  plant  consolidaFon.  
- Superstore  channel  is  becoming  
3) A  profitability  analysis  of  plant  consolidaFon.  
increasingly  criFcal  
- Gained  10  share  pts  in  past  2  yrs    
- Typically  discount  products  30%   Exhibit  1–  Hand  out  aner  interviewee  asks  about  profitability  
to  small  retailers/dealers    
- Superstores  are  aggressively   Exhibit  2–  Hand  out  aner  interviewee  concludes  that  plant  consolidaFon  
subsFtuFng  private  label  products  for   is  a  worthy  area  for  a  “deep-­‐dive.”  This  should  be  evident  from  the  
tradiFonal  brand  names   case  introducFon,  but  provide  hints  if  necessary.  
 
Client  CharacterisFcs  
- Broader  product  line  than  compeFtors   Exhibit  3–  Following  the  discussion  of  plant  closures,  the  interviewee  
(12.5K  SKUs  vs.  4-­‐5K  for  compeFtors)   should  ask  about  the  cost  structures  about  the  various  plants.  
- DistribuFon:  75%  wholesalers,  15%   - If  interviewee  asks  about  revenues,  gently  suggest  to  calculate  on  a  
superstores,  10%  end  customers   per  SKU  basis  (e.g.,  total  sales  /  total  SKUs  =  $22K  /  SKU).  
- Most  profitable  product  is  a  high-­‐end    
branded  stapler  
- Staples,  Inc.  is  OOS’s  largest  customer  

45
Key elements to analyze
Profitability   Capacity  u=liza=on   Plant  closures  

§ Using  Exhibit  1,  have  a  discussion   § Using  Exhibit  2,  qualitaFvely  discuss   § Using  Exhibit  3,  crunch  the  
about  why  the  slopes  for  sales  and   the  potenFal  opFons  for  plant   numbers  on  the  profitability  of  a  
profits  differ  as  Fme  elapses   consolidaFon.   possible  plant  closure?  

Notes  to  interviewer   Notes  to  interviewer   Notes  to  interviewer  

§ Exhibit  1  -­‐  interviewee  should  not   § Interviewee  should  recognize  the   § They  should  have  idenFfied  that  
only  be  able  to  interpret  the  data  on   Chihuahua  plant  is  close  to  having   the  Chihuahua  plant  is  the  most  
this  slide,  but  also  come  up  with  two   capacity  to  produce  OOS’s  12.5K   feasible,  but  there  are  some  key  
insights:     SKUs.  Either  OOS  can  close  that   consideraFons.  
plant  and  move  all  producFon  to  
 1)  the  fact  profits  have  been  declining   § Key  ques=ons  to  ask:  
the  US,  or  it  could  close  the  US  
more  steeply  than  sales  reflects  the  
plants,  disconFnue  500  SKUs  and      How  would  this  change  revenues?  
fixed-­‐cost  nature  of  this  business,  and    
move  producFon  to  Chihuahua.   (currently  $275M  /  year)  
 2)  the  reason  that  sales  did  not  grow  
§ Insigh€ul  interviewees  will  note    How  would  this  change  producFon  
at  a  faster  clip  than  profitability  
that  Chihuahua  is  the  most  feasible   costs?  What  are  they  now?  
during  the  1980s  likely  reflects  a  
strategy,  but  will  ask  to  see  fixed    How  would  this  change  pre-­‐tax  
strategy  to  grow  through  acquisiFons,  
and  variable  cost  data;  if  so,  then   profits  (currently  $25M  /year?)  
which  prevented  OOS  from  seeing  the  
produce  Exhibit  3.    
gains  through  economies  of  scale  that  
one  would  normally  expect  in  a  
business  such  as  this  

46
Calculations
Math  ques=ons  

1. How  would  consolidaFng  to  Chihuahua  change  revenues?  (currently  $275M  /  year)  
2. How  would  this  change  producFon  costs?  What  are  they  now?  
3. How  would  this  change  pre-­‐tax  profits?  (currently  $25M  /year)  

Calcula=ons  

1. Revenues:  Each  SKU  earns  annual  revenues  of  $22K  ($275M  divided  by  12,500  SKUs)  therefore,  eliminaFng  500  
SKUs  will  decrease  annual  revenue  by  $11M,  or  4%  
 
2.  Prod.  costs:  Each  plant  currently  has  the  following  annual  costs,  totaling  to  $136M  
   Chihuahua:  $20M  +  ($4K  *  4.5K  SKUs)  =  $20M  +  $18M  =  $38.0M  
   Michigan:    $15M  +  ($7.9K  *  5K  SKUs)  =  $15M  +  $39.5M  =  $54.5M  
   New  Jersey:  $18M  +  ($8.5K  *  3K  SKUs)  =  $18M  +  $25.5M  =  $43.5M  
 ConsolidaFng  revenues  to  Chihuahua  will  reduce  annual  costs  by  50%  to:  
Chihuahua:  $20M  +  ($4K  *  12K  SKUs)  =  $20M  +  $48M  =  $68.0M  
 
3.  Profits:    We  have  reduced  costs  by  $68M  and  lowered  revenues  by  $11M,  thus  increasing  profits  by  $57M,  to  a  total  
of  $82M,  which  more  than  triples  them.    

47
Solution and recommendations
Solu=on  &  Recommenda=ons  

§ Overall,  our  client  should  eliminate  500  SKUs  and  consolidate  all  producFon  to  the  Chihuahua  plant  to  raise  annual  
profits  from  $25M  to  $82M.    
§ The  client  should  also  consider  several  qualitaFve  issues:  
— ImplementaFon  Timeframe:  Will  not  be  done  tomorrow.  
— RelaFonships  with  Union:  If  organized  labor  is  part  of  our  producFon  employee  pool  in  the  two  plants  that  we  
are  going  to  close,  we  will  need  to  address  that  situaFon.  
— Changes  in  DistribuFon  and  Warehousing:  We  will  need  a  carefully-­‐developed  transiFon  plan.  
— Purchasing:  We  will  need  to  transiFon  to  a  strong  central  purchasing  department,  rather  than  smaller  local  
ones.  
— Culture:  CommunicaFng  the  change  properly  is  key,  and  we  will  need  to  ensure  that  morale  does  not  take  a  
nosedive.  

Bonus/Guide  to  an  Excellent  Case  

§ Excellent  interviewees  need  to  recognize  what  macroeconomic  issues  are  beyond  the  scope  of  the  client’s  control  
and  then  quickly  dive  into  the  plant  consolidaFon,  then  analyze  the  cost  structures  
§ AddiFonally,  common  sense  and  basic  familiarity  with  manufacturing  operaFons  should  guide  the  successful  
interviewee  to  some  or  all  of  the  qualitaFve  issues  provided  

48
Exhibit 1: OOS Sales / profit trend

49
Exhibit 2: Overview of OOS production plants

50
Exhibit 3: Plant operating costs

51
Case 4: Syzygy Supercomputers
By: Edwin Van Dusen, Brian Fox and David Welch (Kellogg Class of ‘04), Edited By: Uri Kalir (Kellogg Class of ‘12)

Case  Ques=on  

§ Syzygy  Supercomputers  is  a  large  internaFonal  fully-­‐integrated  computers  and  communicaFons  company  with  annual  
revenues  of  approximately  $20  billion  U.S..  In  the  past  several  years,  the  company  has  seen  a  steady  decline  in  profits.   3
§ The  CEO  has  asked  us  to  look  into  this  problem.  How  can  Syzygy  Supercomputers  get  back  on  track?   Quants.

7
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:     Spend  first  15  min  on  fit   § This  case  is  about  a  tech  company  undergoing  a  decline  
Tech  &  Telecom   in  profitability,  despite  a  strong  compeFFve  posiFon.  
§ What  is  the  single  most   Profit Imp.
Syzygy  has  been  overinvesFng  in  R&D  relaFve  to  its  
§ Level  of  Difficulty:  Hard   important  detail  in  your   Comp. Anl
returns  and  performance  has  suffered  as  a  result.   Ops.
resume?  
§ Case  format:  Improving   § The  interviewee  is  expected  to  go  through  these  general  
profitability   § What  is  the  least   steps  while  presenFng  a  soluFon:  
important  detail  in  your  
§ Concepts  being  tested:   1. Confirm  profitability  issues  and  ask  to  see  
resume?  
- CompeFFve   historical  revenue  and  cost  informaFon.  
§ Why  is  the  lifestyle  of   2. Ask  to  see  market  posiFon  and  related  data.  
analysis  
this  job  right  for  you?     3. Realize  that  this  case  is  going  to  be  decided  
- OperaFons   based  on  informaFon  regarding  the  products.    
4. IdenFfy  the  main  issue  affecFng  profitability  –  
the  company’s  R&D  spending  
 

52
Clarifying answers and case guide
Clarifying  answers  to  provide  if  Asked   Interviewer  Guide  to  Case  

General  Informa=on  on  Syzygy   A  sample  case  structure  would  include  the  following:  
- Only  the  informaFon  that  has  already   1) ExaminaFon  of  historical  performance  to  deep-­‐dive  declining  profits.  
been  given.  Other  informaFon  currently   2) Discussion  of  market  dynamics  and  compeFFve  posiFoning.  
unavailable.   3) Deep-­‐dive  into  drivers  and  profitability  ,  ulFmately  leading  to  a  discussion  of  
Compe==ve  Dynamics   SG&A  

- There  are  several  players  in  the  market,  

but  everything  has  remained  stable   Necessary  Informa=on  that  should  be  given  only  when  specifically  asked  for  by  
from  a  compeFFve  standpoint.   interviewee:  
§ Historical  costs,  revenues  and  profits  –  exhibit  1  
Profitability  drivers   § Note  that  the  interviewee  should  be  asking  for  historical  trends  in  the  
- COGS,  SG&A,  and  other  profitability   company’s  profitability.  If  they  are  asking  only  for  current  profitability,  
factors  are  on-­‐par  with  Syzygy’s   interviewer  should  point  them  in  the  direcFon  of  historical  trends  
compeFtors  (except  for  R&D,  about   § Market  data  –  exhibit  2  followed  by  exhibit  3  
which  the  candidate  should  ask   § Interviewer  should  give  the  interviewee  a  few  seconds  to  understand  
specifically).   slide  2  and  then  handout  slide  3.  Interviewer  should  ask  interviewee  
which  product  in  slide  3  is  which  (on  slide  2).  
§ R&D  spending  data  –  exhibit  4  and  exhibit  5  
§ The  candidate  will  naturally  ask  about  potenFal  drivers  of  profitability  
(S&GA  expense,  COGS,  etc.).  
§ These  exhibits  should  only  be  given  once  the  candidate  has  idenFfied  
R&D  as  a  driver  of  Syzygy’s  profitability.  

53
Key elements to analyze

Interpre=ng  Exhibit  3   Notes  on  Exhibits  2  &  3   Notes  on  Exhibits  4  &  5  

§ The  X  axis  represents  absolute  market   § Correctly  interpreFng  slides  2  and  3   § The  key  insight  in  exhibit  4  is  that  
share  (AMS),  which  correlates  with   will  lead  the  candidate  to  correctly   Syzygy  is  the  only  major  compeFtor  in  
the  height  of  Syzygy’s  rectangles  in   idenFfy  the  products  on  slide  3:   this  industry  whose  R&D  spending  is  
exhibit  2.   below  the  “normaFve  band”  
§ Product  #1  is  custom  
§ The  Y  axis  represents  relaFve  market   applicaFons   § We  would  expect  each  company’s  
share  (RMS),  calculated  as  Syzygy’s   degree  of  technical  leadership  to  go  
market  share  divided  by  the  market   § Product  #2  is  supercomputers  
up  as  it  invests  in  R&D,  but  Syzygy,  
share  of  the  closest  compeFtor.  If   § Product  #3  is  telecom   with  slightly  more  R&D  spending  than  
Syzygy  is  the  market  leader,  this   equipment   Cray  Research  and  Sonic  Wave,  enjoys  
number  is  greater  than  1.  If  Syzygy  is   less  of  a  percepFon  of  technical  
§ Product  #4  is  satellites  
not  the  market  leader,  its  market   leadership  from  its  customers  
share  divided  by  the  market  leader’s   § Product  #5  is  operaFng  
share  will  be  lower  than  1.  This   sonware   § Exhibit  5  builds  on  this  point.  The  key  
insight  is  the  absolute  expense  (not  
correlates  with  the  the  raFo  of  the  
height  of  Syzygy’s  rectangles  to  that  of   percentage)  Syzygy  is  spending  on  
compeFtors’  rectangles  for  each   R&D.  Correct  analysis  will  show  that  
Syzygy  is  spending  money  on  features  
product  in  exhibit  2.  
that  do  not  generate  customers’  
§ The  diameter  of  the  bubbles  is  driven   “willingness  to  pay”.  Syzygy  is  
by  Syzygy’s  total  revenues  in  that   spending  money  to  develop  features  
category,  comprised  of  its  market   that  consumers  are  not  willing  to  pay  
share  in  the  category  mulFplied  by  the   for.  
category’s  size.  

54
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ The  candidate  should  be  able  to  produce  one  of  the  following  insights:  
§ Cut  R&D  to  eliminate  spending  on  unnecessary  customer  features.  
§ Keep  R&D  spending  the  same,  but  switch  the  work  to  developing  features  that  consumers  will  be  willing  to  
pay  for  at  a  level  that  is  higher  than  the  R&D  expense  itself.  
§ A  second-­‐order  insight  from  the  case  is  that  Syzygy  should  exit  the  operaFng  sonware  business  (product  #5  in  this  
case)  since  it’s  small  market  share  will  conFnue  to  erode  as  a  result  of  economies  of  scale,  network  economics  and  
the  experience  curve  all  working  against  it.  

Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  interviewee  will  –    

§ Take  a  few  seconds  to  fully  understand  each  of  the  complex  graphs  he/she  is  given  before  giving  an  answer.  
§ Immediately  ask  about  R&D  spending  and  not  go  through  COGS  or  SG&A  first  (this  is  a  hi-­‐tech  company,  so  
R&D  spending  should  be  looked-­‐at  before  other  drivers  of  profitability).  
§ Conclude  their  recommendaFon  by  not  only  staFng  that  Syzygy  should  exit  the  operaFng  sonware  business,  
but  also  focus  on  the  categories  in  which  it  is  the  market  leader  in  order  to  get  some  or  all  of  those  
economies  to  work  for  it  and  against  its  compeFFon.  

55
Exhibit 1: Syzygy’s Historical Costs, Revenues and Profits

56
Exhibit 2: Worldwide Telecom Computing Market (Today)

57
Exhibit #3: Syzygy’s Absolute vs. Relative Market Share

58
Exhibit #4: Companies’ R&D vs. Degree of Technical
Leadership

59
Exhibit #5: Syzygy’s R&D Expenses and Selling Prices for
Supercomputers

60
Case 5: Winter Olympics Bidding
By: Chris Dupre (Kellogg Class of ‘03), Edited By: Uri Kalir (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client,  a  major  US  television  network,  is  trying  to  figure  out  how  much  to  bid  for  the  exclusive  right  to  broadcast  the  
2018  Winter  Olympics  Games  in  the  U.S.  
8
§ The  Winter  Olympics  are  a  huge  deal  and  will  require  a  significant  amount  of  capital  to  secure  the  rights,  so  our  client  has  
Quants.
brought  us  in  to  help  them  figure  out  the  right  bid  amount  aner  considering  all  relevant  factors.  
4
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:      Media  &   Spend  first  15  min  on  fit   § This  is  a  very  quanFtaFve  case  that  requires  the   Basic NPV
Entertainment   interviewee  to  run  the  numbers  on  an  Olympics  bid.  The   B/E
§ How  would  you  describe  
candidate  will  have  to  decide  potenFal  ad  revenue/cost  
§ Level  of  Difficulty:   your  problem  solving  
informaFon,  as  well  as  the  NPV,  to  determine  bid  size.  
Medium   skills?  
§ The  candidate  will  need  to  ask  for  addiFonal  informaFon  
§ Case  format:   § Do  you  consider  yourself  
that  is  necessary  to  solve  the  problem,  rather  than  
Opportunity   a  more  visionary  or  more  
relying  on  the  interviewer  to  dispense  it.  Aner  geong  the  
Assessment   pragmaFc  thinker….and  
iniFal  calculaFons  right,  there  are  a  lot  of  implicaFons  
why?    
§ Concepts  being  tested:   that  may  change  the  level  of  the  bid.  
§ What  did  you  like  least  
- Basic  NPV   § Especially  for  less  finance-­‐minded  interviewees,  you  may  
about  your  last  job?  
- Breakeven  analysis   have  to  help  nudge  candidates  through  the  math.  

61
Clarifying answers and case guide
Clarifying  answers  to  provide   Guide  to  case  

Revenues   Part  1  –  QuanFtaFve  discussion  

- No  subscripFon  revenue,  but  can  keep   - Candidate  should  determine  that  this  is  a  cost-­‐benefit  /  NPV  analysis.  
100%  of  adverFsing  revenue   - Candidate  should  idenFfy  potenFal  revenue  streams  from  hosFng  the  
- Ad  rates  are  $400K/30  second  ad  for   Olympics,  i.e.  ad  revenue,  product  placements,  etc.  
prime  Fme  (M-­‐F  7-­‐11  PM,  all  weekend)  
- Then,  the  candidate  will  have  to  figure  out  if  this  is  a  good  investment.  They  
and  $200K/ad  for  non-­‐prime  Fme  
- Market  research  has  shown  that  you   should  idenFfy  3  costs  (producFon  costs,  opportunity  costs,  and  Fme  value  of  
can  include  no  more  than  10  minutes  of   money).  By  factoring  in  these  costs,  the  candidate  will  find  out  if  the  Olympics  
are  worth  the  investment.  
adverFsing  per  hour.  
- Some  of  the  numbers  and  assumpFons  here  are  difficult,  so  nudge  the  
Costs   candidate  along  if  necessary.  
- $482M  of  total  producFon  costs  
- Opportunity  cost:  $1M/hour   Exhibit  1  –  Provide  Winter  Olympics  schedule  if  asked  
- Time  value  of  money:  4  year  lag  for   - Give  to  candidate  once  he/she  idenFfies  ad  revenues  
receipt  of  revenue  
 
Part  2  –  QualitaFve  discussion  
- Aner  finding  the  NPV  of  $200M,  ask  the  candidate  about  intangible  factors,  
benefits,  and  risks.  Some  criFcal  factors:  
- Might  give  network  access  to  new  viewers  
- There  is  presFge  associated  with  hosFng  this  event  
- We  can  use  the  air  Fme  to  promote  other  programming  
- OpportuniFes  for  product  Fe-­‐ins,  supplemental  revenue  
- Aner  finishing  the  discussion,  ask  the  candidate  for  a  recommendaFon.  

62
Math questions
Math  ques=on  

1)  Calculate  the  revenue  from  broadcasFng  the  Winter  Olympics.  

2)  Factoring  in  costs,  is  this  a  good  investment?  Find  the  NPV.  

Math  solu=on   Math  informa=on  

1)  Total  revenues  should  be  equal  to  $928M  for  the  project.     Revenues  
- $400K/ad  for  prime  
• PrimeFme:  Weekdays  (M-­‐F):  10  weekdays  x  4  hrs/day  x  10  min/hr  x  2  slots/min    x  $400,000/
Fme  (M-­‐F  7-­‐11  PM,  all  
ad  =  $320M  
weekend)  and  $200K/
• Non-­‐prime:  Weekdays  (M-­‐F):  10  weekdays  x  6  hrs/day  x  10  min/hr  x  2  slots/min    x  $200K/ad   ad  for  non-­‐prime  Fme  
=  $240M   - 10  minutes/hour  of  
• Weekend:  4  days  x  10  hrs/day  x  10  min/hr  x  2  slots/min  x  400K/ad  =  $320M   adverFsements  

• Opening/Closing:  2  days  x  3  hrs/day  x  10  min/hr  x  2  slots/min  x  400K/ad=$48M   Costs  

2)  Total  profit  should  be  equal  to  $300M.   - $482M    of  producFon  
costs  
• Profit:  Revenues  $928M  -­‐  $482M  of  total  costs  -­‐  $146M  of  opportunity  cost  (2  days  x  3  hours    
- Opportunity:  $1M/hr  
x    $1M/hr  +  14  days  x  10  hours  x  $1M/hr)  =  $300M  
- WACC:  10%  
3)  NPV  should  be  equal  to  $200M.  
• Discount  rate:  1.104  =  1.4641  (ask  candidate  to  round  to  1.50)  
• $300M/1.5  =  $200M  

63
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ While  the  NPV  of  the  project  is  $200M,  the  fact  that  there  are  other  intangibles  (new  viewers,  plugging  our  
programs,  and  presFge)  the  bid  should  just  be  $200M.    
§ While  there  is  no  one  correct  answer,  most  answers  should  be  in  the  range  of  $200M.  If  there  is  significant  
fluctuaFon  from  $200M,  the  candidate  will  have  to  provide  in-­‐depth  jusFficaFons  and  make  a  concrete  argument.    

Bonus/Guide  to  an  Excellent  Case  

§ This  case  tests  the  interviewee’s  comfort  with  numbers  and  understanding  of  how  intangible  factors  may  influence  
financial  value.  The  bid  process  requires  another  level  of  understanding  around  game  theory  and  what  dynamics  
will  ulFmately  determine  the  value  of  the  bid  beyond  NPV.  
§ UlFmately,  the  best  interviewees  will  make  a  very  strong  argument  using  the  facts  provided  and  support  their  bid  
and  explain  why  they  moved  their  bid  from  the  NPV  figure.  
§ There  is  also  a  lot  of  room  for  creaFvity  for  the  interviewee  to  discuss  other  factors,  including  supplemental  streams  
of  revenue,  intangible  factors,  and  things  to  consider  during  the  bid  process.    

64
Exhibit #1

Winter  Olympics  Schedule  

Day 1 Day 2-15 Day 16

Opening Ceremonies (Friday) Closing Ceremonies (Saturday)
8-11pm Weekday: 9am-12pm, 2-5pm, 8-11pm
7-11pm

Weekend: 11am-9pm
Case 6: Rotisserie Ranch
By: Brian Fox (Kellogg Class of ‘04), Edited By: Adam Louras (Kellogg Class of ‘11)

Case Question
§ Our client is Rotisserie Ranch, a poultry farming company that specializes in growing chickens for rotisserie
roasting. Its main line customer segment is comprised of large grocery chains, who buy its chickens to fresh
roast in the meat departments of their grocery stores. Market research has revealed to Rotisserie Ranch that
more and more consumers have begun buying flavored rotisserie chickens recently. 6
Quants.
§ Rotisserie Ranch is thinking of pre-flavoring some of its chickens for grocers. Should Rotisserie Ranch begin
selling this new product?
5
Structure
Case tracker Fit Questions Guide to interviewer
CPG
§ Industry: Consumer Spend first 15 min on § This case is similar in style to a McKinsey &
Goods fit Company 1st round case in that the Interviewer
§ Level of Difficulty: § What are your top 9 should drive the case. Micro
Medium weaknesses? (Stress § The case is primarily tests the ideas behind a new Prc. Elas.
Cust. Stgy
§ Case format: Test – If interviewee gets product introduction and forces the interviewee to
Developing a new 9, ask for 9 more until consider market testing, profitability, etc. before
product they cannot answer)
rolling out a new product.
§ Concepts being § Ok, what are 9 of your
§ Because this is a “Market Introduction” case, the
tested: strengths?
interviewee SHOULD ask questions about
- Microeconomics § Imply that interviewee competition.
answered the strengths
- Elasticity much faster than the § For the purposes of this case, assume that
weaknesses and ask, Rotisserie Ranch will only compete against
- Customer strategy
why? existing Private Label brands at grocery stores.

66
Clarifying answers and case guide
Clarifying answers to provide if
Interviewer Guide to case and handouts
Asked
Industry  Characteris=cs/Market   Case  Structure  –  Interviewee’s  structure  should  include:  
Economics   - Value  to  customers  (grocery  chains)  –  Will  they  buy  it?  
- Perishability:  PredicFng  demand  for   - Revenue  and  Cost  implica5ons  of  new  venture  
cooked  chickens  is  difficult  for  grocers;  
- Cost  increase  to  client  is  offset  by  price  increase  to  grocers  
any  lenover  cooked  chickens  at  the  end  
of  the  day  are  thrown  out;  unthawed   - Compe55on  
chickens  cannot  be  re-­‐frozen   - None.  CompeFFon  freezes  chicken  so  can’t  be  pre-­‐seasoned.  
Client  Characteris=cs   Prompt  1  &  2  –  Aner  Interviewee  walks  through  structure,  ask  them:  
- Compe55ve  Advantage:  Client  has   - Do  you  think  that  grocery  retailers  would  be  interested  in  pre-­‐seasoned  
patented  process  for  sterilely  packaging   chickens  from  Ro5sserie  Ranch?  
chicken,  so  that  it  will  remain  fresh  for   - No  correct  answer;  however,  should  be  logically  defended  
30  days,  making  freezing  unnecessary  
- Client  is  currently  the  industry  market  
- AJer  several  interviews,  it  turns  out  that  the  grocers  are  very  interested  
share  leader  in  roFsserie-­‐ready  chicken    
in  Ro5sserie  Ranch’s  proposed  new  product,  but  first  they  want  to  be  
- Four  New  “Flavored”  Products  to  be   sure  that  the  Ro5sserie  Ranch  chickens  will  sell  well.  How  would  you  
introduced  concurrently:  Barbecue,   make  sure?  
lemon  herb,  tandori  and  teriyaki   - The  correct  answer  is  to  run  a  test  market.  
Compe==ve  Dynamics   Prompt  3  –  Aner  discussing  Prompt  2,  discuss  the  results  of  the  market  test:  
- No  compeFFon  in  new  product  market   - Assumes  that  the  demand  funcFon  for  RoFsserie  Ranch  chickens  is  
due  to  patented  process   linear.    
- Store  1  is  comparable  to  test  store  A  and  store  2  to  test  store  B  

67
Key elements to analyze
Value to Grocers Market Testing Demand Elasticity

§ Do  you  think  that  grocery  retailers   § Aner  several  interviews,  grocers  are   § A  test  market  launch  for  the  new  
would  be  interested  in  pre-­‐seasoned   interested  in  RoFsserie  Ranch’s   RoFsserie  Ranch  BBQ  chicken  was  
chickens  from  Ro5sserie  Ranch?   proposed  new  product,  but  first  they   administered  (Hand  out  Exhibit  1).  
want  to  be  sure  that  the  chickens  will   § Should  the  grocers  carry  our  product?  
sell  well.  How  would  you  make  sure?  

Prompt 1 Sample Answers Prompt 2 Answer Notes on Exhibit 1 & 2

§ Sample  “YES”  response:   § The  correct  answer  is  to  run  a  test  market   § Using  Exhibit  1,  interviewee  should  calculate:  
§ Labor  Cost  Reduc5on:  Meat   for  the  new  products.   § Retail  Margin  ($):  
§ Store  A:    25%  x  $4  =  $1  Per  Unit  
department  workers;  don’t  need  to   § The  candidate  may  begin  going  into   § Store  B:    25%  x  $3  =  $0.75  Per  Unit  
spend  Fme  seasoning  the  chickens.     detail  on  how  this  test  would  be  run.   § Gross  Profit:  
§ Economies  of  Scale:  Seasoning   Cut  him  or  her  off  as  soon  as  you  are   § Store  A:    $1  Per  Unit  x  400  =  $400  
comfortable  that  they  understand   § Store  B:    $0.75  Per  Unit  x  1000  =  $750  
centralizaFon;  lower  cost.  
that:   § Cannot  answer  with  Exhibit  1  alone,  so  they  
§ Product  Consistency:  Centrally   should  ask  for  “Control  Group”  informaFon:  
managed;  able  to  spend  more  on  R&D.   § A  pilot  test  should  be  run.  
Hand  out  Exhibit  2  when  this  is  asked  
§ Sample  “No”  response:   § The  pilot  needs  to  have  some  
§ Interviewee  should  calculate  (NOTE:  Answer  is  
control  or  comparison  group.   the  same  for  both  chicken  types):  
§ Loss  of  Differen5a5on:  Grocery  chains  
differenFate  by  value-­‐added  .   § Variable  Margin  ($)  RoFsserie:  
§ Store  1:    30%  x  $3.33  -­‐  $0.20  =  $1  /Unit  
§ A;une  to  Local  Needs:  Likely  to  be   § Store  2:    30%  x  $2.50  -­‐  $0.15  =  $0.75  /Unit  
be_er  at  gauging  consumer  tastes.   § Gross  Profit  RoFsserie:  
§ Store  1:    $1  Per  Unit  x  300  =  $300  
§ Increases  Inventory  &  SKUs.   § Store  2:    $0.75  Per  Unit  x  800  =  $600  
 

68
Solution and recommendations

Solution & Recommendations

§ Overall,  our  client  should  launch  the  Pre-­‐Seasoned  BBQ  Chicken  product  and  test  other  products  because:  
§ Compe55ve  Necessity:  Consumers  are  spending  more  money  on  seasoned  roFsserie  chicken  than  tradiFonal  roFsserie  
chicken  and  the  market  is  shining  in  this  direcFon  
§ Benefit  to  Grocers:  Assuming  test  market  was  representaFve,  Grocers  can  expect  to  earn  $100  to  $150  more  gross  
profit  using  our  client’s  product  relaFve  to  their  own  “Private  Label”  
§ CannibalizaFon  is  not  an  issue  because  the  variable  margins  and  gross  profits  are  the  same  on  standard  and  
seasoned  roFsserie  chicken,  i.e.  shining  from  either  of  these  products  to  our  clients  is  a  net  benefit  
§ Benefit  to  Client:  Assuming  that  the  increased  price  to  the  Grocers  offsets  the  increased  cost  of  producFon,  our  client  
will  make  more  money  due  to  increased  sales  of  the  new  chicken  

Bonus/Guide to an Excellent Case

§ An  excellent  interviewee  will  note:  
§ The  benefit  to  the  Grocers  based  on  a  linear  interpretaFon  of  Demand,  i.e.  At  a  $3.50  price  point,  sales  are  expected  
to  be  700  units.  This  give  a  variable  margin  of  $0.875  /unit  and  total  operaFng  profit  of  $612.50  
§ The  benefit  to  the  Grocers  as  percentages,  i.e.  Store  1  would  gain  33.3%  and  store  2  would  gain  25%  to  their  operaFng  
profit  by  shining  to  our  client’s  product.  
§ PotenFal  scale  benefits  to  our  Client  over  Fme  as  more  pre-­‐seasoned  chickens  are  sold  
§ PotenFal  labor  reducFons  by  grocers  as  the  workload  is  “Outsourced”  down  the  value  chain  to  our  client  

69
Exhibit #1: Market Test of Pre-Seasoned BBQ Chicken

Rotisserie Ranch Market Test of Pre-Seasoned BBQ Chicken

P
$4.50

$4.00

$3.50

$3.00

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00
400 1000 Q  
Store:   A   B  
Retailer  
25%   25%  
Margin:  

70
Exhibit #2: Control Group Stores

Seasoned
Standard Rotisserie
Rotisserie

Store  1   Store  2   Store  1   Store  2  

Chicken  Type   Standard   Standard   Chicken  Type   Store  Seasoned   Store  Seasoned  
Weekly  Sales   $1,000     $2,000     Weekly  Sales   $1,200     $2,400    
               
Retail  Price   $3.33     $2.50     Retail  Price   $3.99     $2.99    
Seasoning  Cost   $0.00     $0.00     Seasoning  Cost   $0.20     $0.15    
               
Retailer  Margin   30%   30%   Retailer  Margin   ?   ?  

71
Case 7: Tarrant Fixtures
By: David Welch (Kellogg Class of ‘04), Edited By: Adam Louras (Kellogg Class of ‘11)

Case  Ques=on  

§ Our  client,  Tarrant  Fixtures,  is  a  low-­‐intensity  manufacturing  company  that  produces  display  fixtures  for  retail  clients.  The  
company’s  financial  performance  has  deteriorated  in  each  of  the  last  three  years.  Specifically,  they  are  concerned  with   8  
the  company’s  falling  Return  on  Investment  (ROI).    
Quants.  
§ The  CEO  has  asked  us  to  look  into  this  problem.  How  can  Tarrant  Fixtures  get  back  on  track?  
7  
Structure  
Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:    Industrial   Spend  first  15  min  on  fit   § This  case  is  about  improving  ROI  and  requires  a  real  
goods   understanding  of  finance  to  solve.  There  has  been  a  
§ What  do  you  see  as  the  
massive  increase  in  working  capital  due  to  inventory  
§ Level  of  Difficulty:   most  challenging  aspect   Opps.  
Medium   of  this  job?     build-­‐up  from  an  increase  in  the  number  of  SKUs.   Acct.  
§ This  is  a  short  case,  designed  to  be  solved  in  
§ Case  format:  Improving   § Tell  me  about  your   approximately  15-­‐20  minutes.  There  are  no  slides.  
profitability   wri_en  communicaFon   § The  important  steps  are:  
skills.   § Establishing  a  viable  structure  (Using  ROI  formula)  
§ Concepts  being  tested:  
§ What  are  a  couple  of  the   § Breaking  down  the  problem  into  component  
- OperaFons   parts  
best  and  worst  decisions  
- AccounFng   you  have  made  in  the   § ConFnuing  to  examine  issues  unFl  the  correct  
past  year?     ones  are  idenFfied.  

72
Clarifying answers and case guide
Clarifying  answers  to  provide  if  asked   Interviewer  Guide  to  Case  

Industry  Characteris=cs/Market   A  sample  case  structure  would  include  the  following:  

Economics   1) Start  with  the  definiFon  of  ROI  and  idenFfy  the  potenFal  areas  for  problems  
- The  market  has  grown  25%  in  total  over   2) IdenFfy  differences  in  profits  over  the  last  three  years  
the  past  three  years   3) IdenFfy  capital  employed  and  deep  dive  increase  in  working  capital  
Client  Characteris=cs    
Necessary  Informa=on  that  should  be  given  only  when  specifically  asked  :  
- Client  has  remained  the  industry  market  
§ Product  Types:  
share  leader  in  displays  over  the  past  
three  years  and  has  maintained  25%   § Custom  displays  (50%  of  Sales)  -­‐  Produced  only  when  an  order  is  placed  and  the  
payment  is  received  
market  share  
§ Standard  displays  (50%  of  Sales)  -­‐  Manufactured  to  “open  standard”  for  display  sizes/
Compe==ve  Dynamics   types  and  stored  in  inventory  (Built-­‐to-­‐stock)  
§ 5  standardized  products  account  for  80%  of  sales  in  standardized  products;  
- There  are  several  players  in  the  market,   Number  of  standardized  products  increased  from  5  to  12  over  last  3  years  
but  everything  has  remained  stable  
§ Past  Three  Years  of  Financial  Performance:  
from  a  compeFFve  standpoint  
§ Total  Revenues:  Grew  by  25%,  from  $100M  to  $125M,  equally  across  both  types  
§ Costs  of  produc5on  (COGS,  labor,  SG&A,  etc.):  Remained  stable  as  a  percentage  of  
revenue  [80%]  
§ CAPEX:  The  company  has  no  new  investments  in  Property,  Plant,  &  Equipment  
§ Working  Capital  
§ Total  Working  Capital  Employed  three  years  ago  =  $80M  
§ Total  Working  Capital  Employed  today  =  $130M  
§ Inventory  levels  increased  by  200%  (primarily  in  finished  goods),  from  $25  
million  to  $75  million  

73
Key elements to analyze
Defini=on  of  ROI   Net  Profits   Capital  Employed  

§ To  begin  this  case  correctly,  the  interviewee   § The  interviewee  will  likely  begin  by   § The  interviewee  should  examine  Capital  
must  understand  the  components  of  ROI   discussing  the  “top  line”  of  the  ROI   Employed  to  find  that  PP&E  is  constant  as  
§ If  the  interviewee  doesn’t  know  the  formula   equaFon   no  CAPEX  was  employed,  Inventory  is  the  
for  ROI,  the  case  is  dead;  however,  you   § Net  Profit  is  not  the  cause  of  the  ROI  issue   culprit  
should  guide  the  interviewer  to  help  them   as  shown  from  the  calculaFon  below   § Once  idenFfied,  follow  up  with,  “What  can  
pracFce   management  do  to  improve  the  Inventory  
Problem?”  

Notes  to  Interviewer   Notes  to  Interviewer   Notes  on  Exhibit  1  &  2  

§ The  formula  for  ROI:     § Net  Profit  can  be  calculated  based  on  the   § A  line-­‐by-­‐by  line  examinaFon  of  a  typical  
informaFon  from  the  prior  page  as  follows:   Working  Capital  statement  will  indicate  all  
of  the  relevant  categories  of  capital  for  
Year  1   Year  3   purposes  of  calculaFng  ROI.    
Revenue   100M   125M  
§ Based  on  the  data  from  the  prior  page,  
Cost  of  Produc=on  $   80M   100M  
following  conclusion  may  then  be  drawn:  
Net  Profit   20M   25M  
§ Total  Working  Capital  increased  by  
$50M  because  Inventory  levels  
Cost  of  Produc=on  %  of  
increased  by  $50M  
Revenue   80%   80%  
§ PP&E,  AR,  AP,  Cash  etc.  are  all  stable  
§ The  company’s  absolute  level  of  profits  
§ PotenFal  Causes/fixes  for  Inventory  
have  increased  25%  during  the  last  three  
Increase:  
years,  so  this  is  not  the  cause  of  the  ROI  
issue   § ProliferaFon  of  standardized  product  
lines    
§ Inaccurate  demand  forecasts  resulFng  in  
excess  safety  stock  
§ Obsolete  inventories  of  outdated  
product  lines  

74
Solution and recommendations
Solu=on  &  Recommenda=ons  

§ The  client’s  ROI  has  fallen  over  the  past  three  years  due  to  a  $50M  increase  in  Working  Capital  caused  by  a  200%  
increase  in  inventory.  Inventory  has  grown  because  of:  
§ The  increase  in  the  Total  number  of  standardized  product  SKUs  from  5  to  12  
§ Inaccurate  demand  forecasts  resulFng  in  excess  safety  stock  
§ Obsolete  inventories  of  outdated  products  
§ To  correct  this  issue,  the  client  should  work  to  reduce  its  inventory  by:  
§ WriFng  off  or  working  down  obsolete  inventory  (a  write-­‐off  will  cause  an  immediate  hit  on  profits,  so  
management  may  be  reluctant)  
§ Improving  demand  forecasFng  to  set  more  realisFc  safety  stock  levels  
§ Reducing  the  “Standard”  product-­‐line  down  to  the  top  5  products  (80%  of  current  sales)  

Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  interviewee  will:  

§ Provide  creaFve,  logical  reasons  for  the  inventory  increase  
§ Provide  creaFve,  logical  soluFons  to  reduce  Inventory  
§ Detail  a  cohesive  demand  forecasFng  plan  that  would  improve  accuracy  
§ Provide  a  plan  to  limit  future  product  proliferaFon  in  the  “Standard”  product  lines  

75
Case 8: Vindaloo Corporation
By: Ben Walter (Kellogg Class of ‘03), Edited By: Ameed Mallick (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client,  Vindaloo  CorporaFon,  is  a  small  biotechnology  company  that  has  developed  a  new  seed  for  sugar  beets,  
which  produces  twice  as  much  sugar  as  the  seeds  that  are  currently  in  use.  They  now  want  to  sell  the  company,  and   8
wonder  how  much  it  is  worth.     Quants.

4
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer   CPG

§ Industry:    Consumer   Spend  first  15  min  on  fit   § This  is  a  valuaFon  case  and,  as  such,  has  a  lot  of  number  
products   crunching.  To  calculate  the  NPV,  the  interviewee  will  
§ What  do  you  read?   Basic NPV
have  to  size  its  impact  up  and  down  the  value  chain  and  
§ Level  of  Difficulty:   Mkt. Stgy
§ What  is  the  most   determine  its  value  using  assumpFons  about  market   Opps.
Medium   important  issue  facing   penetraFon  and  growth  rates.  
§ Case  format:   the  industry  of  your  last  
Developing  a  new   job?   § There  are  also  several  important  qualitaFve  insights  for  
the  candidate  to  make,  the  main  one  of  which  is  that  the  
product  
§ Describe  your  methods   new  technology  will  halve  the  land  rather  than  doubling  
§ Concepts  being  tested:   of  diagnosing  client’s   producFon,  which  would  cause  an  immediate  worldwide  
needs.   sugar  glut  and  rapidly  falling  prices.  
- Basic  NPV  
- MarkeFng  Strategy    
- OperaFons  

76
Clarifying answers and case guide
Clarifying  answers  to  provide  if  Asked   Interviewer  Guide  to  Case  

Industry  Characteris=cs/Market   A  sample  case  structure  would  include  the  following:  

Economics   1) Start  with  an  understanding  of  the  sugar  industry  and  market  economics      
- The  market  has  grown  at  GDP  over  the   2) Analyze  the  product  benefits  and  potenFal  impacts  for  farmers  
last  few  years  which  is  predicted  to   3) IdenFfy  the  channel  structure  and  assess  the  opportuniFes  to  minimize  costs  
grow  at  2%  annually.   within  the  value  chain  
- Sugar  is  a  mature  commodity.  The   4) Calculate  NPV  of  cost  savings  to  value  the  company      
wholesale  market  is  $2  billion  
worldwide  per  year.  
• Beets  grown  from  the  new  seeds  will  produce  2x  the  sugar  that  tradiFonal  seeds  
Compe==ve  Dynamics   yield.    For  example:  Currently  100  beets  produce  100  lbs  of  sugar  while  the  new  
- We  can  assume  a  100%  market   seeds  will  produce  200  lbs  of  sugar,  or  2  lbs/beet.  
penetraFon,  since  there  are  no   • The  elasFcity  of  demand  for  sugar  is  1.  
compeFng  products,  and  the  efficacy  of   • The  value  chain  can  be  broken  down  into  four  primary  processes:    
the  product  is  proven.  
1. Farming  (planFng,  harvesFng,  and  selling  beets),  which  is  40%  of  cost  
- There  is  no  imminent  threat  of   2. Trucking,  which  is10%  of  the  cost  
compeFFon  and  a  patent  would  protect  
the  investment  for  a  number  of  years.   3. Refining,  which  is  30%  of  the  cost  
4. DistribuFon,  which  is  20%  of  the  cost.  
• Farmland  that  is  not  used  for  sugar  can  be  repurposed  to  grow  cabbage,  which  
is  currently  one  finh  as  profitable  as  sugar.  
• Trucking  costs  for  sugar  are  5%  fixed  and  95%  variable,  with  the  variable  costs  
directly  related  to  the  weight  of  what  is  being  trucked.  
• Refining  costs  are  all  variable,  and  it  will  cost  25%  more  per  beet  to  refine  the  
new  beets  than  it  cost  to  refine  the  old  beets.  
• There  are  no  cost  savings  in  distribuFon  from  the  reduced  volume.  

77
Calculations

Math  ques=on  

§ What  are  the  cost  savings/increase  in  profits  from  farming?  

Math  solu=on  

• Solu=on  -­‐  Farming  

• The  product  allows  farmers  to  grow  the  same  amount  of  sugar  on  half  of  the  land.  So  we  can  assume  that  farmers  
will  keep  half  of  their  land  for  sugar  and  repurpose  the  rest  of  the  land  for  growing  cabbage.  Previously,  one  acre  
of  land  produced  “X”  profits  of  sugar  -­‐  now  half  an  acre  can  produce  profits  of  “X”  while  the  other  half  produces  
profits  of  “.1X”  of  profits  from  cabbage.  Recall  that  cabbage  is  a  fiLh  (20%)  as  profitable  as  sugar  currently  –  
accounFng  for  the  2x  yield  from  the  new  sugar  beets,  cabbage  would  only  be  10%  as  profitable  as  the  “new”  
sugar.  Since  profits  per  acre  go  from  X  to  1.1X,  there  is  a  10%  increase  in  profits  from  farming.  
• Common  mistakes:  
• Candidates  who  think  that  farmers  will  just  use  the  same  amount  of  land  and  produce  twice  as  much  sugar  have  
not  thought  the  quesFon  through.  Sugar  is  a  mature  commodity  and  if  everyone  produced  twice  as  much  sugar,  
there  would  be  far  more  supply  than  demand,  causing  global  prices  to  crash.    AddiFonally,  some  candidates  will  try  
to  calculate  the  costs  savings  of  the  enFre  value  chain  here  (make  sure  to  remind  them  in  the  debrief  to  answer  
the  quesFon  that  is  asked.)  

78
Calculations (cont.)

Math  ques=on  

§ What  are  the  cost  savings  from  Trucking,  Refining,  and  DistribuFon?  

Math  solu=on  

• Solu=on  -­‐  Trucking    

• Variable  trucking  costs,  which  represent  95%  of  the  total  cost  structure,  will  decrease  by  50%,  leading  to  an  overall  
costs  savings  of  95%  x  50%  =  47.5%.  

• Solu=on  -­‐  Refining  

• Refining  costs  have  two  components.    IniFally  the  costs  will  drop  by  50%  because  only  half  as  many  sugar  beets  
need  to  be  refined.  However,  the  variable  cost/beat  increases  by  25%  for  the  new  sugar  beets.  In  step  the  costs  go  
from  “X”  to  “.5X”  to  “.625X”,  an  overall  cost  savings  of  37.5%.  

• Solu=on  –  Distribu=on  
• There  are  no  cost  savings  in  distribuFon.  

79
Calculations (cont.)

Math  ques=on  

§ What  are  the  total  cost  savings  in  the  value  chain?  

Math  solu=on  

Step   A  –  Cost  Por=on   B  –  Cost  Savings   Weighted  Cost  

Savings  (A  x  B)  

Farming   40%   10%   4%  

Trucking   10%   47.5%   4.75%  
Refining   30%   37.5%   11.25%  
DistribuFon   20%   0%   0%  
Total   100%   20%  

80
Calculations (cont.)

Math  ques=on  

§ How  valuable  is  this  product?  

Math  solu=on  

• Solu=on  –  Net  present  value  of  cost  savings  

• Our  client’s    product  will  save  20%  a  year  in  sugar  costs  -­‐  mulFplied  by  the  $2  billion  market  size,  that  cost  savings  comes  
out  to  $400  million  per  year.  The  final  quesFon  then,  is  how  valuable  is  that?  Here,  it  would  be  valuable  for  the  candidate  
to  know  the  perpetuity  formula,  which  is:    
• Value  =  Annual  Cash/(r-­‐g)  
• We  are  given  the  growth  rate,  g,  as  2%.  “r”  (the  discount  rate  is  not  given),  so  it  is  fine  for  the  candidate  to  use  the  
standard  assumpFon  of  10%.  Therefore  the  company  can  be  valued  at:  
• Value  =  $400M/(10%-­‐2%)  
       =  $5B  

81
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ This  product  will  only  allow  our  client’s  clients  (sugar  growers)  to  produce  sugar  more  efficiently.  It  won’t  cause  the  
sugar  to  taste  any  be_er  or  cause  consumers  to  demand  more  of  it.  Therefore  the  product  cannot  be  expected  to  
grow  revenue,  but  it  will  reduce  costs.  The  value  of  Vindaloo  CorporaFon  is  directly  related  to  cost  savings.  
§ Aner  running  the  NPV  analysis,  Vindaloo  CorporaFon  should  be  valued  at  $5B.  
§ The  interviewee  should  also  idenFfy  a  number  of  risks  and  potenFal  benefits  along  the  way  (i.e.  adopFon  rates  
given  the  required  change  to  farmland  and  likely  capex  for  equipment,  compeFFve  response,  other  uses  for  sugar  in  
adjacent  or  completely  separate  markets,  other  uses  for  newly  acquired  farmland,  potenFal  buyers,  government  
intervenFon,  etc.)  before  making  their  final  recommendaFon.  

Bonus/Guide  to  an  Excellent  Case  

§ This  is  a  quanFtaFvely  heavy  case.    A  excellent  interviewee  can  quickly  idenFfy  the  important  drivers  of  cost  and  
can  crunch  the  numbers  easily  and  with  li_le  error.    AddiFonally,  they  will  organize  the  data  in  a  tabular  form  for  
ease  of  calculaFon  and  presentaFon.        
§ AddiFonally,  an  good  interviewee  will  synthesize  each  relevant  cost  savings,  the  final  valuaFon,  and  next  steps/risks  
as  part  of  their  final  presentaFon.    

82
Case 9: Zephyr Beverages
By: Edwin Van Dusen, Brian Fox and David Welch (Kellogg Class of ‘04), Edited By: Ameed Mallick (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client,  Zephyr  Beverages,  is  a  division  of  a  large  consumer  products  company.  The  division  produces  fruit  juices  in  
three  forms,  all  under  the  Zephyr  name:  chilled,  juice  boxes,  and  frozen  concentrate.  Zephyr  had  sales  of  $600  million  last   1
year,  about  3%  of  the  company’s  overall  sales  of  $20  billion.     Quants.
§ The  chilled  segment  represents  $120  million  in  sales  per  year.  While  juice  boxes  and  frozen  concentrate  have  been  
consistently  profitable,  chilled  juices  are  only  breaking  even  in  good  quarters  and  are  losing  money  in  bad  quarters.   5
Zephyr  has  received  a  proposal  from  upper  management  to  sell  the  chilled  juices  business.  We  need  to  help  them  decide   Structure
whether  or  not  this  is  a  good  idea.  
CPG

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

Comp. Als.
§ Industry:    Consumer   Spend  first  15  min  on  fit   § This  is  a  relaFvely  short  case  that  requires  the  candidate   Capacity
Goods   to  create  a  holisFc  structure  for  solving  the  problem:  
§ What  do  you  do  for  fun?  
§ Level  of  Difficulty:  Easy   what  does  Zephyr  do  with  an  underperforming  business?  
§ What  did  you  contribute   It  can  divest  chilled  juices,  sell  its  whole  juice  division,  or  
§ Case  format:   in  your  last  job  that   remain  in  all  its  business.  Any  of  the  three  possible  
Opportunity   made  a  difference  to  the   soluFons  listed  at  the  end  can  be  argued,  but  the  third  
assessment   organizaFon?   soluFon  makes  the  most  economic  sense.    
§ Concepts  being  tested:   § Outside  of  school  and   § The  candidate  will  need  to  ask  for  addiFonal  informaFon  
- CompeFFve   work,  what  is  your   that  is  necessary  to  solve  the  problem,  rather  than  
analysis   greatest  personal   relying  on  the  interviewer  to  dispense  it  all  at  once.    
accomplishment?  
- Capacity   § This  case  is  not  representaFve  of  the  quanFtaFve  rigor  of  
contracFon   interview  cases  and  therefore  we  recommend  it  only  be  
given  as  a  warm-­‐up  early  in  the  process.  

83
Clarifying answers and case guide

Clarifying  answers  to  provide  if  Asked   Interviewer  Guide  to  Case  

Industry  Characteris=cs/Market   A  sample  case  structure  would  include  the  following:  

Economics   1) IdenFfying  the  opFons:  sell  chilled  juice,  sell  all  juice  businesses,  conFnue  on  
- It  has  been  growing  at  GDP  (~3%)  the   with  all  businesses  
last  few  years  and  is  projected  to   2) QualitaFve  discussion  of  compeFFve  dynamics  
conFnue  that  growth  rate.   3) Discussion  of  product  selecFon/components,  as  well  as  ways  to  cut  costs  
- The  market  for  chilled  juices  is  
dominated  by  mothers  with  young  kids.  
- Brand  name  is  important  in  this  market,   When  asked,  the  interviewer  can  reveal  the  following  addi=onal  informa=on:  
as  mothers  tend  to  prefer  reliable   • Chilled  beverages  are  a  $1  billion  worldwide  industry  
products.  However,  the  brand  premium   • The  two  largest  players  have  market  shares  of  40%  and  25%,  respecFvely.  
must  be  in  line  with  other  branded   Zephyr’s  market  share,  12%  makes  it  third  in  the  industry.  
products  and  all  branded  juices  sell  in   • The  two  market  leaders  are  able  to  do  more  adverFsing,  couponing,  promoFon,  
the  same  price  range.   and  trade  than  Zephyr  is  able  to  do.  We  do  not  know  about  their  profitability,  
- This  is  a  highly  price  sensiFve  market   but  assume  it  is  posiFve.  
that  loves  coupons,  promoFons,  etc.  
Compe==ve  Dynamics  
- This  is  a  highly  concentrated  market.  
There  has  not  been  a  lot  of  change,  
technological  or  otherwise,  recently  and  
there  are  no  obvious  entrants.    

84
Key elements to analyze
Compe==ve  Dynamics   Product  selec=on  

§ Using  basic  informaFon  provided,  interviewee  should  deep   § Using  informaFon  about  our  products  vs.  our  compeFtors,  the  
dive  the  compeFFve  dynamics  in  further  detail.   interviewee  should  focus  on  discussion  about  how  to  cut  costs.  

Notes  to  interviewer   Notes  to  interviewer  

• Relevant  info:   • Relevant  info  (when  asked):  

• Bad  market  posiFon:  12%  vs.  40%  and  25%   • The  market  leaders  produce  pure  orange  juice/blends  
• Assumed  profitability  differences   based  on  citrus  juices.  Zephyr  uses  more  elaborate  
blends,  usually  with  a  base  of  pear  or  peach  juice  (60%  of  
• Disadvantage  on  trade  promoFons  
inputs)  and  flavor  with  cranberries,  bananas,  mangoes,  
etc.  (the  other  40%).  Pear  and  peach  juice  are  a  similarly  
• Interviewee  should  be  able  to  see  that  Zephyr  is  at  a   price  to  orange  juice,  but  the  other  flavorings  cost  about  
serious  disadvantage  on  all  fronts  as  a  smaller  company   twice  as  much.  
that  is  both  less  profitable  and  less  engaged  in  the  kinds  of   • A  plant  in  California  produces  all  products;  chilled,  juice  
trade  promoFons  that  key  customers  covet.  The  overall   boxes  and  frozen.  Each  of  the  three  products  uses  
conclusion  should  be  that  this  is  a  weak  compeFFve  
different  machinery.  It  would  be  difficult  to  find  another  
posiFon.   use  for  the  plant  without  a  major  conversion.  
• AddiFonally,  there  are  currently  synergies  between  chilled,  
frozen  and  juice  boxes  –  mothers  are  slightly  more  likely  to  buy  
products  from  the  same  brand  
• This    indicates  that,  despite  a  disadvantage,  divesFng  is  not  
realisFc  and  there  may  be  room  for  cost  reducFon  based  on  
reformulaFon  to  make  Zephyr  profitable.  

85
Solution and recommendations

Solu=on  &  Recommenda=ons  

There  are  three  possible  solu=ons,  with  no  right  answer.  The  recommenda=on  should  be  well-­‐reasoned,  
comprehensive,  and  include  as  much  relevant  informa=on  as  possible.  
§ Sell  the  chilled  juice  business.  This  would,  however,  affect  the  juice  and  frozen  concentrate  businesses,  as  there  are  
both  adverFsing  and  manufacturing  synergies.  
§ Sell  all  of  the  juice  business.  This  may  be  more  feasible,  as  the  buyer  could  capture  the  synergies,  but  would  not  be  
too  likely  to  turn  the  business  around.  The  selling  price  is  likely  to  be  low.  
§ Keep  the  chilled  juice  business  and  rework  the  ingredients  and  costs.  This  is  the  most  feasible  opFon,  as  evidenced  
by  the  success  of  the  compeFtors.  We  are  probably  developing  extra  features  in  our  ingredient  mix  that  the  market  
does  not  want  and  is  not  willing  to  pay  for.  EliminaFng  or  scaling  back  those  features  will  probably  allow  us  to  cut  
costs  without  affecFng  revenue.  

Bonus/Guide  to  an  Excellent  Case  

§ Prospects  who  do  well  on  this  case  will  have  to  be  comfortable  with  ambiguity  and  with  a  lack  of  perfect  
informaFon.  They  will  quickly  grasp  the  issues  and  delve  into  the  underlying  qualitaFve  discussions,  coming  up  with  
a  lot  of  addiFonal  risks/potenFal  benefits  for  each  opFon.  
§ CreaFve  soluFons  beyond  those  listed  are  possible  and  encouraged,  though  should  be  done  within  the  framework  
of  the  informaFon  available.  

86
Case 10: A+ Airline Co.
By: Adam J. Louras (Kellogg Class of ‘11)

Case  Ques=on  

§ Our  client  is  A+Airline  Co.,  the  third  largest  airline  in  the  United  States  by  passengers  carried.    This  week,  we  have  been  
flying  on  our  primary  compeFtor,  Gamma  airline,  and  we  noFced  something  interesFng;  they  stopped  accepFng  cash  for  
in-­‐flight  food  and  beverage  services  and  they  now  only  accept  major  credit  cards.  
8
§ The  CEO  of  A+Airline  Co.  wants  to  know,  why  did  Gamma  Airline  switch  from  a  Cash  &  Card  system  to  a  credit  card  only  
Quants.
system,  and  should  we  follow  them?  
8
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:      Airline   Spend  first  15  min  on  fit   § This  case  will  force  an  interviewee  to  rely  on  logic,  
business  acumen,  and  structure  
§ Level  of  Difficulty:  Hard   § Tell  me  about  a  Fme   Basic NPV
when  you  had  to  adjust   § Commonly,  the  interviewee  will  ask  a  lot  of  quesFons   Opps.
§ Case  format:   Mkt. Size
a  project  schedule   about  historical  costs,  revenues,  etc.    This  is  not  the  
Opportunity   Cust Stgy
because  you  didn’t  have   correct  approach  to  this  ques=on.      
Assessment  
all  the  resources  that   § The  savvy  interviewer  will  realize  that  this  is  a  BEFORE  vs.  
§ Concepts  being  tested:   you  needed   AFTER  comparison  of  switching  from  a  CASH  &  CARD  
- Basic  NPV   § Describe  a  situaFon  in   system  to  a  CARD  ONLY  system.    Therefore,  the  
- OperaFons   which  you  had  to  change   quesFons  asked  should  focus  on  the  DELTA,  or  the  cash  
your  communicaFon   changes  that  occur  when  the  switch  is  made.  
- Market  Sizing   style  to  influence  
- Customer  Strategy   stakeholders  from  
different  groups  

87
Clarifying answers and case guide
Clarifying  answers  to  provide  if  Asked   Interviewer  Guide  to  case  and  handouts  

Industry  Characteris=cs/Market   Case  Structure  –  Interviewee’s  structure  should  be  a  BEFORE  vs.  AFTER  
Economics   comparison  of  the  switch  from  CASH  &  CARD  to  CARD  only  and  should  include:  
- Card  Use:  Roughly  99%  of  all  consumers   - Revenue  Changes:  Loss  of  Cash  Only  customers  vs.  Increase  in  Credit  Card  
purchase  their  airline  Fckets  using  a   customers  
credit  card,  i.e.  all  consumers  on  an   - Cost  Changes:  Benefit  of  Cash  Management  Cost  Removed  vs.  Incremental  
airplane    have  a  credit  card  available  to   Cost  (Fee)  of  Credit  Card  
them.   - Cash  Flow  Changes:  Interest  and  Time  Value  of  Money  (TVM),  and  Working  
Client  Characteris=cs   Capital  impacts  due  to  an  increase  in  collecFon  speed  
Exhibit  1  –  Aner  Interviewee  walks  through  structure,  they  will  likely  ask  quesFons  
- Items  Sold:  Only  food  and  alcoholic  
about  consumer  purchase  behavior  on  airplanes.    Once  you  feel  that  they  have  
beverage  items  are  sold  on  A+Airline  
idenFfied  the  need  to  do  a  market  sizing,  hand  out  Exhibit  1.  (DO  NOT  ALLOW  
flights  
- Loca5ons:  This  is  a  US  DomesFc   ROUNDING)  
decision  only.    Ignore  internaFonal.   - Ask  the  interviewee  to  determine  the  Total  Market  Size  in  ($)  for  food  and  
beverage  purchases  on  an  average  flight  
Compe==ve  Dynamics  
- The  interviewee  should  calculate  the  CURRENT  alloca5on  of  purchases  
- Gamma  is  the  only  airline  that  has  made   (Cash  Vs.  Card)  for  an  average  flight.  
the  switch;  however  all  other  airlines   - The  interviewee  should  correctly  iden5fy  that  some  of  the  current  
are  evaluaFng  the  switch.   “Cash”  customers  will  not  convert  to  Card.    Tell  them  we  will  lose  1/3.  
- For  the  purposes  of  this  case,  Gamma   Exhibit  2  –  The  interviewee  should  recognize  that  there  might  be  a  cost  savings  
and  A+Airline  should  be  considered  to   due  to  the  change.    Most  interviewees  know  that  there  is  a  Credit  Card  
be  exactly  the  same  in  all  regards.   processing  fee  but  do  not  realize  that  there  are  many  costs  associated  with  cash  
management.    Ask  them  about  the  types  of  costs  A+Airline  might  face  under  
both  processes  before  handing  out  the  exhibit.    When  asked,  explain  that  the  
total,  per  flight,  savings  from  elimina=ng  overhead  due  to  Cash  Management  
Opera=ons  is  $35/flight  
 
88
Key elements to analyze

Changes  in  Revenue   Changes  in  Costs   TVM  &  Working  Capital  

§ Interviewee  will  likely  begin  with  the  correct   § Interviewee  should  make  menFon  of  Cost   § Exhibit  2  also  shows  that  there  is  a  30  day  
assumpFon  that  revenue  will  be  lost  due  to   changes  due  to  the  shin  to  a  Card  Only   Fme  benefit  to  collecFng  payment  via  Credit  
unhappy,  cash-­‐only  passengers   strategy.   Card  vs.  Cash  
§ Once  asked  about  how  many  are  lost,  hand     § Ask  the  interviewee  to  detail  the  types  of   § Prompt  1:  Ask  the  interviewee  to  qualita5vely  
out  Exhibit  1  to  do  a  market  sizing   costs  that  might  be  involved  before  handing   explain  the  impact  this  5me  savings  will  have  
out  Exhibit  2  

Notes  on  Exhibit  1   Notes  on  Exhibit  2   Qualita=ve  Assessment  

§ Using  Exhibit  1,  interviewee  should  calculate:   § Exhibit  2  shows  the  current  operaFons  for   § The  interviewee  should  qualitaFvely  menFon  that  
1. Total  Number  of  Passengers  per  Plane   Cash  Management  and  Card  Management  at   there  are  benefits  to  eliminaFng  the  longer  cash  
Seats   Occupants   Business   Leasure   A+Airline.   management  process:  
First  Class   50   50   50   0   § Time  Value  of  Money:  A+Airline  will  receive  
Economy   150   120   60   60  
§ The  interviewee  should  noFce  the  following  
their  money  30  days  sooner,  and  this  money  
Total   200   170   110   60   informaFon:  
could  be  used  to:  
2. Total  Number  that  Purchase  &  Total  Spend  ($)   § Cash  Management  &  Card  Management  both   § Invest  in  interest  earning  accounts  or  
have  2%  fees  associated,  so  this  is  a  “wash”  in  
#  that  Purchase   Total  Purchase  $   growth  projects  
Business   45     $450     terms  of  savings.  
§ Pay  off  suppliers  early  and  take  
Leasure   15     $75     § Cash  Management  requires  addiFonal  
advantage  of  discounts  
Total   60     $525     overhead,  7  total  employees  per  airport,  that  
§ Pay  down  lines  of  credit  faster  
3. Cash  vs.  Card  Spend  +  LOSS   could  be  eliminated  for  further  savings.   § Working  Capital  Improvement:  $50  per  flight  in  
Cash   Card   Total   § When  asked,  explain  that  the  total,  per  flight,   change  can  be  eliminated,  thus  freeing  up  cash  
Inflight  $   $105     $420     $525     savings  from  eliminaFng  overhead  due  to   flow.    AddiFonally,  there  will  be  a  reducFon  in  
Cash  Management  OperaFons  is  $35/flight   loss  of  cash  due  to  then  and  damage  
Lose  1/3  of  Cash  Customers  
§ Interviewee  should  no=ce  that  the  $35   § Happier  Customers:  The  majority  of  customers  
#   $   New  Total  
Business   3     ($30)   $420     savings  offsets  the  $35  loss  in  Revenue   will  be  able  to  place  and  receive  their  order  
Leisure   1     ($5)   $70     (Slightly  more  because  this  impacts  bo_om   faster  on  the  plane  which  will  also  increase  
Total   4     ($35)   $490     line,  but  ignore  margin)   sales  

 
89
Solution and recommendations
Solu=on  &  Recommenda=ons  

§ Overall,    our  client,  A+Airline,  should  switch  to  a  Credit  Card  only  system  for  in-­‐flight  food  &  beverage  because:  
§ Quan5ta5ve  Benefits:  We  calculated  that  there  would  be  a  loss  of  3  business  customers  and  1  economy  
customer  per  flight  which  amounted  to  a  Revenue  loss  of  $35.    We  also  found  that  we  could  save  $35  in  
overhead  expenses  by  eliminaFng  the  Cash  Management  process.    In  sum,  the  decision  to  switch  is  in  favor  
because  the  savings  are  to  the  bo_om  line  and  the  revenue  losses  are  top  line.  
§ Qualita5ve  Benefits:  We  also  found  that  we  will  receive  payment  30  days  sooner  by  only  accepFng  credit  
cards.    This  improves  our  cash  flow  and  could  allow  us  to  earn  interest,  pay  down  creditors,  or  invest  in  
projects.    AddiFonally,  by  reducing  cash  losses  and  eliminaFng  “Change”  Fed  up  on  airplanes,  we  can  
improve  our  Working  Capital  and  also  put  this  money  to  work  for  us.    Finally,  it  appears  as  though  
customers,  in  general,  might  actually  be  happier  because  the  speed  of  transacFons  on  the  airplane  will  
improve.  
Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  interviewee  will  note:  

§ Due  to  the  increased  transacFon  speed,  probability  of  purchase  for  both  Business  and  Economy  passengers  
in  the  AFTER  state  should  go  up  due  to  a  reducFon  in  frustraFon.    The  people  on  the  back  of  the  airplane  
onen  abandon  a  purchase  if  it  takes  too  long  to  place  an  order.    Making  change  takes  a  lot  of  Fme!  
§ Average  purchase  amount  should  also  increase.  There  is  a  proven  psychological  phenomenon  that  shows  
how  consumers  who  do  not  carry  cash  purchase  less  when  a  cash  opFon  is  offered  because  they  feel  guilty  
using  their  card.    A  card-­‐only  opFon  eliminates  this  guilt  and  consumers  don’t  mind  using  the  card.  
§ Being  creaFve  when  lisFng  the  change  of  costs  as:  Wifi  cost  (connect  with  banks  and  verify  transacFon),  
Fraud  cost  (increased  chance  of  fraud  to  happen  aner  implemenFng  card  only  payment).  

90
Exhibit #1: An Average A+Airline Flight
A+Airline  Boeing  737-­‐800  Vers.  2  (738)  

Total  Seats   200    

%  of  Seats   Load  Factor   %  Business   %  Leisure  

First  Class   25.0%     100%     100%   0%  
Economy   75.0%     80%     50%   50%  

%  that  Purchase   Avg.  Spend  ($)  

Business   75.0%     $10    
Leisure   25.0%     $5    
*Note:  First  Class  Passengers  Receive  Free  Food  &  Beverage  

%  of  In-­‐flight  Purchases  

Cash   20%  
Card   80%  

91
Exhibit #2: A+Airline Cash & Card Operations
AAirline Cash Management Process

STEP 4: STEP 5: STEP 7: STEP 8:

STEP 1: STEP 6:
Cash Handler Flight Lockboxes Armored Car Cash (Less Fees)
Cash Handler Armored Car
On Ground collects Flight deposited to Service reconciles deposited to
Loads Plane with Service collects
Lockbox from Onsite Cash cash for AAirline Bank
$50 in Change cash
Plane (EOD) Processing Center counterfeit. Account
2% Fee on All Cash
Collected

31 Days Total Time

STEP 2:
STEP 3:
Flight Attendant KEY
Flight Attendant
In Flight collects cash from 5 Cash Handlers per Airport
Deposits Cash into
passengers and 2 Employees in Onsite Cash Processing Center per Airport
Flight Lockbox
gives change

AAirline Credit Card Process

2% Fee on All Cash
Collected

STEP 2: STEP 3:
Merchant Service Cash (Less Fees)
On Ground Receives and deposited to
processes Credit AAirline Bank
Card Account

24 Hours Total Time

STEP 1:
Flight Attendant
In Flight swipes credit card
in wireless
terminal

92
Case 11: Bell Computer Inc.
By: Adam J. Louras (Kellogg Class of ‘11)

Case  Ques=on  

§ Our  client,  Bell  Computer  Inc.,  is  the  second  largest  PC  manufacturer,  by  unit  sales,  in  the  United  States.  Over  the  past  5  
years,  Bell  has  been  gaining  market  share  and  growing  revenue,  but  at  the  same  Fme,  their  net  income  is  eroding.  
§ The  founder  of  Bell  has  returned  to  the  company  and  taken  over  as  CEO.  He  has  hired  us  to  determine:  
8
§ Why  have  our  profit  margins  declined?   Quants.
§ What  can  we  do  to  improve  our  profitability  and  reach  our  “Full  PotenFal”?  
10
Structur
e
Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:  Tech/Telecom   Spend  first  15  min  on  fit   § This  case  is  primarily  about  product  mix  changes  in  the  
PC  industry  combined  with  Average  Selling  Price  (ASP)  
§ Level  of  Difficulty:  Hard   § What  skills  can  you  bring   Mkt. Stgy
Declines  resulFng  in  lower  overall  revenues  for  the   Comp. Als
to  this  posiFon?  
§ Case  Format:   industry.  CompeFtors  that  did  not  keep  up  with  cost   Sup Chain
Improving  profitability   § Give  me  an  example  of  a   reducFons  are  faced  with  Fghter  margins  
+  Reducing  Costs   business  problem  your  
§ The  interviewee  should  recognize  that  this  is  a  “Profit  
company  faced  and  tell  
§ Concepts  Tested:   EquaFon”  style  quesFon  and  use  a  version  of  the  
me  how  you  solved  it.    
- MarkeFng  Strategy   following  equaFon  in  their  “Framework”:  
- CompeFFve   § What  other  types  of  jobs  
§ Profit/Unit  =  Price/Unit  –  Variable  Cost/Unit  –  
Analysis   are  you  considering?  
Fixed  Costs/Unit  
Why  and  how  did  you  
- Supply/value  chain  
choose  the  companies?   § Various  terms  from  the  PC  industry  are  used  throughout  
How  do  they  compare  to   the  case  and  it  is  not  expected  that  the  interviewee  
consulFng?   knows  these  terms.  Help  as  needed.  

93
Clarifying answers and case guide
Clarifying  answers  to  provide  if  Asked   Interviewer  Guide  to  case  and  handouts  

Industry  Defini=ons   Case  Structure  –  Interviewee’s  structure  should  be  structured  as  a  comparison  of  
Bell  Computer’s  financials  from  Before,  i.e.  2005,  and  Aner,  i.e.  2010.  The  
- ASP:  ASP  or  Average  Selling  Price  is  the  
interviewee  should  note  the  “Profit  EquaFon”  and  they  should  make  the  
term  used  for  the  average  price  sold  by  
following  inferences  from  the  quesFon  setup:  
the  company  for  a  computer.  
MulFplying  units  sold  by  ASP  will  give   - Revenues  are  going  up  and  Market  Share  is  Increasing  AND  Net  Income  is  
you  total  revenue.   going  down  
- Client  Segment:  PCs  designed  for,  and   - Thus:  Prices  (ASPs)  are  being  reduced  to  buy  market  share.  This  is  causing  
sold  to,  retail  consumers  either  direct  or   more  units  to  be  sold,  but,  with  Net  Income  going  down,  it  is  clear  that  costs  
through  a  retailer  like  Best  Buy.   have  not  reduced  to  keep  up  with  the  reducCon  in  ASPs.  
Client  Characteris=cs   Exhibit  1-­‐3  –  Aner  Interviewee  walks  through  structure,  they  should  ask  quesFons  
about  the  components  of  Net  Income,  i.e.  Revenue  and  Costs.    
- Items  Sold:  Assume  that  only  hardware  
- Have  a  conversa5on  with  the  Interviewee  to  force  them  to  talk  through  the  
is  sold  as  shown  in  Exhibit  1.  
essen5al  components  of  the  Profit  Equa5on  that  are  needed  to  answer  the  
Interviewee  could  suggest  selling  
ques5on.    
addiFonal  items  such  as  printers,  
sonware,  warranty  service,  etc.  to   - Let  the  Interviewee  drive  the  case.  When  you  feel  that  they  have  asked  enough  
improve  profit   informa5on  about  the  following  topics,  give  them  the  exhibit  that  shows  this  
- Loca5ons:  This  is  a  US  DomesFc   informa5on:  
decision  only.  Ignore  internaFonal.   - Sales  Units    à    Exhibit  1  
Compe==ve  Dynamics   - Prices    à    Exhibit  2  
- Costs    à    Exhibit  3  
- All  compeFtors  face  the  same  ASPs  and  
sell  comparable  products.   Answer  –  The  interviewee  cannot  solve  this  case  without  all  three  exhibits.  Once  
they  have  given  you  sufficient  reason  to  hand  them  each  exhibit,  they  should  
drive  through  the  case  to  answer  both  quesFons.  

94
Key elements to analyze
Marke=ng  Strategy     Compe==ve  Analysis  +  Supply  Chain  

§ Using  Exhibits  1-­‐3,  the  interviewee  should  be  able  to  determine   § Using  Exhibit  3,  the  interviewee  should  idenFfy  a  “Full  PotenFal”  
that  margins  are  falling  due  to  product  mix  shining  and  price   improvement  for  Bell  to  improve  its  margins  by  copying  the  strategy  
declines   of  its  direct  compeFtors.  

Notes  to  interviewer   Notes  to  interviewer  

• The  Interviewee  should  be  able  to  answer  the  quesFon,  “Why   § The  interviewee  should  be  able  to  answer  the  quesFon,  “What  can  we  
have  our  profit  margins  declined?”  with  the  following  raFonale:   do  to  improve  our  profitability  and  reach  our  “Full  PotenFal”?”  with  
the  following  COST  REDUCTION  strategy:  
§ Exhibit  1:  Shin  in  Client  preference  towards  Laptops  &  
Netbooks   § Copy  Haysus'  strategy  for  part  procurement  to  reduce  the  build  
cost  of  PCs  
§ Exhibit  2:  Declining  ASPs  for  Laptops  and  Low  ASPs  for  
Netbooks   § Copy  Racer's  strategy  for  Direct  Labor  to  reduce  the  labor  cost  of  
producing  PCs  
§ Exhibit  3:  Cost  posiFon  has  remained  unchanged    
§ Copy  HC's  strategy  for  G&A  to  reduce  the  total  company  overhead  
• The  interviewee  could  answer  the  quesFon  qualitaFvely  by  
interpreFng  Exhibits  1-­‐3.    To  make  this  case  more  quanFtaFvely   § The  interviewee  could  answer  the  quesFon  qualitaFvely  by  
focused,  ask  the  interviewee  to  calculate  various  metrics  for  2005   interpreFng  Exhibit  3.    To  make  this  case  more  quanFtaFvely  focused,  
and  2010.   ask  the  interviewee  to  calculate  various  metrics  for  “Full  PotenFal”.  
• The  interviewee  should  be  able  to  calculate  the  following  using   § The  interviewee  should  be  able  to  calculate  Bell’s  “Full  PotenFal”  
Exhibits  1-­‐3  (Math  calculaFons  on  following  page):   using  Exhibits  1-­‐3  (Math  calculaFons  on  following  page):  
• Net  Income  per  Unit  by  product  type   § Net  Income  per  Unit  by  product  type  
• Revenue  by  product  type  and  Total  Revenue     § Revenue  by  product  type  and  Total  Revenue    
• Cost  by  product  type  and  Total  Cost   § Cost  by  product  type  and  Total  Cost  
• Net  Income  by  product  type  and  Total  Net  Income   § Net  Income  by  product  type  and  Total  Net  Income  

95
Math Solutions
Math  Part  I   Math  Part  II  

BELL  FY2005   BELL  Full  Poten=al  

Desktop   Laptop   Netbook   Desktop   Laptop   Netbook  
PCs   PCs   PCs   Servers   Other   TOTAL   PCs   PCs   PCs   Servers   Other   TOTAL  
Units  Sold  (K)   20.0     10.0     0.0     5.0     5.0     40.0     Units  Sold  (K)   30.0     30.0     5.0     10.0     5.0     80.0    

ASP   $1,000.0     $2,000.0     $0.0    $3,000.0    $250.0     ASP   $1,000.0     $750.0     $500.0    $3,000.0    $250.0    
CPU   800.0     800.0     0.0     800.0     200.0     CPU   350.0     350.0     350.0     350.0     200.0    
NI/Unit   $200.0     $1,200.0     $0.0    $2,200.0     $50.0     NI/Unit   $650.0     $400.0     $150.0    $2,650.0     $50.0    

Revenue  ($M)   $20.0     $20.0     $0.0     $15.0     $1.3     $56.3     Revenue  ($M)   $30.0     $22.5     $2.5     $30.0     $1.3     $86.3    
Total  Cost  ($M)   16.0     8.0     0.0     4.0     1.0     $29.0     Total  Cost  ($M)   10.5     10.5     1.8     3.5     1.0     $27.3    
NI  ($M)   $4.0     $12.0     $0.0     $11.0     $0.3     $27.3     NI  ($M)   $19.5     $12.0     $0.8     $26.5     $0.3     $59.0    
Profit  Margin   20.0%     60.0%     73.3%     20.0%     48.4%     Profit  Margin   65.0%     53.3%     30.0%     88.3%     20.0%     68.4%    

Results:  
BELL  FY2010  
Desktop   Laptop   Netbook  
Desktop   Laptop   Netbook  
PCs   PCs   PCs   Servers   Other   TOTAL  
PCs   PCs   PCs   Servers   Other   TOTAL  
Units  Sold  (K)   30.0     30.0     5.0     10.0     5.0     80.0     NI  ($M)  Improved   $13.5     $13.5     $2.3     $4.5     $0.0     $33.8    
Cost  Per  Box  
ASP   $1,000.0     $750.0     $500.0    $3,000.0    $250.0     Reduced   $450.0     $450.0     $450.0     $450.0     $0.0    
CPU   800.0     800.0     800.0     800.0     200.0    
NI/Unit   $200.0     ($50.0)   ($300.0)   $2,200.0     $50.0    

Revenue  ($M)   $30.0     $22.5     $2.5     $30.0     $1.3     $86.3    

Total  Cost  ($M)   24.0     24.0     4.0     8.0     1.0     $61.0    
NI  ($M)   $6.0     ($1.5)   ($1.5)   $22.0     $0.3     $25.3    
Profit  Margin   20.0%     (6.7%)   (60.0%)   73.3%     20.0%     29.3%    

96
Solution and recommendations
Solu=on  &  Recommenda=ons  

§ Bell  Computer  Inc.  and  the  PC  industry  have  faced  five  years  of  Average  Price  declines  in  the  Laptop  product  
segment.    At  the  same  Fme,  “Client”  or  retail  consumers  have  shined  their  preferences  towards  Laptops  and  a  new  
product  segment  called  Netbooks.    Because  Bell  Computer  has  not  reduced  its  costs  over  this  same  Fmeframe,  
profit  margins  and  net  income  have  deteriorated  despite  increases  in  revenue.  
§ In  order  for  Bell  Computer  Inc.  to  return  to  profitability,  they  must  reduce  their  cost  per  unit  sold.    The  best  
approach  we  idenFfied  was  through  an  analysis  of  our  compeFtors.    Using  our  compeFtors  line-­‐item  costs  as  a  
benchmark,  we  could  potenFally  reduce  our  cost  per  box  by  $450.    This  amounts  to  a  total  Net  Income  
improvement  of  roughly  $34M.  

Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  interviewee  will  note:  

§ AddiFonal  ways  to  improve  net  income  by  selling  complimentary,  high  margin  products  such  as:  
§ Printers  
§ Sonware  
§ Parts  upgrades  
§ WarranFes  
§ AddiFonal  ways  to  cut  costs,  such  as:  
§ SKU  RaFonalizaFon  (Reducing  the  number  of  product  models)    

97
Exhibit 1: Product Mix breakdown by Business Segment for
2005 and 2010

PC Units(K) Sold in 2005 PC Units(K) Sold in 2010

*Note: Netbook PCs did not exist in 2005; “Other” products include Pocket PCs and Calculators

98
Exhibit #2: ASPs by Business Segment 2005 and 2010

*Note: Netbook PCs did not exist in 2005

99
Exhibit 3: Avg. Per Unit Cost Breakdown of a Desktop PC for
Bell (05’,10’) and Top 3 Competitors

*Note: Servers, Laptops, and Netbook Product types have the same costs per unit; however, Net Income will vary
based on ASP.
“Other” products have a total CPU of $200

100
Case 12: Shermer Pharma
By: Ameed Mallick (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client,  Shermer  Pharma,  is  a  venture  backed  start-­‐up  PharmaceuFcal  company.    Over  the  past  15  years,  Shermer  has  
been  developing  a  molecule  that  has  been  approved  by  the  FDA  to  cure  Alzheimer’s  with  90%  efficacy.  
§ Shermer’s  owners  have  hired  us  to  determine:  
5
§ How  should  we  sell  our  product?   Quants.
§ Is  our  product  going  to  be  profitable?  
5

Case  tracker   Fit  Ques=ons   Guide  to  interviewer   Structure

§ Industry:      Health  Care   Spend  first  15  min  on  fit   § This  case  is  focused  on  2  quesFons:  can  you  determine  
what  it  takes  to  launch  a  new  product  profitably  through  
§ Level  of  Difficulty:   § Give  me  an  example  of  a  
a  cost  benefit  analysis,  and  can  you  think  through  the  
Medium   Fme  you  had  to  change   B/E
implicaFons  of  starFng  a  Sales  &  MarkeFng  organizaFon   Mkt. Stgy
§ Case  format:    Market   someone’s  mind.  
from  scratch.  The  case  should  be  driven  by  the   Org. Chg.
entry   § What  are  the  most   interviewee.  
difficult  or  challenging  
§ Concepts  Tested:   § The  interviewee  should  be  guided  towards  2  primary  
decisions  you  have  made  
- Break  Even  analysis   recently?     opFons  for  the  Sales  &  MarkeFng  quesFon  
- MarkeFng   1. Start  your  own  sales  force  
§ In  what  kind  of  work  
strategies   2. Contract  sales    
environment  are  you  
- OrganizaFonal  
most  comfortable?     § Bonus  sales  force  answer  is  sell  Shermer  to  a  larger  firm  
changes  
§ Profitability  will  center  on  the  interviewees  ability  to  
read  tables  and  data  on  the  market  and  our  market  
share.  

101
Clarifying answers and case guide
Clarifying  answers  to  provide  if  asked   Interviewer  Guide  to  case  and  handouts  

Industry  Defini=ons   Case  Structure  –  Interviewee    should  focus  on  the  quesFons  separately.  First    we  
will  brainstorm  how  to  sell  our  product  and  ask  quesFons  to  get  aner  the  costs  
- Our  product  is  a  pill  that  cures  
of  a  sales  force  (Exhibit  1).  An  opFonal  middle  step  is  a  brain  teaser  to  
Alzheimer’s,  an  illness  that  currently  has  
determine  the  size  of  the  Alzheimer’s  market.  (provide  answer  of    5MM  at  the  
no  treatment  that  cures  or  stops  the  
end  of  the  exercise.  They  then  need  to  ask  about  the  costs  and  revenues  from  
progress  of  this  disease  
our  new  product  (Exhibit  2).    
- Alzheimer’s  is  a  degeneraFve,  terminal  
disease  that  causes  senility  and    
demenFa.  30  MM  people  suffer   Exhibit  1-­‐3  –  Aner  Interviewee  walks  through  structure,  they  should  ask  quesFons  
worldwide   about    the  costs  of  sales  and  then  ulFmately  the  profit  equaFon.  
- Sales  would  be  focused  on  Neurologists   - Let  the  Interviewee  drive  the  case.    When  you  feel  that  they  have  asked  
and  Geriatric  psychiatrists  (not  the   enough  informa5on  about  the  following  topics,  give  them  the  exhibit  that  
consumer  of  the  product)   shows  this  informa5on:  
Client  Characteris=cs   - Sales  force  op5ons    à    Exhibit  1  
- We  don’t  have  a  Sales  or  MarkeFng   - Revenues  vs  Costs  à    Exhibit  2  
organizaFon,  the  company  has  purely   - If  the  interviewee  isn’t  gerng  to  the  ques5on  on  the  three  Sales  Force  op5ons,  
been  a  research  firm  to  this  point.   guide  them  back  toward  this  and  provide  Exhibit  1.  
- FDA  approval,  etc  has  been  granted   - Have  a  conversa5on  with  the  Interviewee  to  force  them  to  talk  through  the  
Compe==ve  Dynamics   essen5al  components  of  the  profit  equa5on  that  are  needed  to  answer  the  
ques5on.      
- We  will  not  focus  on  compeFFve  
 
response  during  this  case  as  we  are  the  
only  firm  that  has  a  cure  for  this  illness   Answer  –  The  numbers  reveal  that  our  product  will  be  profitable.  However,  a  
and  will  be  for  the  next  5  years   criFcal  quesFon  will  be  the  sales  channel,  which  is  why  they  need  to  determine  
to  use  contract  sales  in  order  to  be  profitable.  It  is  also  correct  to  state  that  
Shermer  should  sell  the  product  to  a  larger  firm,  but  the  second  half  of  the  case  
should  be  under  the  assumpFon  that  the  owners  decide  to  do  contract  sales.  

102
Key elements to analyze
Market  Entry     Profitability  

§ Using  Exhibits  1  the  interviewee  should  be  able  to   § Using  Exhibit  2,  the  interviewee  should  determine  that  our  
determine  that  contract  sales  is  the  best  financial  opFon   product  will  be  profitable  uFlizing  either  type  of  sales  force.  

Notes  to  interviewer   Notes  to  interviewer  

• The  quesFon  boils  down  to  realizing  that  our  client’s   • You  should  let  them  try  to  size  the  market  as  a  first  step,  but  
competencies  are  rooted  in  developing  a  product,  not  Sales   then  provide  the  actual  number  of  5MM.  
and  MarkeFng.  The  correct  approach  is  therefore  to   • The  firm  requires  that  R&D  costs  be  recovered  by  Year  5  of  the  
contract  sales  or  sell  the  company   product  (a  window  before  which  there  will  be  no  compeFFve  
• The  qualitaFve  approach  to  the  answer  is  appropriate,  but   response)  
once  the  interviewee  has  discussed  enough  of  the  inputs,   ― We  can  ignore  NPV  for  this  quesFon  and  just  assume  a  
exhibit  1  should  be  shared:   straight  line  amorFzaFon…interviewee  should  come  to  this  
• There  is  missing  data  in  the  chart  that  should  be  easy  to   conclusion  on  their  own,  but  course  correcFng  is  okay  if  they  
calculate  (soluFons  provided)   get  stuck  
• A  third  opFon  with  no  a_ached  data  would  be  to  sell  the   • CriFcal  informaFon  on  the  exhibit  should  be  provided  as  the  
company  to  a  larger  firm,  this  is  an  appropriate  discussion   interviewee  asks,  though  should  only  be  volunteered  if  the  
to  have  and  if  prompted  the  interviewee  should  discuss  the   interviewee  is  stuck  
tradeoffs  of  this  more  qualitaFvely   • We  can  ignore  tax,  however  a  good  interviewee  will  ask  about  
• A  contract  sales  organizaFon  is  typically  less  effecFve  than   it,  and  doing  so  would  realize  we  sFll  hit  our  profit  targets  by  
internal  sales,  though  most  interviewers  wont  pick  up  on   year  5  
this  and  simply  giving  the  financial  answer  is  appropriate   • Manufacturing  &  Packaging  costs  are  included  in  the  Gross  
Margin  

103
Math Solutions: Exhibit 1

Develop own Sales Force   Contract Sales Force  

Percent of visit focused on 100%   50%  

our product  

Annual fully loaded cost per $200k   n/a  

Sales Rep  

Cost per sales call   $170 (($200k*85)/100)   $60  

Total calls required   100k (should be asked/given)   200k (100k*2)  

Total Sales Reps needed   85   170 (85*2)  

Total annual Selling Cost   $17MM ($200k*85)   $12MM ($60*200k)  

104
Math Solutions: Exhibit 2
Total Market   5MM  
*Data  at  len  to  be  provided  
Annual gross margin per user   $1000   as  the  quesFons  are  asked  
R&D Cost   $1.5B   by  interviewee  
G&A cost   $25MM  

Year 1   Year 2   Year 3   Year 4   Year 5  

Projected Market 5%   10%   25%   40%   60%  
penetration  
Total Users   250k 500k 1.25MM 2MM 3MM
(5%*5M)   (10%*5M)   (25%*5M)   (40%*5M)   (60%*5M)  

Total Gross Margin   $250MM $500MM $1.25B $2B (2MM* $3B (3MM*
(250*$1000)   (500*$1000)   (1.25MM* $1k)   $1k)  
$1k)  
Amortized R&D Costs   $300MM $300MM $300MM $300MM $300MM
($1.5B/5)   ($1.5B/5)   ($1.5B/5)   ($1.5B/5)   ($1.5B/5)  
Selling Costs   $12 MM $12 MM $12 MM $12 MM $12 MM
(from ex.1)   (from ex.1)   (from ex.1)   (from ex.1)   (from ex.1)  
G & A Costs   $25 MM   $25 MM   $25 MM   $25 MM   $25 MM  

Net Income   ($87MM)   $163MM   $913MM   $1.663B   $2.663B  

105
Solution and recommendations
Solu=on  &  Recommenda=ons  

§ Shermer  Pharma’s  core  competency  is  their  research  focus.  The  plausible  argument  can  be  made  that  they  should  
sell  the  company  to  a  larger  firm  that  has  the  appropriate  capabiliFes  that  it  takes  to  market  and  sell  a  product.  
Though  this  might  be  the  right  answer,  the  client  isn't  always  going  to  do  take  the  opFmal  approach,  parFcularly  
when  it  comes  to  ownership  of  the  firm.  We  need  to  be  flexible  to  account  management’s  wishes  
§ Assuming  the  owners  decide  not  to  sell  the  company,  contract  sales  is  the  next  best  opFon,  that  gives  us  the  best  
scenario  when  determining  overall  profitability  of  our  product.  
§ The  la_er  half  of  the  case  is  simple  math,  determining  a  P  &  L  for  our  product  and  coming  up  with  the  correct  
answer  that  Shermer  can  be  profitable.  
§ Ask  for  high  level  analysis  at  the  end  of  the  case,  what  else  should  be  consider  before  engaging  this  plan?  

Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  interviewee  will  note:  

§ There  is  an  opFon  to  sell  the  company,  even  though  there  is  no  data  provided  to  support  this  conclusion  
§ Some  of  the  numbers  give  an  obvious  answer  before  needing  the  exact  calculaFons  
§ Challenging  the  interviewer  on  the  effecFveness  of  a  contract  sales  organizaFon  is  a  bonus.  A  qualitaFve  
argument  can  be  made  that  for  an  addiFonal  $5MM  a  year,  we  can  realize  the  benefit  of  a  more  effecFve  
sales  force,  this  isn't  the  financially  correct  answer  but  may  be  the  right  tradeoff  given  the  relaFvely  minimal  
impact  to  the  bo_om  line  vs.  revenues  of  $3B  
§ $1000  per  year  for  a  life  saving  cure  for  a  currently  incurable  ailment  is  definitely  under  priced!  

106
Exhibit 1: Sales force options

Develop own Sales Contract Sales Force  

Force  
Percent of visit focused 100%   50%  
on our product  
Fully loaded annual $200k   n/a  
cost of 1 sales rep  
Cost per sales call   $60  

Total calls required  

Total Sales Reps 85  

needed  
Total annual Selling
Cost  

107
Exhibit 2: Annual Net Income

Year 1 Year 2 Year 3 Year 4 Year 5

Projected Market 5% 10% 25% 40% 60%

penetration

Total Users

Total Gross Margin

Amortized R&D
Costs
Selling Costs

G & A Costs

Net Income

108
Case 13: Hospitality Co
By: Craig DePriester (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client  owns  a  large  hotel  chain  and  is  thinking  about  invesFng  in  an  add-­‐on  for  a  waterpark  on  one  of  its  properFes.  
This  has  been  tested  in  some  places  and  has  a  lot  of  potenFal  benefits:  family  friendly,  year-­‐round  availability,  and   5
potenFal  to  bring  in  new  clientele.  They  have  done  a  lot  of  work  surveying  their  chain  and  believe  that  they  have  found   Quants.
the  right  hotel  to  experiment  with  a  waterpark  add-­‐on.  Currently,  this  hotel  has  a  lot  of  business  travelers,  but  our  client  
believes  it  would  also  be  a_racFve  for  families.     5
§ Our  client  is  nervous  about  the  capital  required  to  build  the  add-­‐on  and  wants  to  make  sure  that  they  are  making  the   Structure
right  investment.  That’s  why  we  brought  you  on  board.  What  do  you  think?  

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

Invest.
B/E
§ Industry:      Leisure   Spend  first  15  min  on  fit   § This  case  forces  the  interviewee  to  focus  on  the  right  
issues  and  can  be  tricky.  The  candidate  will  need  to  
§ Level  of  Difficulty:   § Tell  me  about  a  Fme  
ignore  compeFFve  posiFoning  and  focus  on  the  
Medium   when  you’ve  had  a  
profitability  of  the  waterpark.  The  waterpark  should  
conflict  with  a  
§ Case  format:   recoup  its  investment  and  can  even  charge  a  premium.  
teammate.  
Opportunity  
§ They  will  need  to  ask  the  right  quesFons  about  the  
Assessment   § How  would  your  friends  
investment,  its  buyback  period,  and  make  assumpFons  
describe  you?  
§ Concepts  Tested:   about  vacancy.  
§ How  would  you  compare  
- Investment   § There  are  also  lots  of  potenFal  risks  and  benefits  that  a  
our  industry  with  others  
- Breakeven  analysis   great  interviewee  will  recognize  that  allow  them  to  
you  are  interested  in?    
consider  the  case  on  another  level  of  detail.  

109
Clarifying answers and case guide

Clarifying  answers  to  provide   Interview  guidelines  

(Ignore  any  discussion  of  compeFFon  or   This  is  a  simple  profitability  calculaFon  (Profit  =  Revenue  –  Costs)  for  the  
market  dynamics)   investment  of  a  water-­‐park  add  on.  Many  candidates  will  focus  on  the  revenue  
side,  but  we  need  to  back  into  the  minimum  amount  the  hotel  has  to  charge  to  
CompeFFve  dynamics  
break-­‐even  on  its  investment  in  the  payback  period.  The  math  porFon  assumes  
- There  are  no  compeFtors  immediately   that  all  guests  are  incremental  (the  50%  vacancy  rate).  This  is  done  to  simplify  
nearby  for  a  waterpark   the  case,  but  it  may  require  a  li_le  explanaFon  to  the  interviewee  .  
- We  have  no  informaFon  about    
compeFtors  
A  sample  case  structure  would  include  the  following:  
- There  is  no  possibility  for  a  compeFFve  
response  in  the  short  run     1) Cost  structure  -­‐  IdenFfy  the  costs  (fixed  and  variable)  as  well  as  the  relevant  
payback  period  for  the  investment.  
Market  informaFon     2) Breakeven  analysis  -­‐  Based  on  the  esFmated  room  rates  and  payback  period,  
idenFfy  how  much  the  hotel  would  have  to  charge  (fixed  +  variable  costs)  for  
- We  do  not  have  any  specifics  about  the  
each  room  to  breakeven  over  the  life  of  the  investment.  
market  and  are  unable  to  conduct  
addiFonal  survey  data   3) AddiFonal  risks  and  benefits  –  QualitaFve  assessment  of  other  potenFal  
benefits/issues  that  may  arise  from  the  investment.  
Hotel  characterisFcs  
- Hotel’s  normal  clientele  is  business  
travelers,  but  we  believe  that  this  
waterpark  will  bring  in  families  as  well  

110
Math question and solution

Math  ques=on  

§ How  much  will  the  hotel  need  to  charge  per  room  to  recoup  its  costs?  

Math  solu=on   Math  informa=on  

The  math  is  about  backing  into  how  much  the  hotel  needs  to  charge  per  room  over  the  course  of  the   § Investment:  
three  years  to  recover  its  investment.  The  interviewee  needs  to  ignore  the  variable  cost  and  focus  on   - $6  million  
how  to  spread  the  fixed  cost  of  the  investment  over  the  payback  period.   investment  
 
- Payback  in  3  years  
$6  million  investment  /  3  years  =  $2  million  /  year  in  revenues  
§ Hotel:  
 
400  rooms  X  50%  vacancy  X  350  days  (don’t  use  365)  year  =  70,000  rooms  per  year   - 400  rooms  
(Many  candidates  will  struggle  with  this,  try  to  combine  costs,  and  will  make  the  difficult  on   - With  waterpark,  50%  
themselves.  Let  them  struggle  for  a  few  minutes  before  helping).   vacancy  on  average  
  for  the  year  
$2  million/year  divided  by  70,000  rooms/year  =  28.6,  or  about  $30/night  in  fixed  cost   § Cost  structure:  
  - Investment  is  fixed  
The  candidate  should  add  this  with  the  variable  cost  for  around  $70/night  total  for  the  three  year   cost  
period.  If  they  do  not  interpret  the  number  immediately,  ask  them  what  they  think  about  the  $70/ - Variable  cost  is  $40/
night  total.  
night  per  room  

111
Key elements to analyze
Pricing  decisions   Other  revenue  streams   Poten=al  risks  and  issues  

§ How  should  we  interpret  the   § What  other  potenFal  benefits/ § What  are  the  potenFal  risks  and  issues  
breakeven  point  on  the  hotel  costs?   revenue  streams  might  this  have?     associated  with  ?  
§ How  do  we  think  about  pricing?  

Notes  to  interviewer   Notes  to  interviewer   Notes  to  interviewer  

§ The  interviewee  should  realize  $70  is   § There  are  a  lot  of  potenFal  places  to   § Similarly,  there  are  a  lot  of  potenFal  
an  extremely  low  number,  especially   go  here,  but  here  are  some  ideas:   risks:  
considering  that  families  may  be   § Charging  admission  entry   § Management  competency  (do  
staying  at  the  park.  
we  have  any  experience?)  
§ Food/restaurants  at  the  park  
§ This  will  also  ask  the  interviewee  to   § Regulatory/insurance  risks  
gauge  this  number  against  the  real   § PromoFonal  Fe-­‐ins  
cost  of  hotels  and  their  personal   § Health/liFgaFon  risks  
§ Merchandise/swim  suit  
experiences.   associated  with  theme  parks  
apparel  
§ RealisFcally,  the  hotel  will  be  able  to   § CompeFFve  response  
§ Expansion  to  other  hotels  
charge  significant  premium  in  addiFon   § AlienaFng  business  customers  
to  covering  its  basic  costs.   with  family  friendly  
§ There  are  two  opFons:  charge  an   atmosphere  
addiFonal  fee  for  waterpark  entry  or  
make  it  all-­‐inclusive  with  hotel  fee.  

112
Solution and recommendations
Solu=on  &  Recommenda=ons  

§ This  project  should  be  undertaken.  While  there  are  a  number  of  potenFal  risks  and  consideraFons  (including  
compeFFve  dynamics),  the  economics  are  extremely  a_racFve  and  the  price  ($70/room)  to  earn  back  our  
investment  is  relaFvely  low  for  almost  any  hotel,  much  less  one  with  these  ameniFes.  
§ The  interviewee  should  make  a  solid  case  for  their  recommendaFon,  using  the  other  potenFal  avenues  for  profit  
and  the  low  payback  price  as  key  points  for  its  undertaking.  
§ While  the  model  answer  suggests  undertaking  the  investment,  if  an  interviewee  has  a  compelling,  logical  story  on  
why  the  risks  outweigh  the  benefits,  it  should  be  judged  on  its  own  merits.  It  would  have  to  be  a  powerful  argument  
though.  

Bonus/Guide  to  an  Excellent  Case  

§ This  case  is  defies  a  lot  of  candidate’s  expectaFons,  with  a  lot  of  them  really  focusing  on  compeFFve/market  
dynamics.  An  excellent  interviewee  will  get  to  the  math  quickly  by  focusing  on  the  important  issues:  returning  the  
investment.  
§ AddiFonally,  an  excellent  interviewee  will  interpret  the  breakeven  point  as  low.  Asking  them  to  “interpret”  these  
numbers  provides  a  good  check  of  business  judgment.  Furthermore,  an  excellent  interviewee  will  provide  a  lot  of  
creaFve  risks/benefits  from  this  investment  as  well.  

113
Case 14: Rock Energy
By: Mauricio Atri (Kellogg Class of ‘12); Edited by: Ron Mantel (Kellogg Class of ‘15)

Case  Ques=on  

§ Rock  Energy,  an  Oil  &  Gas  company,  is  evaluaFng  the  purchase  of  one  of  three  oil  fields  in  LaFn  America.    Aner  Rock  
Energy  has  decided  which  oil  field  to  purchase,  it  will  outsource  all  drilling  related  acFviFes.  You  have  been  brought  in  to  
idenFfy  the  best  investment  for  Rock  Energy.  
7
§ How  would  you  evaluate  the  three  oil  fields,  and  which  oil  field  should  Rock  Energy  purchase?  
Quants.

Case  tracker   Fit  Ques=ons   Guide  to  interviewer   5

Structure
§ Industry:      Energy   Spend  first  15  min  on  fit   § Main  steps  the  interviewee  should  take:  
§ Level  of  Difficulty:   — You  will  likely  see  something  similar  to  the  Revenue/
§ What  are  you  most  
Medium   Cost  framework  where  the  interviewee  assess  the  
proud  of?  
investment  opportunity  for  each  field;  provide  Exhibit  
§ Case  Format:   § Describe  a  Fme  at   #1  once  they  are  ready  to  approach  Revenues/Costs   Invest.
Opportunity   Kellogg  where  you   (aner  iniFal  quesFons)   Creativity
Assessment   worked  with  a  team  to   — With  the  info  from  Exhibit  #1,  interviewee  is  expected  
§ Concepts  Tested:   achieve  a  challenging   to  calculate  Revenues  and  Costs  (interviewee  should  
goal   idenFfying  that  they  need  to  ask  for  price  of  oil  and  
- Investments   cost  to  secure  iniFal  rights)  
- CreaFvity   — The  price  and  barrels  extracted  by  day  will  allow  the  
interviewee  to  esFmate  the  total  revenue  and  profit  by  
well.  
— Aner  calculaFng  profit,  the  interviewee  should  
consider  other  factors,  risks  that  could  affect  the  
decision  investment  

114
Clarifying answers and case guide

Clarifying  answers  to  provide   Guide  to  case  /  Guide  to  handouts  

Industry  CharacterisFcs/Market  Economics   Part  1  –  Hand  out  exhibit  #1  once  the  interviewee  is  at  the  point  in  their  
framework  where  they  will  analyze  Revenue  &  Costs  
- The  rights  being  offered  to  Rock  Energy  
gives  them  the  right  to  drill  during  year   - This  handout  should  lead  the  interviewee  to  understand  that  each  region  will  
1,  and  produce  oil  for  20  years.    Assume   have  different  geological  characterisFcs  which  will  affect  the  drilling  Fme,  
that  no  oil  is  produced  unFl  the   producFon,  revenues  and  costs  for  Rock  Energy  
beginning  of  year  2.   Part  2  –  Profitability    
- Rock  Energy  can  get  the  drilling   - Provide  the  price  of  oil  ($50/bbl)  if  the  interviewee  does  proacFvely  ask  for  it  
operator  to  deploy  a  maximum  of  10   when  trying  to  calculate  profitability;  ask  the  interviewee  to  work  out  the  
rigs  in  each  of  the  regions   profitability  for  each  field,  and  not  only  by  well.  
- The  cost  of  the  rig  day  includes  crew,   - The  answer  will  be  a  funcFon  of  the  investment,  variable  costs,  and  quanFty  
consumables  and  services   of  oil  extracted  by  field.    This  last  variable  will  depend  on  the  number  of  wells  
- Any  amount  of  oil  being  extracted  will   drilled  in  one  year.    
be  sold  at  the  spot  market  price  of  the  
Part3  –  Conclusion  and  other  issues  
moment  
- For  simplicity  assume  that  the  oil  wells   - Rock  Energy  should  choose  to  buy  the  rights  for  Region  2  because  it  will  offer  
will  produce  the  same  amount  of  oil  for   the  best  profits,  but  there  are  other  factors  that  could  impact  the  decision  to  
the  next  20  years  with  no  maintenance   invest:  
costs     - Insurance  costs;  poliFcal  stability  of  the  region;  labor  contracts  and  
- The  rights  to  extract  oil  cost  $40M  in   unions;  volaFlity  of  oil  prices;  oil  quality  differences  
each  region  

 
 

115
 Math question and solution

Math question

§ What  are  the  first  profits  during  the  first  year  of  producFon  (i.e.  1st  year  spent  on  drilling,  and  producFon  begins  in  2nd  year)  

Math solution
• Time  to  complete  a  well  =  (Depth/PenetraFon  Rate):  Region  1  =  60,  Region  2  =  90,  Region  3  =  180  
• Produc=on  per  well  by  region  =    Daily  producFon  *  360  days:    Region  1  =  36K,  Region  2=72K,  Region  3=  108K  
• Cost  per  well  =  Days  to  complete  well*Cost  per  rig  day.  Yearly  Revenue  per  well  =  Price  *  #  barrels  per  year.  Number  of  wells  per  year  =  360/
(Time  to  complete  a  well)  *  number  of  rigs.  Profit  Margin  =  (Profit  per  well)/(cost  per  well).  Total  Revenue  =(Yearly  Revenue)  *(  Number  of  wells  
per  year).    Total  Cost  =  (Cost  per  well)*(number  of  wells)+(Rights  to  extract  oil).    Profit  =  Total  Rev  –  Total  Cost.  

  Concept   Region  1   Region  2   Region  3  

Investment  Cost  (Rights  to  extract  oil)    $                    40,000,000      $                    40,000,000      $                    40,000,000    
Cost  per  well    $                                300,000      $                                900,000      $                          3,600,000    
Yearly  Revenue  per  well    $                          1,800,000      $                          3,600,000      $                          5,400,000    
Profit  per  well    $                          1,500,000      $                          2,700,000      $                          1,800,000    
Profit  margin  per  well   500%   300%   50%  
(360/60)=6x10  
Number  of  wells  per  year   40   20  
Rigs=60  

Total  Revenue    $                108,000,000      $                144,000,000      $                108,000,000    

Total  Cost    $                    58,000,000      $                    76,000,000      $                112,000,000    
Profit    $        50,000,000.00      $        68,000,000.00      $        (4,000,000.00)  

116
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ Rock  Energy  should  invest  in  buying  the  rights  for  Region  2  
§  It  is  important  to  recognize  that  even  though  the  profit  margin  for  Region  1  is  significantly  higher  on  a  per  well  
basis,  the  return  of  the  investment  depends  on  the  total  number  of  wells  that  you  can  drill  in  the  first  year  and  the  
upfront  cost  for  the  rights  to  extract  oil  in  that  Region  
§ AddiFonally,  the  interviewee  should  be  able  to  idenFfy  other  qualitaFve  aspects  of  the  investment  that  might  affect  
the  decision  to  invest  in  a  certain  Region  

Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  answer  would  menFon  and  briefly  summarize  the  impact  of  including  an  expected  value  analysis,  
which  would  assign  different  probabiliFes  of  extracFng  the  expected  barrels  per  day  
 

117
Exhibit #1: Oil Field profiles, 2010

Drilling rates by Region Average depth of wells by Region

32 30 4000
3600
30
28 3500
26
24 3000 2700

Avg. Depth (meters)

22 20 20
20 2500
Meters/day

18
16 2000
14
12 1500 1200
10
8 1000
6
4 500
2
0 0
Region 1 Region 2 Region 3 Region 1 Region 2 Region 3

Average depth (meters)

Region  1   Region  2   Region  3  

Max  number  of  Rigs  that  would  operate  concurrently   10   10   10  
Average  well  producFon  (barrels  per  day)   100   200   300  
Cost  per  rig  day  ($US)   $5,000     $10,000     $20,000    
*Note:  Wells  are  conFnuously  dug  during  year  1  (assume  360  days),  and  oil  is  extracted  beginning  of  year  2.    Wells  are  
dug  by  “Rigs”.  Once  a  Well  has  been  completed,  the  Rig  moves  on  to  dig  another  well.  

118
Case 15: Orange Retailer Co.
By: Mauricio Atri (Kellogg Class of ‘12)

Case  Ques=on  

§ Orange  Retailer  Co.  (ORC)  manufactures,  import/exports  and  distributes  high-­‐end  world  known  brands  and  conservaFve/
tradiFonal  apparel  brands  in  several  countries  in  LaFn  America.  ORC  is  considering  entering  a  new  country  in  LaFn  America,  and   5
you  have  been  hired  to  determine  whether  they  should  enter  this  new  market  or  not.  
Quants.
§ Don’t  men5on  this  un5l  they  have  determined  to  enter  the  market:  What  would  be  the  best  entry  strategy?  
5
Structure
Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:      Retail   Spend  first  15  min  on  fit   § This  case  tests  the  ability  to  understand  business  concepts  
and  quanFfy  the  potenFal  benefits  and  risks  of  entering  a  new  
§ Level  of  Difficulty:   § Ask  interviewee  the  name  
market.  
Medium   of  a  firm  with  which  they   Mkt Size.
§ The  interviewee  should  be  able  to  size  the  potenFal  market,  
have  an  interview,  then  ask   Mkt. Stgy
§ Case  Format:    Market   disFnguish  different  type  of  customer  segments,  and  idenFfy  
Why  this  firm?   Creativity
Entry   entry  strategy  for  Orange  Retailer  Co.  
§ Tell  me  about  a  Fme  when   § AddiFonally,  the  interviewee  should  idenFfy  some  associated  
§ Concepts  Tested:  
you  led  a  team  through  a   risks  and  potenFal  ways  to  miFgate  them  
- Market  Sizing   challenge   § Hand  out  exhibit  #1  –  Size  of  potenFal  market  and  customer  
- MarkeFng  Strategy   segments  
§ Hand  out  exhibit  #2–  Current  players’  share  and  margins  
- CreaFvity   § Aner  quanFfying  the  size  of  the  opportunity  and  the  ideal  
strategy  to  enter  this  market,  the  interviewee  should  idenFfy  
qualitaFve  aspects  of  entering  this  new  market  
§ Consider  doing  this  case  as  an  interviewer  led  case  for  
beginners,  and  interviewee  driven  case  for  advanced  casers  

119
Clarifying answers and case guide

Clarifying answers to provide Guide to case / Guide to handouts

Industry  Characteris=cs/Market  Economics   Part  1  –  Hand  out  aner  introducing  case  

- Macroeconomic  outlook  is  posiFve  in   - Is  there  a  market  opportunity  for  ORC?  What  is  the  size  of  the  relevant  
the  new  market   market?  Interviewee  should  quanFfy  the  size  of  the  market  for  fashion/
- DistribuFon  channels  are  primarily   high  end  and  conservaFve/tradiFonal  apparel  
department  stores,  free  standing  points   - AddiFonally,  there  should  be  insight  about  the  most  a_racFve  customer  
of  sale,  and  online  sales  
segments  to  target    
 
Client  Characteris=cs   Part  2  –  Hand  out  Exhibit  2  aner  solving  Exhibit  1  
- Client  is  currently  the  third  biggest   - The  data  should  lead  the  interviewer  to  recognize  that  the  high-­‐end  
apparel  retailer  and  has  focused  on  F/H   fashion  market  is  probably  driven  by  brand  and/or  other  factors  besides  
and  T/C  brands  for  over  30  years   price.  The  margins  are  more  a_racFve.  ORC  should  be  able  to  leverage  
- ORC  has  tradiFonally  targeted  High-­‐End   the  “world  known”  brands  to  a_ract  customers  in  this  segment.  
clients,  men  and  women  of  ages  15-­‐40   AddiFonally,  by  targeFng  “young  adults”  and  “teen  &  children”  it  can  
 
serve  +80%  of  the  market  
- In  the  conservaFve/tradiFonal  market,  there  seems  to  be  stronger  
compeFFon,  which  is  probably  driven  primarily  by  price.  Achieving  low  
costs  in  this  market  by  imporFng  would  be  unlikely  due  to  tariffs,  and  
local  manufacturing  would  probably  require  significant  fixed  (plants,  …)  
and  variable  (labor,  …)  costs    
Part3  –  What  other  elements  should  ORC  consider  in  its  decision  to  enter  
this  market?    

120
Key elements to analyze
Topic  1  being  tested   Topic  2  being  tested   Topic  3  being  tested  

§ What  is  the  potenFal  of  the  market  for   § What  could  the  client  drivers  be  for   § What  channels  would  you  use  to  enter  
this  apparel  brand?     each  segment?   the  market  
§ When  asked,  answer  the  following:  ORC   § Should  ORC  compete  in  both   § What  other  elements  need  to  be  
has  tradi5onally  targeted  High-­‐End   segments,  one  or  neither?   considered?  
clients,  men  and  women  of  ages  15-­‐40   § When  asked,  current  players  include   § What  factors  would  impact  how  much  
§ When  asked,  say  that  Young  Adults  and   local/domes5c  players   market  share  we  could  get?    
Adults  make  70-­‐80%  of  the  market    

Notes  to  interviewer   Notes  to  interviewer   Notes  to  interviewer  

§ With  Exhibit  1,  you  can  esFmate  the   § The  Fashion/High-­‐end  market  seems   § ORC  should  probably  enter  the  market  
size  of  each  market:  Value  Driven   to  be  driven  by  factors  such  as  brand,   by  distribuFng  to  department  stores  
(245M),  ConservaFve  (155M),  Fashion   trendiness  items,  aspiraFon  aspects,   coupled  with  online  opFons,  limiFng  
&  High-­‐end  (105M)   or  similar.  Assuming  manufacturing   costs  of  tesFng  the  market.  Once  this  
§ Although  the  high-­‐end  market  is  smaller   costs  are  similar,  players  seem  to  be   has  proven  successful,  ORC  should  
(105M)  than  the  conservaFve  market   able  to  charge  more  for  products  that   think  about  rolling  out  a  series  of  free  
(155M),  its  concentrated  in  two   have  a  brand  recogniFon   standing  stores,  beginning  by  flagships  
customer  segments  that  account  for   § The  TradiFonal  market  appears  to  be   stores  for  the  brand  which  will  help  
~70%-­‐80%  of  the  market,  which  would   a  price  sensiFve  market,  driven  by   them  posiFon  in  the  new  market  
make  entry  efforts  simpler  and  more   cost.  Assuming  that  ORC  has  no  cost   § Some  of  the  other  elements  that  
focused.   advantages  over  local  players,  this   could  be  considered  are:  new  
seems  like  a  less  a_racFve  market  
§ Value  Driven  apparel  is  not  something   organizaFonal  structure,  investments  
(tariffs,  or  investment  cost  would  
in  which  ORC  focuses,  so  they  should   in  adverFsing,  transportaFon  Fmes  
not  enter  this  segment   drive  ORC  prices  up)   and  costs  ,  and  exchange  rates  risk  
§ ORC  should  only  enter  the  F/H  market  

121
Solution and recommendations

Solution & Recommendations

§ ORC  should  enter  the  Fashion/High-­‐end  market.    It  should  be  able  to  leverage  the  “world  known”  
brands  to  posiFon  itself  in  this  market  as  an  a_racFve  opFon  for  the  “adults”  and  young  adults.”  
Assuming  ORC  has  compeFFve  capabiliFes  for  “teens  &  children”  segments,  or  can  develop  these  
with  li_le  risk  or  cost,  then  it  should  also  consider  entering  this  segment.  
§ To  enter  this  market,  ORC  should  focus  on  department  stores  first  to  test  the  market  with  low  risk.  
It  could  enter  the  department  stores  and  online  channels    without  the  need  of  a  local  partner.    
Once  the  market  has  been  tested,  it  could  be  convenient  to  acquire/form  a  JV  to  build  an  
independent  store  network  

Bonus/Guide to an Excellent Case

§ An  excellent  answer  should  menFon  investments  costs,  manufacturing  costs,  transportaFon  costs,  
and  exchange  rate  risks.  If  costs  are  expensed  outside  of  the  new  market,  there  are  opFons  to  
miFgate  exchange  rate  risks  by  buying  currency  financial  opFons  

122
Exhibit #1: Apparel market

Market  Share  (revenue)   Market  share  by  customer  

segment  (revenue)  
$500M  
100% 100%
6%  
15%  
90% 21%   90% 21%  
80% 24%   40%  
80%
70% 35%  
70% Fashion/High-­‐end   34%  
60%
31%  
60% TradiFonal/ConservaFve   50% 20%  
40%
50% Value  Driven   70%  
30%
40% 50%   45%  
20% 40%  
30% 10%
49%  
20% 0%
Seniors   Adults   Young  Adults   Teens  &  
10% Children  

0%
Market  Share  
Fashion/High-­‐end   TradiFonal/ConservaFve   Value  Driven  

123
 Exhibit #2: Current players

Current  players  in  the  Fashion/High-­‐end  market  

Fashion/High-­‐end   Player  1   Player  2   Player  3  

Market  share   40%   26%   34%  
Gross  Margin   70%   43%   55%  
OperaFng  Margin   45%   18%   30%  

Current  players  in  the  ConservaFve/TradiFonal  market  

Conserva=ve/  
Tradi=onal   Player  1   Player  2   Player  3   Player  4   Player  5  
Market  share   21%   18%   19%   21%   21%  
Gross  Margin   21%   22%   20%   23%   20%  
OperaFng  Margin   11%   12%   10%   13%   10%  

124
Case 16: Vitality Insurance, Inc.
By: Peter Manoogian (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client,  Vitality    Insurance,  is  a  leading  provider  of  supplemental  insurance  products  in  the  United  States.        
§ Vitality  agents  partner  with  companies  to  offer  their  employees  opFonal,  supplemental  insurance  for  such  condiFons  as  
life,  long-­‐term  disability,  etc.  
3
§ Vitality  has  undergone  fairly  steady  growth  in  the  past  two  years,  but  profit  margin  is  decreasing.  What  should  they  do   Quants.
about  it?  
7
Structur
e
Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:      Financial   Spend  first  15  min  on  fit   § This  case  is  primarily  about  diagnosing  the  source  of  cost  
Services   increases  for  an  insurance  firm  and  then  determining  
§ Give  me  an  example  of   Reducing
whether  those  increases  are  jusFfied  by  increased  profits   costs;
§ Level  of  Difficulty:   when  you  had  to  
Medium   moFvate  others  who  did   § The  case  is  fairly  structured  in  that  the  interviewee  will   profit
not  report  to  you   need  to  “peel  back”  the  layers  of  this  case  in  the  
§ Case  Format:  
following  process  
Improving  profitability;   § How  would  a  friend,  or  a  
Reducing  Costs   professor  who  knows   § Recognize  that  sales  costs  are  rising  drasFcally  
you  well,  describe  you?  
§ Concepts  Tested:   § IdenFfy  the  shin  in  sales  contest  mix  for  2010  
- Supply/value  chain   § Evaluate  the  effecFveness  of  the  new  contest  mix  
- MarkeFng  strategy   § With  any  cost  reducFon  case,  an  interviewee  may  seek  
- Customer  strategy   informaFon  on  other  cost  drivers.    If  this  occurs,  politely  
tell  the  interviewee  nothing  else  exists  and  then  refocus    
 
125
Clarifying answers and case guide
Clarifying  answers  to  provide   Guide  to  case  /  Guide  to  handouts  

Client  Characteris=cs   Exhibit  1–  Provide  once  interviewee  receives  clarifying  informaFon  (len  
- Vitality  is  the  leader  in  its  category  and   pane)  and  asks  for  more  detail  on  costs  
has  over  10K  field  sales  agents     Interviewee  should  recognize  the  following:  
- Vitality  sells  all  policies  through  its  field   - All  line  items  except  for  sales  costs  growing  at  10%  per  year  
sales  agents  who  are  solely  compensated  
on  a  %  commission  of  total  new  premium,   - Sales  costs  grow  at  10%  from  2008  to  2009,  but  at  45%  from  2009  to  
defined  as  premium  from  new  customers   2010  (while  premium  growth  remains  at  10%)  
or  addiFonal  premium  (up-­‐sell)  from   - Stronger  interviewees  will  quickly  note  that  something  is  strange  w/the  
exisFng  policyholders   2010  sales  costs,  but  will  calculate  to  confirm  
- In  addiFon  to  the  commission,  short  term   - Finally,  profit  margins  are  declining  significantly  from  09-­‐10,  suggesFng  
prioriFes  are  onen  communicated  via     that  the  increase  in  sales  costs  is  not  paying  off  
sales  contests  that  focus  on  a  parFcular   Exhibit  2–  Provide  if  interviewee  asks  about  the  value  chain  or  selling  
customer  segment  or  acFvity  and  pay  a   process.    If  the  interviewee  asks  about  the  new  contests  focused  on  
bonus  in  addiFon  to  standard  commission   premium,  provide  the  following  informaFon:    
- Major  costs:  sales,  G&A,  and  adverFsing  
- Vitality  launched  a  contest  called  “Sweeps  Week”  that  aimed  to  drive  
Compe==on  
increased  premium  in  weeks  that  were  tradiFonally  low  volume  for  the  
- Vitality  has  a  few  other  compeFtors  in   company.    Vitality  paid  an  extra  10%  bonus  on  all  premium  booked  in  
this  market  who  have  seen  similar  
those  two  weeks.      
growth,  but  Vitality  is  a  leader  in  the  
space  and  thus  compeFFon  is  not  the   - Sales  agents  thought  “Sweeps  Week”  was  a  great  contest  
focus   - We  have  no  info  on  the  addiFonal  two  contests  on  new  accounts  
Industry  trends   Exhibit  3-­‐  Provide  if  interviewee  asks  for  further  detail  on  the  effecFveness  
- Mature  market     of  “Sweeps  Weeks”  
- Agent  turnover  is  very  high  on  a  yearly    
basis  (though  was  lower  during  the  
 
recessionary  period)  
 

126
Key elements to analyze

Supply/value  chain     Marke=ng  strategy  

§ As  seen  in  Exhibit  2;  Vitality’s  sales  agents  are    engaged   § Exhibit  3  shows  weekly  premiums  for  all  of  Vitality  from  2008  
in  several  acFviFes  along  the  sales  process,  and  that   –  2010.  The  chart  is  shown  in  a  way  that  compares  each  
new  premium  can  be  generated  in  many  ways.       year’s  actual  premium  to  the  average  of  historical  premium  
for  that  year,  so  as  to  provide  for  a  “benchmark”  
§  The  interviewee  should  recognize  the  shin  in  contest  
comparison.    
mix  from  2008/09  to  2010.    Coupled  with  the  addiFonal  
informaFon  provided  in  the  previous  slide,  the   § The  “Sweeps  Week”  contest  launched  in  2010  is  shown  in  
interviewee  should  realize  that  Vitality  has  shined  its   weeks  4  and  20  in  the  chart,  and  clearly  yields  high  premium  
focus  more  toward  total  premium  and  new  accounts  in   volume  for  those  parFcular  weeks.    However,  it  is  done  at  
2010   the  expense  of  the  weeks  surrounding  the  sweeps  week.  
§ This  implies  that  agents  may  be  “gaming”  the  system  by  
pushing/pulling  sales  into  that  week  to  earn  the  contest  $$  
Notes  to  interviewer   Notes  to  interviewer  

§ Assume  the  types  of  contests  run  in  2008  and  2009  were   § If  asked,  confirm  that  agents  have  authority  to  “book”  sales  
fairly  similar     whenever  they  want  by  influencing  the  enrollment  Fming  by  
up  to  one  week  
§ Do  not  share  Exhibit  3  unFl  the  interviewee  recognizes  
this  shin  in  mix  and  begins  asking  quesFons  about  the   § Strong  interviewees  will  also  recognize  that,  despite  not  
new  programs   having  charts  to  support  it,  a  shin  in  customer  focus  toward  
acquiring  new  accounts  in  2010  will  likely    also  hinder  profit  
 
margins,  as  acquiring  a  new  customer  costs  considerably  
more  than  retaining  (or  up-­‐selling)  an  exisFng  customer    

127
Solution and recommendations

Solution & Recommendations

§ The  interviewee  should  conclude  that  Vitality  overspent  in  2010  on  the  “Sweeps  Week”  sales  contest,  thus  hurFng  
its  profitability  
§ Exhibit  three  indicates  that  the  contest  influenced  the  sales  force    to  conduct  undesirable  selling  pracFces  by  
pushing  /  pulling  forward  business  to  earn  the  extra  commission  
§ Further,  the  contest’s  focus,  driving  new  premium  was  duplicaFve  with  that  of  the  main  commission  system,  
therefore  it  did  not  add  much  value  
§ RecommendaFon:  eliminate  “Sweeps  Week”  for  2011  and  potenFally  repurpose  those  funds  toward  an  acFvity  that  
is  not  already  covered  by  the  main  commission  structure  
§ It  is  unclear  whether  we  should  remove  the  increased  contests  on  new  accounts,  as  this  could  be  a  new  customer  
focus  that  we  do  not  know  about  

Bonus/Guide to an Excellent Case

§ Strong  candidates  will  make  the  following  observaFons:  
§ Recognize  that  the  likely  decline  in  profit  margin  from  2009  to  2010  is  linked  to  the  abnormal  increase  to  
sales  costs  
§ That  the  “contest  mix”  in  Exhibit  two  is  similar  to  a  firm’s  markeFng  mix,  especially  given  that  the  sales  
channel  has  already  been  established  as  the  main  markeFng  channel  for  these  products  
§ Suggest  that  the  added  contests  on  acquiring  new  accounts  will  also  decrease  profitability  because  acquiring  
new  customers  is  more  costly  than  retaining  exisFng  ones.      

128
Exhibit 1: Vitality results and major costs

Vitality insurance key results and costs (Figures in 000s)

2008   2009   2010  
Accounts converted   500   550   605  
Total policyholders enrolled   1,500   1,650   1,815  
Total premium from policyholders   $2,500,000   $2,750,000   $3,025,000  

Total costs  
General and Administrative   $50   $55   $58  
Sales   $250   $275   $400  
Advertising   $25   $28   $30  

Profit margin   9.50%   9.40%   8.50%  

129
Exhibit 2: Vitality insurance sales process
Reac=va=ng  
dormant  
account  

Hire  new   Acquire  new   Keep  accounts   Upsell  ac=ve  

agents   accounts   ac=ve   accounts  

Produce  
results  
(Premium  $)  

#  of  sales  contests  targeted  at  these  leverage  points  on  the  selling  process  
Acquire  new  accounts   Keep  accounts  acFve   Upsell  acFve  accounts   Produce  results  (bonus  
New  Agents   (bonus  based  on  #  of  accounts)   (bonus  based  on  #  of  accounts)   (bonus  based  on  #  of  accounts)   based  on  total  premium  $)  

2008   N/A   2   4   1   2  
2009   N/A   2   4   1   2  
Year  

2010   N/A   4   0   1   4  

130
Exhibit 3: Snapshot of “Sweeps Week” contest results

Ratio to Average Weekly Premium (2008-2010)

200%

2010 “Sweeps 2010 “Sweeps

Week” (1) Week” (2)
150%

Yr 2008
100% Yr 2009
Yr 2010

50%

0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Week during Jan-Jun

131
Case 17: Chic Cosmetology University
By: Peter Manoogian (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client  is  a  for-­‐profit,  specialty  college  named  Chic  Cosmetology  University  (CCU).  Founded  in  2005,  CCU  is  a  program  
for  high  school  graduates  seeking  their  professional  cosmetology  license.  CCU  is  currently  the  market  leader  for  
cosmetology  educaFon  with  campuses  in  ten  major  metropolitan  areas  in  the  US.    
7
§ CCU  has  capital  to  invest  in  a  new  campus  and  is  considering  Chicagoland  as  a  loca5on  –  should  they  do  it?   Quants.
§ (If  interviewee  asks  about  OTHER  objec5ves  or  defining  success  for  opening  the  new  loca5on):  The  client  considers  a  
successful  launch  as  achieving  posiFve  operaFng  profit  for  the  new  campus  two  years  aner  opening   8
Structure
Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:      EducaFon   Spend  first  15  min  on  fit   § This  case  involves  some  number  crunching  but  is  more  
§ Level  of  Difficulty:   structurally  focused.  It  is  criFcal  to  ensure  that  the  
§ Tell  me  about  a  difficult   B/E
Medium   interviewee  lands  on  the  figures  presented  (or  is  course  
or  sensiFve  situaFon   Mkt. Stgy
§ Case  Format:     corrected  toward  them)  in  order  to  proceed  with  the  
that  required  careful   Mkt Share
Opportunity   later  parts  of  the  case.  
communicaFon   Invest.
Assessment   § The  interviewee  should  be  able  to  develop  a  variant  of  
§ Describe  a  project  or   the  following  quesFon:  
§ Concepts  Tested:   idea  that  was  introduced   Will  CCU  be  able  to  enroll  enough  students  to  offset  
- Break-­‐Even  Analysis   or  implemented  because   the  ini5al  investment  and  achieve  posi5ve  profit?  
- MarkeFng  Strategy   of  your  efforts   § Key  case  steps:  
- Market  Share   1. Evaluate  CCU  revenue  and  cost  structures  
- Investments   2. Project  CCU’s  market  share  
3. EsFmate  CCU  Chicago  enrollments  
4. IdenFfy  qualitaFve  issues  to  consider  
 

132
Clarifying answers and case guide

Clarifying  answers  to  provide   Guide  to  case  /  Guide  to  handouts  

Client  Characteris=cs   Share  Exhibit  1  with  interviewee  aner  probing  quesFons  are  received  
- Enrolled  students  take  classes  at  a   about  CCUs  revenues  and  costs  .  Interviewee  should  be  able  to  compute  
physical  campus  for  one  school  year  to   the  following:  
earn  degree  (FY  begins  on  9/1)   - Average  revenue  per  enrollment  =  $15K  (revenue  /  total  
- CCU  boasts  the  best  campuses  in  the   enrollments)  
industry  with  state  of  the  art  equipment   - Total  annual  fixed  cost  per  campus  =  $4.8M  ($48M  /  10)  
- Strong  job  placement  due  to  CCU’s  
relaFonships  with  top  salons  in  local  areas   - Total  variable  cost  per  student  =  $8K  ($80M  /  10K)  
- CCU  and  industry  enrollments  growing  at   - Gross  profit  per  student  =  $7K  ($15K  -­‐  $8K)  
5%  per  year   Aner  that,  the  interviewee  should  begin  to  tackle  the  overall  opportunity  
Compe==ve  Dynamics   in  the  area  as  well  as  how  many  enrollments  CCU  could  reasonably  
- 2-­‐3  other  large  specialty  colleges,  some  of   expect  to  obtain  in  year  1  
which  are  in  the  same  geographies  as  CCU  
- Community  colleges  beginning  to  offer   Share  Exhibit  2  with  interviewee  aner  some  of  the  qualitaFve  aspects  of  
cosmetology  degrees  at  lower  prices   CCU’s  targeFng  and  markeFng  strategy  are  covered.  AddiFonally,  the  
- All  ten  CCU  campuses  have  been  present   interviewee  should  have  asked  about  compeFtor  informaFon  or  made  
for  at  least  three  full  school  years   some  a_empt  to  assess  what  share  of  the  market  they  should  expect  in  
- All  compeFtor  campuses  have  also  been   Chicago.  
present  for  similar  lengths  of  Fme   - See  “Market  Share”  secFon  in  next  slide  for  further  informaFon  on  
Industry  Characteris=cs/Economics   Exhibit  2  
- H.S.  Diploma  and  cosmetology  degree  
 
required  to  enter  the  field  
- 98%  of  cosmetologists  are  women    
 
 
  133
 
 
   
 
 Key elements to analyze
Break-­‐even  analysis   Marke=ng  strategy   Market  share  

§ How  many  students  will  CCU  need   § What  types  of  schools  /  students  do  you  think   § What  is  the  highest  share  we  could  
to  break-­‐even  in  year  1?     CCU  targets?   expect  CCU  Chicago  to  capture  in  Y1?  

Notes  to  interviewer   Notes  to  interviewer   Notes  to  interviewer  

• Interviewee  should  ask  about  the   Possible  responses  (schools):     • Show  Exhibit  2  to  interviewee  
investment  cost  of  building  a  new   -­‐ Public  schools  (private  HS  more  likely  to  have   • Interviewee  should  recognize:  
campus  in  Chicagoland   grads  go  to  4yr  univ)     - Campuses  w/compeFtors  present  
• Aner  asking,  tell  interviewee  that   tend  to  have  a  lower  share  (10%)  
-­‐ HS’s  in  middle-­‐class  ciFes  (may  be  an  
the  total  cost  is  $4.5M  in  iniFal   than  those  w/out  (15%)  
affordability  issue  w/lo  income)  
building  costs  to  renovate  its  chosen   - However,  presence  of  >1  compeFtor  
site.  These  costs  can  be  amorFzed   -­‐ Closest  to  the  campus  (geography)  
does  not  have  an  increased  negaFve  
evenly  over  a  three  year  period.     Possible  responses  (students)   impact  on  market  share  (Boston  has  
• Assume  fixed  costs  remain  flat  per   -­‐ Women  HS  graduates   8%  share  w/only  one  compeFtor)  
year   -­‐ Not  a_ending  4yr  college   - Interviewee  should  assume  a  
-­‐ Interested  in  cosmetology   projected  10%  market  share  for  a  
Interviewee  should  calculate    
ALer  a  few  of  the  above  criteria  are  noted,   Chicago  campus  (one  compeFtor)  
• Total  fixed  costs  per  year  =  $6.3M  
share:   • Also  share  the  following  :            80%  of  
($4.8M  +  $1.5M  from  amorFzaFon).    
• Gross  profit  per  student  =  $7K   - CCU  has  idenFfied  1,000  targeted  high   enrolled  students  directly  from  high  
• Break-­‐even  number  of  enrollments   schools  in  the  Chicagoland  area   school,  the  other  20%  of  students  come  
from  the  “Adult”  market  
per  year  =  900  ($63M  /  $7K)   - Within  these  HS,  CCU’s  market  research  
esFmates  that  on  average  6  students  per  HS  
have  “potenFal”  for  CCU  enrollment  

 
134

 
Calculations
Math  ques=ons  

1. What  is  the  breakeven  number  of  students  required  for  CCU  Chicago?  
2. How  many  students  should  CCU  Chicago  expect  to  enroll  in  year  1,  at  the  most?  
3. (If  Fme  permits)  =  Suppose  CCU  finds  a  lot  with  a  one  Fme  construcFon  cost  of  $300K  with  the  same  
amorFzaFon  schedule.  Should  they  enter  Chicago  now?  

Calcula=ons  

1. Break-­‐even:  (Es=mated  campus  fixed  cost  +  Yearly  amor=za=on  )  /  gross  profit  per  student  
               (  $4.8M  +  $1.5M  )  /  $7K  =  900  students  
 
2.  Students:    Total  poten=al  students  x  maximum  projected  market  share  
       Total  potenFal  students  =  PotenFal  (HS)  +  PotenFal  (Adult)  =  7,500  students  
   PotenFal  (HS)  =  6  /  HS  X  1,000  targeted  HS  =  6,000  students  
   PotenFal  (Adult)  =  6,000  students  *  25%  =  1,500  students  
 Total  potenFal  students  (year  1)  =  7,500  students  x  10%  share  =  750  students  
         Total  potenFal  students  (year  2)  =  750  students  x  1.05  (growth)  =  788  students  
 
3.  Break-­‐even:  (Es=mated  campus  fixed  cost  +  new  yearly  amor=za=on  )  /  gross  profit  per  student  
               (  $4.8M  +  $0.1M  )  /  $7K  =  700  students  
 

135
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ Overall,  our  client  should  NOT  enter  the  Chicago  market  under  the  current  cost  structure.  Even  with  a  10%  market  
share  assumpFon  in  year  1,  the  Chicago  campus  will  enroll  only  750  students,  this  is  150  fewer  than  the  900  
required  to  break-­‐even.    
§ The  client  should  also  consider  several  qualitaFve  issues:  
— Consider  offering  scholarships  to  increase  the  number  of  potenFal  students  and/or  conversion  rate  of  potenFal  
students  
— Consider  other  ciFes  beyond  Chicagoland  that  currently  do  not  have  a  CCU  presence,  or  add  a  second  campus  
to  a  city  such  as  NYC  that  has  high  market  share  and  potenFally  low  capacity    
— Perform  market  research  in  other  ciFes  to  understand  if  there  is  a  greater  potenFal  per  target  high  school  to  
increase  ROI  
— Consider  ways  to  reduce  fixed  costs  (e.g.,  transporFng  equipment  /  materials  from  campuses  that  are  not  at  
capacity)  

Bonus/Guide  to  an  Excellent  Case  

§ Excellent  interviewees  will  recognize  that  the  10%  market  share  is  for  campuses  that  have  been  in  place  for  at  least  
three  years  ,  therefore  Chicago  is  unlikely  to  achieve  that  share  in  year  1  or  2;  this  rules  out  the  feasibility  of  the  
follow-­‐up  quesFon  that  suggests  the  possibility  of  reducing  the  one-­‐Fme  investment  from  $4.5M  to  $300K.    
§  AddiFonally,  a  strong  interviewee  will  idenFfy  several  of  the  qualitaFve  issues  listed  above  as  ways  in  which  CCU  
could  proceed  

136
Exhibit 1: 2010 CCU Financials

CCU  Financials  as  of  8/31/2010  ('000s)  

Student  enrollments  (all  campuses)   10  

Revenue  from  enrollments   $150,000  

Total  fixed  campus  costs   $48,000  

   Buildings  and  equipment   $32,000  
   RecruiFng,  general,  and  administraFve   $16,000  

Total  variable  campus  costs   $80,000  

 Instructors   $40,000  
 Student  supplies   $40,000  

Opera=ng  profit   $22,000  

137
Exhibit 2: CCU and major competitor locations

As of 8/31/2010
2010
Campus share*
San Fran 8%

LA 14%

Minneapolis 15%

Dallas 14%

Houston 10%

Atlanta 16%

Miami 12%

Philly 12%

New York City 16%

Boston 8%
CCU Campus
Major competitor campus

* Measured as share of total “potential” students, as defined by CCU 138

Case 18: DigiBooks Inc.
By: Shobhit Chugh (Kellogg Class of ’11), Edited By: Adam Louras (Kellogg Class of ’11)

Case  Ques=on  

§ Our  client,  DigiBooks,  is  a  manufacturer  and  seller  of  electronic  book  readers  (tablets).  DigiBooks  also  distributes  e-­‐books  
for  the  tablets  through  their  website.  The  tablet  is  only  compaFble  with  books  sold  through  the  DigiBooks  site.  
§ DigiBooks  is  planning  the  launch  of  its  tablets  in  a  country  where  no  electronic  book  readers  are  currently  sold.  Only  1%   4
of  the  populaFon  has  ever  used  an  electronic  book  readers  ,  though  50%  is  aware  of  the  concept.  The  Chief  MarkeFng  
Quants.
Officer  of  DigiBooks  has  come  to  you  to  help  determine:  
§ How  should  DigiBooks  launch  and  market  DigiBook  tablets  in  this  new  country?   7
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:  Tech/ Spend  first  15  min  on  fit   § The  case  primarily  tests  the  understanding  of  markeFng  
Telecom   concepts,  specifically  a  new  product  launch.    
§ Tell  me  about  a  Fme   MKT Stgy
§ Level  of  Difficulty:  Easy   when  you  failed.   Cust.
§ The  case  is  wri_en  in  McKinsey  style  format;  the   Stgy
§ Case  Format:   § Share  me  a  Fme  when   interviewer  is  expected  to  guide  the  interviewer  step  by   Creativity
Developing  a  new   you  faced  a  difficult   step  through  each  quesFon.  
product   situaFon  in  a  team  and  
how  you  solved  this  .   § Begin  by  laying  out  the  situaFon  and  case  quesFon,  allow  
§ Concepts  Tested:  
the  interviewee  to  layout  their  structure,  and  then  jump  
- MarkeFng  Strategy   immediately  to  quesFon  1.  The  interviewer  is  expected  
- Customer  strategy   to  drive  this  case  rather  than  the  interviewee.  
- CreaFvity  

139
Clarifying answers and case guide
Clarifying  answers  to  provide  if  Asked   Interviewer  Guide  to  case  and  handouts  

Industry  Defini=ons   Case  Structure  –  Interviewee’s  structure  should    cover  the  key  areas  needed  to  explore  
in  order  to  determine  how  DigiBooks  should  launch  and  market  the  tablets  in  this  
- Electronic  book  readers:  Is  a  sonware,  
country.  
hardware  and  network  pla€orm  that  
uFlizes  wireless  connecFvity  to  enable   • The  interviewee  should  take  a  few  minutes  to  sketch  out  a  framework  for  
users  to  shop  for,  download,  browse,   analysis  of  the  markeFng  plan  
and  read  e-­‐books,  newspapers,   • Key  elements  expected  to  be  included  in  this  framework  are:  
magazines,  blogs,  and  other  digital  
media.   • Segmenta=on,  targe=ng  and  posi=oning:  Are  there  parFcular  
segments  in  the  populaFon  that  will  be  ideal  customers  for  us?  
Client  Characteris=cs  
• Product:  What  key  capabiliFes  are  people  looking  for?  Can  we  use  our  
- DigiBook’s  Tablet:  Uses  an  e-­‐ink   exisFng  products  or  do  we  need  to  develop  a  new  one  for  this  country?  
electronic  paper  display  that  features  
16  shades  of  grey.  This  allows  for  a  12   • Price:  What  price  should  the  tablets  and  books  be  sold  at?  What  is  
hour  long  ba_ery  life  and  easy   customers  willingness  to  pay?  Should  we  price  the  tablet  at  a  low  price  
so  as  to  capture  most  of  the  market,  and  make  margin  on  e-­‐books?  
readability.  
- Loca5ons:  DigiBook  has  never  sold  a   • Promo=on:  How  should  the  tablets  be  marketed?  What  promoFon  
product  outside  of  the  US.     mechanisms  should  be  used?  
• Place/Distribu=on:  Should  the  tablets  be  sold  through  retail  channels,  
Compe==ve  Dynamics  
internet  or  other  alternaFve  means?  
- No  compeFtors  in  the  e-­‐book  or  tablet  
• Selec=on  of  e-­‐books:  Is  a  wide  selecFon  of  books  available  for  this  
space  plan  to  enter  this  country  
country?  
Market  Characteris=cs  
Prompts  1-­‐3  –  Aner  the  interviewee  has  laid  our  their  structure,  begin  by  asking  the  
- Total  populaFon  of  the  country  76MM,   quesFon  in  Prompt  1.    Once  each  prompt  has  been  sufficiently  covered,  move  to  the  
high  literacy  level   next  prompt.    Aner  all  prompts  are  complete,  ask  the  interviewee  to  summarize  their  
findings.    NOTE:  Prompt  2  allows  for  creaFvity,  so  use  your  judgment  when  evaluaFng.  
 
140
Key elements to analyze
Prompt  #1:  Cust.  Strategy   Prompt  #2:  MKT  Strategy   Prompt  #3:  MKT  Strategy  

§ Through  research,  we  found  several   § DigiBooks  is  now  considering  how  it  should   § Based  on  revised  market  esFmates,  we  decided  to  
segments.  (Hand  out  Exhibit  1).  We  are  only   sell  its  e-­‐book  readers:  through  retail  stores  or   price  the  e-­‐reader  at  $100  and  target  the  
able  to  target  one  segment  with  our  product.   through  the  internet.     Occasional  Reader  segment.  
§ Using  a  3-­‐year  projec5on,  which  segment   § How  would  you  go  about  evalua5ng  this   § Using  this  informa5on  and  Exhibit  2,  can  you  
should  DigiBook  target?     decision?   es5mate  the  profit  poten5al  of  each  of  these  sales  
channels?  Which  should  we  choose?  
§ What  segment  would  you  recommend  to  your  
client?  

Notes  on  Exhibit  1   Notes  on  Prompt  #2   Notes  on  Exhibit  2  

§ If  unclear,  the  interviewee  should  answer   • Retail  Channel  Sample  Responses:   § If  unclear,  the  interviewee  should  answer  this  with  
based  on  Revenue  PotenFal  (i.e.  Ignore   a  1-­‐year  Gross  Profitability  calculaFon  for  each  of  
§  CONS:  
probability  of  purchase)  assuming  all  tablet   the  Sales  Channels  and  back  out  the  Upfront  
sales  happen  immediately  (Ignore  TVM).   § Lower  margin  due  to  value  chain   Investment.    They  should  ignore  all  other  costs  
expansion   such  as  SG&A.  
§ The  missing  data  is  that  the  average  price  of  
an  e-­‐book  is  $10,  for  each  of  the  segments,   § Will  take  Fme  and  money  to  set  up   § There  is  no  missing  data;  however,  the  Market  Size  
and  that  e-­‐books  and  tablets  have  the  same   and  adds  training  costs   of  20M  people  in  the  OR  segment  is  needed  from  
margin   § PROS:   Exhibit  1  and  the  price  per  e-­‐book  of  $10.  
§ Using  Exhibit  1,  interviewee  should  calculate:   § Should  encourage  Trial  of  the  product   § Using  Exhibit  2,  interviewee  should  calculate:  
§ SR  Revenue  =  [(15  books  x  $10  X  3  Years)  +   § Retailers  can  help  with  joint  markeFng   § Retail  Profit  =  [(10  Books  x  $10/book  x  50%GM)  
($200  x  1  tablet)]  x  8M  People  =  $5.2B   campaigns   +  ($100/tablet  x    30%GM)]  x  (10M  People  x  40%  
§ OR  Revenue  =  [(10  books  x  $10  x  3  Years)  +   § Retailers  can  help  with    customer   PenetraFon)  =  $320M  -­‐  $20M  II  =  $300M  
($125  x  1  tablet)]  x  20M  People  =  $8.5B   service,  returns   § Internet  Profit  =  [(10  Books  x  $10/book  x  
§ RR  Revenue  =  [(5  books  x  $10  x  3  Years)  +   • Internet  channel  Sample  Reponses:   50%GM)  +  ($100/tablet  x  60%GM)]  x  (10M  
($175  x  1  tablet)]  x  10M  People  =  $3.25B   People  x  10%  PenetraFon)  =  $110M  -­‐  $10M  II  =  
§ PROS:  Likely  cheaper  to  establish,  will   $100M  
§ ANSWER:  Segment  to  be  targeted  =   result  in  higher  margins  
occasional  readers  (OR)  with  a  Revenue   § ANSWER:  Sales  Channel  to  Use  =  Retail  with  a  
§ CONS:  Hard  to  encourage  trial   profit  of  $300M  
Poten=al  of  $8.5B  
141
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ Overall,  DigiBooks  should  launch  the  e-­‐book  reader  for  the  Occasional  Reader  segment  through  the  Retail  Sales  
Channel.  
§  Based  on  our  calculaFons,  we  expect  to  earn  a  $300MM  return  on  an  iniFal  investment  of  $20MM  
§ Other  items  to  consider:  
§ What  adverFsing  mechanisms  do  we  use  in  this  case?  
§ Do  we  setup  a  manufacturing  facility  in  the  country  or  do  we  source  the  products  from  our  current  
manufacturing  faciliFes?  
§ Are  there  any  prospects  of  compeFtors  entering  the  market?  

Bonus/Guide  to  an  Excellent  Case  

§ An  be_er  interviewee  noFces  key  nuances  in  the  case  such  as:  Time  Value  of  Money  impacts  on  Exhibit  1  and  
Probability  of  Purchase  or  PenetraFon  on  Exhibit  1  
§ An  excellent  interviewee  will  detail  various  elements  of  markeFng  strategy  of  a  new  product  launch  
§ A  key  element  of  this  case  is  being  able  to  do  relaFvely  complex  calculaFons  at  a  fast  pace.  Laying  out  the  tables  
appropriately  for  this  case  is  essenFal  to  success  

142
Exhibit #1: Market segments

$200
$175

$125

Segment   Size  
Super  Readers  (SR)   8M  
Occasional  Readers  (OR)   20M  
Rare  readers  (RR)   10M  

143
Exhibit #2: Channel decisions

Channel   Percent of E book E-reader Penetration   Initial

Total Gross Gross investment  
potential Margin %   Margin %  
market  

Retail   50%   50%   30%   40%   $20M  

Internet   50%   50%   60%   10%   $10M  

144
Case 19: After School Programming
By: David Morse (Kellogg Class of ’11), Edited By: Ameed Mallick (Kellogg Class of ‘12)

Case  Ques=on  

§ It  is  2003,  and  our  client  offers  aner  school  programming  focused  on  supporFng  at-­‐risk  youth  through  high  school,  
enabling  them  to  enter  and  succeed  in  college.    
§ The  client  is  trying  to  idenFfy  the  best  approach  to  meet  its  growth  target.  The  client’s  goals  for  expansion  are  to  most   10
efficiently  serve  students  at  7  new  sites,  while  raising  their  naFonal  profile.  We  have  been  hired  to  help  them  vet  
Quants.
potenFal  sites  to  maximize  their  social  and  financial  impact.    
10
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:      Other  (Non-­‐ Spend  first  15  min  on  fit   § This  case  should  be  delivered  McKinsey-­‐style,  i.e.  
Profit)   following  presentaFon  of  the  framework,  the  interviewer  
§ “Why  are  you  interested   Org. Chg
should  guide  the  interviewee  from  quesFon  to  quesFon.   Cap. Exp.
§ Level  of  Difficulty:   in  ConsulFng  as  a  career  
The  secret  to  this  case  is  thoroughly  understanding  the   Cust.
Hard   and  our  firm  in   Stgy
client’s  business  and  goals.  Interviewers  should  
parFcular?”   Mkt. Stgy
§ Case  Format:  Growth   encourage  the  interviewee  to  take  Fme  to  understand  
Strategies   § “Tell  about  a  Fme  you   the  client’s  business  model  and  to  be  sure  they  
failed  and  what  you   thoroughly  understand  the  quesFons  being  asked.  
§ Concepts  Tested:  
learned  from  the  
- OrganizaFonal   § This  case  focuses  on  understanding  not  only  the  financial  
experience?”  
objecFves  but  also  the  other  objecFves/impact  that  a  
- Capacity  Expansion  
client  wishes  to  achieve  and  these  should  impact  the  
- Customer  Strategy   analysis  and  recommendaFons  to  be  delivered.  
- MarkeFng  Strategy  

145
Clarifying answers and case guide
Clarifying  answers  to  provide  if  Asked   Interviewer  Guide  to  case  and  handouts  

The  following  informa=on  can  be   Ques=on  1:  what  are  the  client’s  opFons  for  locaFng  and  for  opening  new  sites,  
provided  if  the  interviewee  asks,  but   and  what  are  some  consideraFons  the  client  should  consider  in  selecFng  among  
should  not  be  volunteered:   these  opFons?  
—‘At-­‐risk’  youth  are  those  who,  due  to   Ques=on  2:  let’s  look  at  the  financial  consideraFons,  parFcularly  at  the  effect  of  
behavior  or  grades,  are  at  risk  of  dropping   addiFonal  sites  on  central  costs.  The  client  allocates  central  office  costs  to  each  
out  of  high  school  or  have  already  done  so   wholly  owned  site  on  a  uniform  basis,  i.e.  total  central  office  costs  /  8  =  allocaFon  
—The  client  operates  local  centers   per  site.  The  client  wants  to  understand  how  expanding  sites  will  affect  the  per  
a_ached  to  high  schools  with  full  Fme  staff   wholly  owned  site  allocaFon  of  central  costs.  For  this  analysis,  assume  that  
—The  client  offers  tutoring  and  test  prep   central  costs  don’t  vary  depending  on  the  method  selected  for  expansion.  (Show  
support  to  the  youth  with  whom  it  works,   Exhibit  1)  
as  well  as  connecFng  youth  to  internships   Ques=on  3:  from  a  mission  perspecFve,  our  client  thinks  that  serving  areas  with  a  
and  career  opportuniFes   high  density  of  at-­‐risk  youth  will  best  deliver  its  mission  as  well  as  raise  its  
—All  centers  are  Massachuse_s  or   naFonal  profile.  As  such,  it  would  like  to  determine  which  geographic  areas  show  
southern  New  Hampshire   the  most  promise  for  mission  fulfillment.  They  provided  some  data  from  
—The  client  operates  8  sites  with  2,500   representaFve  school  districts  for  an  iniFal  analysis:  (Show  Exhibit  2)  
youth  served  
—School  districts  and  state  agencies   Ques=on  4:  earlier,  you  listed  some  addiFonal  factors  that  might  help  the  client  
reimburse  the  client  for  acFviFes   screen  new  locaFons.  What  do  you  think  are  the  pros  and  cons  of  these  
—The  client  has  a  high  naFonal  profile  and   addiFonal  factors  in  each  geographic  area?  How  might  this  influence  the  client’s  
has  received  calls  from  high  school   choice  of  target  geographies?  
systems  in  Florida  and  California  offering   Ques=on  5:  let’s  wrap  up  with  a  summary  of  your  findings  and  a  recommendaFon  
to  pay  for  the  client  to  establish  centers  in   to  the  client.  
their  districts;  the  client  has  declined  these  
offers  to  date    
Answer  –  The  interviewee  cannot  solve  this  case  without  understanding  the  
client’s  business  and  goals  

146
Key elements to analyze (1)

Ques=on  1:  Organiza=onal  Changes    

§ Ques=on  1:  what  are  the  client’s  opFons  for  locaFng  and  for  opening  new  sites,  and  what  are  some  consideraFons  the  client  
should  consider  in  selecFng  among  these  opFons?  

Notes  to  interviewer  

• The  interviewee  should  quickly  focus  on  geographic  opFons  for   • The  interviewee  should  go  back  to  their  original  quesFon,  and  
sites:   hopefully  their  framework,  to  remember  that  the  client  wants  
• Adjacencies  to  exisFng  sites  (middle  schools,  neighboring   to  vet  potenFal  sites  for  mission  and  financial  impact.  Based  on  
high  schools)   this,  they  should  come  up  with  two  sets  of  criteria,  which  might  
• New  sites  in  exisFng  states,  separate  from  exisFng  sites   include:  
• New  states  neighboring  exisFng  states   • Mission  related:  
• New  states  that  have  contacted  the  client   • Number  of  at  risk  youth  
• Presence  of  other  youth  service  organizaFons  
• The  three  primary  methods  for  opening  new  sites  are:   • PotenFal  to  work  with  high  schools  
• Partnerships   • Knowledge  of  target  market  
• Branching  /  licensing   • Finance  /  operaFons  related:  
• Wholly-­‐owned  sites   • PotenFal  to  a_ract  funding  
• Ability  to  leverage  relaFonships  and  engage  in  poliFcal  
advocacy  
• Ability  to  leverage  exisFng  infrastructure  
• Ability  to  recruit  talent  

147
Key elements to analyze (2)

Ques=on  2:  Capacity  Expansion     Ques=on  3:  Customer  Strategy    

§ Ques=on  2:  let’s  look  at  the  financial  consideraFons,   § Ques=on  3:  our  client  thinks  that  serving  areas  with  a  high  
parFcularly  at  the  effect  of  addiFonal  sites  on  central  costs.   density  of  at-­‐risk  youth  will  best  deliver  its  mission  as  well  as  
(Show  Exhibit  1)   raise  its  naFonal  profile  (Show  Exhibit  2)  

Notes  to  interviewer   Notes  to  interviewer  

• A  good  interviewee  will  quickly  point  out  that  the  74%   • Note  1:  Worcester,  MA  neighbors  an  exisFng  site  for  the  client.  
increase  in  costs  is  less  than  the  88%  increase  in  the  number   Nashua,  NH  does  not  have  a  site.    
of  sites,  and  that  central  office  cost  allocaFon  per  site   • Note  2:  This  is  a  tough  problem  to  solve.  Work  acFvely  with  
should  decrease.  Interviewees  should  quanFfy  the  impacts   interviewees  to  get  to  the  answer.  Assume  that  class  sizes,  
of  growth  on  costs  per  site.   dropout  rates  and  GPA  averages  are  uniform  across  grades.  
• Note  3:  MenFon  that  high  school  is  4  years  i.e.  There  are  4  
classes  in  school  at  any  given  Fme.  
• Solu5on  on  “Math  Solu5on”  
 

148
Key elements to analyze (3)

Ques=on  4:  Marke=ng  Strategy    

§ Ques=on  4:  What  do  you  think  are  the  pros  and  cons  of  these  addiFonal  factors  in  each  geographic  area?  How  might  this  
influence  the  client’s  choice  of  target  geographies?  

Notes  to  interviewer  

• Good  interviewees  will  draw  a  table  matching  geographic  opFons  against  the  screening  criteria  they  listed  in  quesFon  one,  then  
will  give  a  quick  summary  of  the  pros  and  cons  of  each  criteria  in  each  geography.  The  interviewer  can  help  the  interviewee  set  
the  chart  up  but  should  let  the  interviewee  take  the  lead  on  walking  through  the  analysis.  This  quesFon  is  highly  qualitaFve  and  
intended  to  test  the  interviewees’  judgment  and  communicaFon  skills.  

• Here  is  an  illustraFve  Chart  

Neighboring  site   New  site  in   Neighboring  state   New  state  

exisFng  state  
Mission  fit   Pro:  knowledge  of  local  youth;  relaFonships   Pro:  would  spread  model    
with  policy  makers  and  school  admins   Con:  need  new  relaFonships,  regulaFons  
Con:  might  not  spread  model   could  differ  and  affect  operaFons  
Financial  fit   Pro:  model  already  approved  for  funding,   Pro:  access  to  new  sources  of  funding,  
ability  to  move  staff  /  hire  easily   higher  naFonal  profile  
Con:  might  hit  funding  limits   Con:  districts  /  states  might  not  fund  model  

149
Math Solutions (1)
ANSWER:  Ques=on  2/Exhibit  1  

Current   AddiFonal  costs  

Staff   $750K   $600K  

IT   $110K   $80K  

Office  expenses   $115K   No  change  

Training  and   $25K   $55K  

support  

Total  central  office   $1,000K   $735  

costs  

Cost  per  site   $1,000K  /  8  =   =$1,735K  /  15  =  

$125K   $115.67K  

150
Math Solutions (2)
ANSWER:  Ques=on  3/  Exhibit  2  

Column A B C D E

Average   Annual  %  change  i n   #  high   HS  completion   2002  %  of  e nrolled  students  

enrollment,  HS at  risk  youth,  2003 schools rate,  class  of  2002 with  GPA  of  D  or  l ower
Worcester,  MA 1,000 -­‐10% 3 70% 30%

Nashua,  NH 800 -­‐5% 2 75% 25%

Barrington,  CT 800 10% 1 75% 20%
San  Mateo,  CA 1,300 1% 4 85% 20%

Column F G H I J K L M
A  *  C F/4  *  (1-­‐D) G*3 G  +  H F  -­‐  I  *  E I+J K  *  (1  +  B) L  /  F
Formula
Total   Dropouts,   Dropouts,   Total   Low  GPA   Total  at   Total  at   Total  %  of  
Enrollment class  of  2002 other   Dropouts Students Risk,  2002 risk,  2003 students  at  
classes risk,  2003

Worcester,  MA 3000 225 675 900 630 1530 1377 45.9%
Nashua,  NH 1600 100 300 400 300 700 665 41.6%
Barrington,  CT 800 50 150 200 120 320 352 44.0%
San  Mateo,  CA 5200 195 585 780 884 1664 1681 32.3%

151
Solution and recommendations
Solu=on  &  Recommenda=ons  

§ The  case  is  designed  to  indicate  that  the  client  should  focus  on  exisFng  states,  and  perhaps  on  neighboring  states.  
The  client  should  not  consider  expanding  outside  its  exisFng  geographic  foot  print  in  New  England.    
§ The  interviewee  should  note  that  the  client  benefits  financially  from  scale,  but  that  a  financial  analysis  does  not  
indicate  a  geographic  area  for  expansion.  From  a  mission  perspecFve,  exisFng  and  neighboring  geographies  provide  
the  highest  density  of  at-­‐risk  youth.  New  geographies  in  exisFng  states  are  also  promising  from  a  mission  
perspecFve.  Thinking  further  about  non-­‐financial  benefits  from  scale,  as  should  be  done  in  quesFon  4,  should  also  
indicates  that  growing  within  exisFng  states  or  in  neighboring  states  poses  fewer  risks  for  the  client.    

152
Exhibit 1: Addt’l central costs from expansion

Current   Additional costs  

Staff   $750K   $600K  
IT   $110K   $80K  
Office expenses   $115K   No change  
Training and support   $25K   $55K  
Total central office costs  
Cost per site  

153
 Exhibit 2: Representative data on at-risk youth

2002,  %  of  
Annual  %   HS  comple=on   enrolled  
Average  
Change  in  at  risk   #  high  schools   rate,  class  of   students  with  
Enrollment,  HS  
youth,  2003   2002   GPA  of  D  or  
lower  

1000   -­‐10%   3   70%   30%  

Worcester,  MA  
800   -­‐5%   2   75%   25%  
Nashua,  NH  
800   10%   1   75%   20%  
Barrington,  CT  
1300   1%   4   85%   20%  
San  Mateo,  CA  

154
Case 20: Dark Sky Co.
By: Sean Burrow (Kellogg Class of ‘11), Edited By: Eugene Kim (Kellogg Class of ‘15)

Case  Ques=on  

§ Our  client,  Dark  Sky,  is  a  small  manufacturer  of  unmanned  (i.e.  remotely  piloted)  data  collecFon  aircran.  Dark  Sky  
produces  the  Assessor,  an  aircran  originally  designed  for  unmanned  weather  exploraFon.  In  2006,  the  United  States  
military  began  purchasing  Assessors  for  use  in  Intelligence,  Surveillance  and  Reconnaissance  (ISR)  missions.  The  Assessor  
is  profitable,  but  sales  have  stagnated  and  the  client  wishes  to  grow.     5
Quants.
§ What  are  some  steps  Dark  Sky  could  take  to  achieve  growth?  
5
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:    Industrial   Spend  first  15  min  on  fit   § This  case  intenFonally  uses  terminology  that  may  not  be  
Goods  –  Aerospace  and   familiar  to  the  typical  MBA  student.  This  is  meant  to  
§ “What  was  the  hardest   Mkt. Stgy
Defense   challenge  the  interviewee  to  dismiss  superfluous  
piece  of  feedback  you   Creativity
informaFon  and  to  focus  on  the  business  problem.  
§ Level  of  Difficulty:   ever  got?  What  did  you  
Easy/Medium   do  about  it?”   § Aner  asking  the  iniFal  quesFon,  engage  in  a  qualitaFve  
discussion  regarding  organic  and  inorganic  growth  
§ Case  Format:  Growth   § “How  would  your  
opportuniFes.  
Strategy   classmates  and/or  
teammates  describe   § Knowledge  of  the  Aerospace  and  Defense  industry  is  not  
§ Concepts  Tested:  
working  with  you?”   necessary  –  creaFvity  is  encouraged.  
- MarkeFng  Strategy  
- CreaFvity  

155
Clarifying answers and case guide
Clarifying  answers  to  provide  if  Asked   Interviewer  Guide  to  case  and  handouts  

Customer  /  Price:   This  case  is  meant  to  s=mulate  the  growth  conversa=on  and  is  designed  
- Dark  Sky’s  only  customer  is  the  U.S.  Military.   to  funnel  the  interviewee  toward  a  new  product  launch.  
- Dark  Sky  has  a  Cost-­‐Plus-­‐Fixed-­‐Fee  contract  with  the  U.S.   Exhibit  1  –  Provide  following  growth  discussion    
Military  for  Assessor  sales:   • The  military  started  purchasing  the  Assessor  in  2006.  The  price  of  the  
- The  contract  has  been  extended  in  the  past  and  is  up   aircran  has  remained  constant  at  $100,000  per  unit.  Throughout  the  
for  renegoFaFon;  the  Military  has  agreed  to  a   past  decade,  The  Assessor  has  been  Dark  Sky’s  only  source  of  revenue.    
marginal  fee  (i.e.  price)  increase  to  account  for  
inflaFon   Exhibit  2  –  Provide  following  Exhibit  1  calcula=ons  
- Contracts  for  new  aircran  will  be  structured  similarly   • Dark  Sky  has  developed  several  aircran  prototypes  designed  
Company:   specifically  for  military  missions.  The  company  has  the  capability  to  
- The  firm  has  addiFonal  capacity  and  is  posiFoned  to   conFnue  producing  the  Assessor  and  to  introduce  one  new  aircran.    
strengthen  any  division  of  the  workforce,  if  required  (e.g.   • SeaBird  is  specially  designed  for  mariFme  (i.e.  Naval)  operaFons  
sales  force,  manufacturing,  R&D)   and  can  be  sold  to  the  Navy  for  $220,000  per  aircran.  
Product:   • SandBird  is  specially  designed  for  desolate  land-­‐based  operaFons  
- Dark  Sky  designs  a  unique  aircran  that  is  launched  from  a   and  can  be  sold  to  the  Army  for  $210,000  per  aircran.  
catapult  device;  the  aircran  can  be  launched  from  ships  
• JointBird  is  designed  as  a  compromise  for  Army  and  Navy  
at  sea  or  from  harsh  terrain  (e.g.  desert,  mountains).   operaFons  and  can  be  sold  to  either  service  for  $180,000  per  
- Dark  Sky  only  sells  the  Assessor,  but  has  designed  
aircran.  
prototypes  specifically  for  military  operaFons.    
Compe==on:   • The  Military  has  agreed  to  a  10%  Assessor  price  increase.  
- There  are  approximately  20  compeFtors  that   Exhibit  3  –  ONLY  PROVIDE  IF  ASKED  
manufacture  unmanned  aircran.   • The  introducFon  of  a  new  aircran  will  have  a  negaFve  impact  on  
- Though  too  small  to  purchase  a  compeFtor,  Dark  Sky  has   Assessor  sales.  
been  considered  an  acquisiFon  target.  Dark  Sky’s  lack  of  
growth  in  recent  years  concerns  potenFal  buyers.    
- Con5nue  to  next  page  for  further  detail  of  the  analysis  to  be  
performed  

156
Key elements to analyze

Current  Revenues  &  Growth  Strategy     Opportunity  Assessment  

§ Exhibit  1:  a)  How  many  units  were  sold  in  2014?  b)  What  was   § Exhibit  2:  To  maximize  short-­‐term  growth,  which  aircran  
the  growth  rate  from  2006  to  2010?     should  Dark  Sky  produce?  
§ What  are  some  steps  to  achieve  growth  (original  quesFon)  

Notes  to  interviewer   Notes  to  interviewer  

• Exhibit  1  should  be  treated  as  a  math  warm  up.  Price  =  100K/Unit   § Exhibit  2:  To  maximize  growth,  Dark  Sky  should  focus  on  maximizing  
• Organic  Growth  –  the  interviewee  should  consider  internal  opFons  to  could   revenue.  
sFmulate  growth.  Some  potenFal  examples  include:    
• Increase  penetra=on  –  negoFate  addiFonal  Assessor  sales  to  the   § To  calculate  the  revenue  for  each  scenario,  the  interviewee  should  
military.   add  Assessor  sales  to  the  sales  of  the  new  product.    
• Product  development  –  develop  new  products  that  may  appeal  to  the   § Assessor  sales  are  based  on:    
military  (e.g.  new  aircran,  training  services,  aircran  accessories  /  add-­‐ § 50  units  sold  with  no  new  product  launch    
ons).   § CannibalizaFon  forecast  specific  to  each  new  
• New  market  entry  –  sell  the  Assessor  in  internaFonal  markets  or   product  launch  
addiFonal  domesFc  markets  (e.g.  Border  Patrol,  police,  news  channels)     § $110,000  per  aircran    
• Diversifica=on  –  develop  a  new  product  to  serve  a  new  market.   § New  product  sales  can  be  easily  calculated  using  shortcuts.  
• Increase  /  Reduce  prices  (based  on  elasFcity  of  demand)   For  example:    
• External  growth  –  the  interviewee  should  consider  growth  opFons  using   § SeaBird:  $220k  *  100  =  $22m…  then  half  of  this  
external  resources.  Some  potenFal  examples  include:   § SandBird:  $210k  *  100  =  $21m…  then  half  of  it  and  
• Joint  Venture  –  contract  with  a  firm  to  increase  market  accessibility  or   add  (10%  of  $21m)    
to  develop  a  new  product  beyond  the  capability  of  Dark  Sky.     § JointBird:  Add  to  get  90…  then  $180k*100  =  $18m,  
• Merger  /  AcquisiFon  –  acquire  a  new  firm  to  add  addiFonal  capacity   subtract  (10%  of  $18m)  
and/or  product  mix.  Because  Dark  Sky  is  relaFvely  small  in  the  Defense  
industry,  consider  becoming  an  acquisiFon  target.  

157
Math Solutions
Math  Exhibit  1   Math  Exhibit  2  

• How  many  units  were  sold  in  2014?     • To  maximize  short-­‐term  growth,  which  aircran  should  Dark  
• Answer:  50  units  or  $5,000k  ÷  $100k/unit  =  50  units   Sky  produce?    
• Answer:  JointBird    
• What  was  the  growth  rate  from  2006  to  2010?     • Assessor  Sales  (Units,  Revenue):  
• Answer:  900%  o  ($5,000k  -­‐  $500k)  ÷  ($500k  )  x  100  =   • No  new  product  =  50  aircran,  $5,500,000    
900%     • With  SeaBird  =  50  +  (50  *  (-­‐40%))  =  50  -­‐  20  =  
30  aircran,  $3,300,000    
• With  SandBird  =  50  +  (50  *  (-­‐70%))  =  50  -­‐  35  =  
15  aircran,  $1,650,000    
• With  JointBird  =  50  +  (50  *  (-­‐90%))  =  50  -­‐  45  =  
5  aircran,  $550,000    
• New  Product  Revenue:  
• SeaBird  =  50  *  $220,000  =  $11,000,000    
• SandBird  =  60  *  $210,000  =  $12,600,000    
• JointBird  =  (38  +  52)  *  $180,000  =  90  *  
$180,000  =  $16,200,000    
• Total  Revenue:    
• Assessor  Only  =  $5,500,000    
• Assessor  and  SeaBird  =  $3,300,000  +  
$11,000,000  =  $14,300,000    
• Assessor  and  SandBird  =  $1,650,000  +  
$12,600,000  =  $14,250,000    
• Assessor  and  JointBird  =  $550,000  +  
$16,200,000  =  $16,750,000  

158
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ Based  on  2015  forecasted  revenue  alone,  Dark  Sky  should  introduce  the  JointBird  to  the  U.S.  Military  in  order  to  
boost  short-­‐term  growth.  However,  there  are  several  connected  issues  that  Dark  Sky  should  consider  to  include  
profitability,  long-­‐term  revenue  forecasts,  compeFFve  response,  etc.  

Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  interviewee  will  note:  

§ How  quickly  could  Dark  Sky  start  manufacturing  a  third  model  (i.e.  can  Dark  Sky  produce  SandBird  this  year,  and  
be  producing  SandBird  and  SeaBird  the  following  year)?  If  so,  what  are  the  revenue  implicaFons?    
§ If  Dark  Sky  produces  JointBird,  is  $550,000  in  Assessor  revenue  worth  the  associated  cost  to  produce  the  
aircran?  Should  resources  be  allocated  to  another  project?    
§ How  profitable  are  the  four  aircran  models  in  comparison?  Note:  Because  Dark  Sky  has  a  Cost-­‐Plus-­‐Fixed-­‐Fee  
contract,  profitability  for  each  aircran  is  likely  equivalent.  For  this  reason,  Dark  Sky  should  focus  on  maximizing  
the  number  of  aircran  sold.  •  How  much  and  how  long  is  the  payback  period  for  the  investment  in  
manufacturing  each  type  aircran?  
§ PotenFal  benefits  of  have  two  customer  bases  for  new  product  (Navy  and  Army).  

159
Exhibit #1

Revenue  
($,  Million)  
5

0
2004 2006 2008 2010 2012 2014

160
Exhibit #2

New  Product  Sales  Forecast,  2015  

New  Product  Sales  (#  of  aircraLs)  

New  Product  Offering   Navy   Army   Price  Per  AircraL  

SeaBird   50   -­‐-­‐   $220,000  

SandBird   -­‐-­‐   60   $210,000  
JointBird   38   52   $180,000  

161
Exhibit #3

Impact  of  New  Product  on  Assessor  Sales  

New  Product  Sales  (#  of  aircraLs)  

Assessor  unit  sales  lost  

New  Product  Offering   Navy   Army  
due  to  cannibaliza=on  

SeaBird   50   -­‐-­‐   40%  

SandBird   -­‐-­‐   60   70%  
JointBird   38   52   90%  

162
Case 21: Health Coaches
By: David Wellner (Kellogg Class of ‘11), Edited By: Craig DePriester (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client  is  a  large  naFonal  health  care  payer  (health  insurance  company,  think  Aetna)  exploring  the  launch  of  a  new  
disease  management  (“DM”)  program  to  be_er  serve  its  5  million  members.  The  idea  is  to  hire  and  train  a  team  of  
“Health  Coaches”  to  specialize  in  a  single  disease  area  (e.g.,  heart  disease,  diabetes,  etc).  Each  Coach  will  manage  a   8
por€olio  of  paFents  to  reduce  the  costs  of  overall  health  expenditures  (e.g.,  reminders  to  take  drugs,  provide  limited   Quants.
medical  advice,  suggested  diet,  etc).  Studies  show  that  once  a  month  contact  with  each  paFent  reduces  health  
spending  by  5%,  on  average.   6
§ Should  our  client  launch  the  program?  If  so,  what  steps  should  it  take?   Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

Cust.
§ Industry:      Healthcare   Spend  first  15  min  on  fit   § The  case  tests  the  interviewee’s  ability  to  probe  and   Stgy
§ Level  of  Difficulty:   develop  a  customer  segmentaFon,  digest  a  relaFvely   B/E
§ How  do  you  feel  about  
Medium   complex  chart,  isolate  the  most  criFcal  informaFon  
working  in  a  feedback-­‐
§ Case  Format:   and  determine  profitability  
intensive  environment?  
Developing  a  new   § The  data  provided  by  both  exhibits  should  be  
§ Why  is  consulFng  a  
product/Service   requested;  try  not  to  show  the  exhibits  unFl  need  for  
be_er  career  move  for  
§ Concepts  Tested:   the  data  is  demonstrated  
you  compared  to  your  
- Customer  strategy   next  best  opFon?   § Strong  interviewees  should  use  common  sense  to  
- Break-­‐even  analysis   make  reasonable  assumpFons  before  you  provide  
required  inputs  

163
 Clarifying answers and handout guide

Clarifying  answers  to  provide   Guide  to  handouts  

Compe==ve  dynamics  (not  core  to  case)   Before  showing  exhibits,  interviewee  should  convey  the  essence  of  the  case:    
Are  the  costs  associated  with  the  DM  program  jus=fied  by  the  savings?  
§ With  spiraling  health  care  costs,  the  
 
industry  is  under  pressure  to  innovate  
Sample  set-­‐up:  
new  products  that  will  control  spending  
  Program  Savings   Program  Costs   Risks  
§ Assume  client  is  first  to  market    
-  Customer   -  Salary  and  other   - Do  assumpFons  hold?  
§ Past  a_empts  to  purely  automate  DM     segmentaFon  by   -  Por€olio  size/capacity   - CompeFFve  response  
have  yielded  minimal  savings     disease  area  and  cost   (members/coach)   - Regulatory,  liabiliFes  
  per  member  
Health  Coaches      
§ All  acFvity  conducted  remotely  via   Exhibit  1  –  Hand  out  when  interviewee  establishes  need  for  understanding  client’s  
phone/email   membership  segmentaFon  and/or  exposure  to  disease  areas.  If  he/she  is  not  
headed  there  alone,  you  can  ask  “how  would  you  segment  the  client’s  members?”  
§ Typical  profile  is  registered  nurse  that  
§ “What  can  we  get  out  of  this  chart?  Please  let  me  know  if  you  have  quesFons”  
wants  to  work  from  home  
§ DefiniFons  (if  needed):  Group  are  employee  sponsored  plans  (e.g.  ,if  you  work  
§ It’s  difficult  to  actually  reach  paFents,  so   for  McKinsey,  you  are  in  a  group  plan),  Individual  are  non-­‐groups  (e.g.,  private  
Coaches  can  contact  8  members  per  day   contractors,  unemployed,  etc).  65+  (see  asterisk  below  chart).  
(assume  25  days  per  month)   § “Which  segment  is  likely  to  generate  the  greatest  per  member  costs.?  Why?”    
§ Annual  costs  per  Coach:  $60K  salary   § “Which  disease  area  should  we  look  at  first?”  
+20%  other  (training,  benefits,  laptop,    
etc)   Exhibit  2  –  Hand  out  when  interviewee  asks  for  medical  cost  data.  Try  to  avoid  
- There  are  no  other  program  costs   handing  out  exhibit  2  unFl  exhibit  1  has  been  discussed  (hint:  if  interviewee  leads  
  with  profitability,  steer  him/her  to  first  think  about  the  customer  segmenta5on)  
§ “What  can  we  do  with  this  informaFon?”  
 
164
Key elements to analyze

Segmentation and disease focus Program profitability

Using  Exhibit  1,  discuss  which  segments  and  disease  areas  are   Leveraging  all  data  (Both  Exhibits),  interviewee  should  determine  if  
most  important  to  explore   Health  Coaches  are  profitable  in  each  of  the  three  segments  

Notes to interviewer Notes to interviewer

Interviewee  should  choose  to  focus  on  the  65+  segment   Cost  per  Coach:   $60,000 + 20% = $72,000
Base Salary + other = per coach per year
§ 65+  (Medicare)  paFents  are  the  sickest,  followed  by    

Individual   Size  of  Por€olio:   8 25 𝟐𝟎𝟎

𝑐𝑜𝑛𝑡𝑎𝑐𝑡𝑠   +   =
§ Group  members  are  the  healthiest  (younger,  working)     𝑑𝑎𝑦𝑠   𝒎𝒂𝒙. 𝒑𝒂𝒕𝒊𝒆𝒏𝒕  𝒑𝒐𝒓𝒕𝒇𝒐𝒍𝒊𝒐
𝑝𝑒𝑟  𝑑𝑎𝑦 𝑝𝑒𝑟  𝑚𝑜𝑛𝑡ℎ
§ Sicker  paFents  are  likely  to  drive  higher  costs,  which  will    

make  them  riper  candidates  for  the  DM  program  (i.e.,  the   Savings  for  one  por€olio  of  65+  diabeFcs:  
5%  cost  reducFon  will  have  a  bigger  impact)     $300 4 5% 12 200 $𝟏𝟒𝟒, 𝟎𝟎𝟎  
𝑎𝑣𝑔.  𝑥   𝑑𝑖𝑎𝑏𝑒𝑡𝑖𝑐  𝑥   𝑎𝑣𝑔. = 60  𝑥   𝑚𝑜𝑠.  𝑥   𝑝𝑎𝑡𝑖𝑒𝑛𝑡 = 𝒔𝒂𝒗𝒊𝒏𝒈𝒔  𝒑𝒆𝒓      
Interviewee  should  choose  to  focus  on  diabe=cs  (Assume  all    

  𝑃𝑀𝑃𝑀 𝑓𝑎𝑐𝑡𝑜𝑟 𝑠𝑎𝑣𝑖𝑛𝑔𝑠 𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑪𝒐𝒂𝒄𝒉  𝒑𝒆𝒓  𝒚𝒓.

are  Type  2  for  the  purposes  of  this  case)  
 
§ DiabeFcs  make  up  the  largest  porFon  of  sick  members  
Overall  savings:   $144𝐾 $72𝐾 $72𝐾 2,000 $𝟏𝟒𝟒  𝑴𝑴
§ As  a  chronic  disease  primarily  brought  on  by  behavior,  T2     −   =  
𝑝𝑟𝑜𝑓𝑖𝑡
   𝑥  
𝐻𝑒𝑎𝑙𝑡ℎ  
=
𝒑𝒓𝒐𝒇𝒊𝒕
   
  𝑠𝑎𝑣𝑖𝑛𝑔𝑠 𝑐𝑜𝑠𝑡𝑠
diabeFcs  are  most  likely  to  benefit  from  DM  program    
𝑝𝑒𝑟  𝐶𝑜𝑎𝑐ℎ 𝐶𝑜𝑎𝑐ℎ𝑒𝑠 𝒑𝒆𝒓  𝒚𝒆𝒂𝒓
 
Number  of  65+  diabe=cs:   Conclusion:  
  20% 40% 5MM 𝟒𝟎𝟎, 𝟎𝟎𝟎 § Profit  is  $72K  per  Health  Coach,  2x  cost  of  a  Coach  
 𝑥    𝑥   =  
𝑠𝑒𝑔𝑚𝑒𝑛𝑡  % %  𝑑𝑖𝑎𝑏𝑒𝑡𝑖𝑐 𝑚𝑒𝑚𝑏𝑒𝑟𝑠 𝟔𝟓 + § Based  on  PMPM  diabeFc  cost  data,  Individual  segment  is  
𝒅𝒊𝒂𝒃𝒆𝒕𝒊𝒄𝒔
break-­‐even  (50%  less  savings),  Group  segment  is  a  loss  

165
Solution and recommendations

Solu=on  &  Recommenda=ons  

With  3-­‐4  minutes  remaining,  give  interviewee  a  moment  to  prepare  a  recommendaFon.  Here  is  a  strong  sample:  
§ Client  should  launch  the  Health  Coaching  program,  and  first  focus  on  diabetes  for  the  65+  Medicare  segment  
§ The  client  should  take  the  following  steps:  
- Launch  a  pilot  program  to  prove  out  assumpFons  (e.g.,  5%  cost  reducFon,  Coach  por€olio  capacity,  etc)  
- First  expand  to  enFre  65+  diabetes  segment  ($144M  per  year  savings  per  coach,  a  2x  return  on  each  
Health  Coach)  
- Consider  introducing  to  Individual  diabetes  segment  despite  break-­‐even  (customer  retenFon,  moral  
raFonale,  etc)  

Follow-­‐up  quesFons  (if  Fme  permits)  

§ There  are  650K  Group  diabeFcs  len  “uncoached.”  Is  there  a  way  to  make  the  segment  profitable?  Ideas  include:  
- More  efficient  DM  program  (e.g.,  Coaching  at  work,  bi-­‐monthly  contact,  automated  correspondence,  etc)  
- Seek  addiFonal  revenue  sources  (e.g.,  Employers  might  be  willing  to  pay  a  fee,  government  support)  
- Since  5%  is  the  average  savings,  program  can  target  members  who  will  respond  with  savings  well  above  
5%  
§ As  first  to  the  market,  client  plans  to  expand  Health  Coach  program  externally.  Who  should  they  target?  
- It’s  tempFng  to  suggest  that  the  client  should  market  to  65+  Medicare  paFents  with  diabetes,  since  this  is  
where  the  program  yields  the  greatest  savings.  While  it’s  good  that  we  have  lowered  the  cost  of  older  
diabeFcs,  client  should  keep  in  mind  that  more  diabeFc  members  will  increase  overall  health  care  costs,  
considerably  –  (sFll  almost  4x  aner  savings)  
- An  insFncFve  interviewee  might  suggest  an  alternaFve:  Client  should  sell  its  Health  Coach  service  to  other  
payers.  But  how  would  you  price  that?  What  are  the  challenges  (e.g.,  regulatory,  info  sharing,  etc)  
 

166
Exhibit #1: Client’s member segmentation by health condition

* Members 65 years of age and above. Known as “Medicare Advantage”, premiums funded by government

167
Exhibit #2: Average cost data (Per Member Per Month)

Segment Average PMPM Average Diabetic

Individual $150
4x
Group $100
(Avg. PMPM)
65+ $300

168
Case 22: Wine & Co.
By: Anil Goteti (Kellogg Class of ’11), Edited By: Mauricio Atri (Kellogg Class of ‘12)

Case Question

§ Wine  &  Co.  is  a  niche  wine  manufacturer  in  the  San  Francisco  Bay  area.  Wine  &  Co.  recently  acquired  12  acres  of  land  
outside  San  Francisco.  The  company  wants  to  invesFgate  opportuniFes  to  best  use  the  land  and  needs  a   7
recommendaFon  from  you.   Quants.

5
Structure

Case tracker Fit Questions Guide to interviewer CPG

§ Industry: CPG Spend  first  15  min  on  fit   § The  case  tests  the  interviewee's  ability  to:  
§ Level of Difficulty: § Tell  me  about  a  Fme   a. Structure  the  problem  and  brainstorm   Mkt. Stgy
Medium when  you  failed.   b. Determine  valuaFon  and  discounFng     NPV
§ Case Format:
§ Share  me  a  Fme  when   c. Recommend  a  markeFng  strategy  
Opportunity
Assessment
you  faced  a  difficult   d. Synthesize  the  answers.    
situaFon  in  a  team  and  
§ Concepts Tested: § This  case  is  a  McKinsey  style  case  and  has  to  be  asked  in  
how  you  solved  this  .  
- Marketing a  quesFon  and  answer  format.  The  interviewer  should  
strategy ask  each  quesFon  given  below  and  wait  for  the  
- Basic NPV interviewee  to  respond.  If  the  interviewee  is  stuck,  
direcFon  should  be  provided  based  on  the  informaFon  
given  below.  The  interviewee  should  be  able  to  drive  the  
case  while  at  the  same  Fme  seek  direcFon  based  on  the  
quesFon  asked.  

169
Clarifying answers and case guide

Clarifying answers to provide Guide to case / Guide to handouts

• Ques=on  1.  Some  interviewees  ask  which  geographical  regions  the   § QuesFon  1.  What  are  the  different  ways  in  which  Wine  
company  serves,  the  type  of  wines  they  manufacture  and  if  they   &  Co.  can  use  the  land?  
have  other  types  of  products  (like  other  liquors  or  wine  tasFng   § QuesFon  2.  Wine  &  Co.  has  decided  to  use  the  land  to  
tours  in  Napa  valley).  The  following  informaFon  can  be  provided  if   manufacture  wine.  Each  acre  of  land  produces  1000  kg  
asked.  a)  They  only  manufacture  red  wines.  b)  The  company  serves   of  grapes  annually.  Wine  &  Co.  has  an  opFon  to  
only  the  local  market  (the  San  Francisco  Bay  area).  c)  The  company   manufacture  Merlot  or  Bordeaux.  The  two  wines  use  
does  not  sell  any  other  products.  d)  The  company  is  currently  very   different  grapes  and  the  grapes  have  varying  yields.  
healthy  and  does  not  face  any  problems.     While  the  Merlot  grapes  yield  2litres/kg,  the  Bordeaux  
• Ques=on  2.  Profit  Margins  on  Merlot  are  10%  while  the  margins  on   grapes  yield  1litre/kg.  Wine  &  Co.  can  charge  $20  per  
Bordeaux  are  15%.     liter  of  Merlot  and  can  charge  $40  per  liter  of  Bordeaux.  
Which  wine  yields  more  profits  annually?  
• Ques=on  3.  a)  Discount  rate  is  12%  (provide  only  when  asked).  
Many  people  forget  the  Fme  value  of  money  and  add  profits  across   § QuesFon  3.  Aging  has  an  effect  on  the  revenues  and  
years  without  discounFng.  b)  Assume  the  costs  are  only  incurred   profitability.  Merlot  has  to  be  stored  for  6  years  while  
when  the  revenues  are  realized  aner  aging  (no  costs  unFl  year  6  for   Bordeaux  has  to  be  stored  for  12  years  before  revenues  
Merlot  and  no  costs  unFl  year  12  for  Bordeaux).  c)  If  people  are   can  be  generated.  Which  wine  would  you  choose  for  
struggling  with  the  division  or  approximaFons,  suggest  the  "Rule  of   manufacturing?  
72"  (If  r  is  the  discount  rate,  72/r  is  the  number  of  years  it  takes  to   § QuesFon  4.  Wine  &  Co.  has  decided  to  manufacture  
double  your  money)   Merlot.  How  should  they  market  this  product  in  the  San  
• Ques=on  4.  Customer  segments  that  are  currently  served  by  Wine   Francisco  Bay  area?  
&  Co.-­‐  niche  wine  enthusiasts.   § Please  summarize  your  recommendaFons  to  the  CEO  of  
Wine  &  Co.

  170
Key elements to analyze

Topic 1 being tested Topic 2 being tested

§ What  are  the  different  ways  in  which  Wine  &  [Link]  can   § Which  wine  yields  more  profits  annually?  
use  the  land?  

Notes to interviewer Notes to interviewer

§ The  interviewee  should  create  a  framework  and  structure   § A  good  candidate  would  ask  for  the  profit  margins/costs  
the  problem.  The  interviewee  should  suggest  opFons   without  being  prompted.  Look  for  organizaFon  and  
including  manufacturing  the  wine,  creaFng  adjacent   structure  when  the  candidate  evaluates  the  annual  profits  
products  (like  wine  tasFng  tours),  using  the  land  for  other   for  each  wine  (a  good  candidate  would  use  a  table  like  
uses  (commercial  real  estate/selling  the  land  for  a  profit/ structure  when  doing  the  math).  The  revenues  would  be  
other  opportunity  costs).  A  good  candidate  would  provide   $480,000  for  both  wines  annually  but  the  margins  would  
a  detailed  structure  (eg.  profitability  framework  for   be  higher  for  Bordeaux  ($72,000  for  Bordeaux  vs.  $48,000  
manufacturing  feasibility  with  customizaFon  of  the   for  Merlot).  Aner  the  candidate  arrives  at  the  profits,  look  
framework  -­‐  yield  of  grapes,  cost  per  liter  of  wine,  etc.)  and   for  interpretaFon.  A  good  candidate  would  recommend  
outline  the  risks  or  consideraFons  involved  in  some  of   using  Bordeaux  while  at  the  same  Fme  consider  other  
these  opFons  (like  usability  of  land  for  manufacturing  or   factors  (competency  in  manufacturing  either  of  the  wines,  
company  competency  in  pursuing  in  other  opportuniFes   customer  demand  in  the  bay  area,  sensiFvity  to  product  
unrelated  to  wine  manufacturing).   yields,  customer  reservaFon  price,  etc.).  A  creaFve  
candidate  might  suggest  that  we  compare  the  age  of  the  
two  wines  (and  hence  will  impact  when  the  profits  might  
actually  start)  

171
Math for Topic 2

Value   Comments  

A   Acres  of  Land   12   Given  

B   kg  of  grapes  produced/acre   1000   Given  

C   kg  of  grapes  produced  total   12000   =A*B  

Merlot   Bordeaux   Comments  

D   Yield  (Litre/kg)   2   1   Given  

E   Total  Yield  (Litre)   24000   12000   =C*D  

F   Price  /  Litre    $20      $40     Given  

G   Total  Revenue    $480,000      $480,000     =E*F  

H   Profit  Margin   10%   15%   Given  

I   Total  Profit    $48,000      $72,000     =G*H  

Key elements to analyze

Topic 3 being tested Topic 4 being tested

§ Which  wine  would  you  choose  for  manufacturing?   § How  should  they  market  this  product  in  
the  San  Francisco  Bay  area?  

Notes to interviewer Notes to interviewer

§ Candidate  should  idenFfy  that  the  cash  flows  for  Merlot  would  be  $48,000   § Candidate  should  ask  for  the  customer  
annually  starFng  year  6.  Cash  flows  for  Bordeaux  would  start  in  year  12   segments  that  the  company  might  sell  to  
($72,000  annually).  A  good  candidate  would  then  consider  the  Fme  value   and  suggest  appropriate  markeFng  
of  money  and  discount  the  two  perpetuiFes  to  the  same  year  for  an   channels/strategies  to  consider.  Look  for  a  
apples-­‐to-­‐apples  comparison.  Merlot:  Annual  Cash  flow  starFng  year  6:   MECE  structure  here.  SuggesFons  should  
$48,000  Perpetuity  value  of  cash  flow  (value  in  year  6)  =  $48,000/0.12  =   include  retail  strategies,  direct  to  
$400,000  Bordeaux:  Annual  cash  flow  starFng  year  12:  $72,000  Perpetuity   consumer  strategies  (like  wine  clubs,  wine  
value  of  cash  flow  (value  in  year  12)  =  $72,000/0.12  =  $600,000  Value  of   tasFng),  tradiFonal  media  and  print  
perpetuity  in  year  6  =  $600,000  /  (1.12^6)  =  $300,000  (Rule  of  72).  Provide   adverFsing  and  online  adverFsing.  
help  here  if  the  candidate  is  struggling  with  the  division.  Look  for  the  
candidate's  approach  than  the  exact  number.  Since  value  of  pursuing  
Merlot  ($400,000)  is  higher  than  value  of  pursuing  Bordeaux  ($300,000),  
the  company  should  manufacture  Merlot.  A  good  candidate  would  
interpret  the  result  and  suggest  we  take  into  account  other  factors  like  
inventory  costs,  sensiFvity  to  discount  rate,  etc.  

173
Math for Topic 3
Merlot   Bordeaux   Comments  
A   Annual  Profit    $                    48,000      $                    72,000     See  Q.  2  
B   Years  to  maturity   6   12   Given  
C   Discount  Rate   12%   12%   Given  
Merlot  NPV  once  ripe  
D   -­‐  at  year  6    $                400,000         =A/C  
Bordeaux  NPV  once  
E   ripe  -­‐  at  year  12        $                600,000     =A/C  
Bordeaux  NPV  at  year  
Method  1   F   6  (using  discount  rate)        $                300,000     =E/(1.12)^6  

Method  1   G   Comparison  at  year  6    $                400,000      $                300,000     =D  and  F  

Merlot  NPV  at  year  12  
Method  2   I   (using  discount  rate)    $                800,000      $                600,000     =D*(1.12)^6  
Comprable  
Method  2   J   comparison  at  year  12    $                800,000      $                600,000     =I  and  E  

Alterna=ve  method  
using  "Rule  of  72"  
instead  of  (1.12)^6   Value   Comments  
Discount  Rate   12%   Given  
Years  to  double  value  
=  72/Discount  rate   6   =72/12  
Bordeaux:  changing  from  year  12  to  year  6  =  halving  the  value  of  
year  12  
Merlot:  changing  from  year  6  to  year  12  =  doubling  the  value  of  
year  6  
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ A  good  candidate  would  recommend  a  soluFon  (manufacturing  Merlot)  but  would  detail  out  the  risks/next  steps  
associated  with  the  recommendaFon.  Next  steps  may  involve  market  research,  land  usability  tesFng,  evaluaFon  of  
opportunity  costs.  Risks  have  been  outlined  above  already.  

Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  answer  should  include:  

a)  IdenFficaFon  of  opportunity  costs,  parFcularly  of  not  selling/leasing  the  land,  which  might  be  more  
profitable  considering  the  current  value  of  land  in  the  Bay  Area  and/or  Napa  
b)  Considering  industry  specific  issues  like  aging  of  wine    
c)  Considering  Fme  value  of  money/perpetuity  of  cash  flow    
d)  Considering  risks  like  customer  demand,  land  usability  
e)  PotenFal  benefits  of  diversifying  the  acreage  and  producing  mulFple  types  of  grapes  (compensate  for  shins  
in  consumer  demand,  broader  appeal  to  local  market,  etc.)  

175
Case 23: Healthy Foods Co.
By: Milija Medic, Edited By: Mauricio Atri (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client  is  Healthy  Foods  Co,  a  wholesaler  serving  a  variety  of  clients  with  Food  products.  The  client  is  profitable  but  
they  want  you  to  help  them  find  revenue  growth  opportuniFes  from  their  current  business.  
5
§ How  can  we  help  Healthy  Foods  Co.  drive  their  revenue  growth?  
Quants.

6
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

CPG

§ Industry:        CPG   Spend  first  15  min  on  fit   § This  case  tests  growth  opportuniFes  idenFficaFon,  and  
share  of  wallet  analysis.    
§ Level  of  Difficulty:   § Tell  me  about  a  Fme  
Creativity
Medium   when  you  failed.   § It  tests  conceptualizaFon  skills  as  the  interviewee  needs   Mkt. Stgy
to  formulate  prioriFzaFon  criteria.  The  case  is  mainly   Cust. Stgy
§ Case  Format:    Growth   § Share  me  a  Fme  when  
qualitaFve.  
Strategies   you  faced  a  difficult  
situaFon  in  a  team  and  
§ Concepts  Tested:  
how  you  solved  this  .  
- CreaFvity  
- MarkeFng  Strategy  
- Customer  Strategy  

176
Clarifying answers and case guide

Clarifying  answers  to  provide   Guide  to  case  /  Guide  to  handouts  

§ Customers   § Exhibit  1:  Hand  out  when  interviewee  asks  about  customers  or  revenue  by  
customer  type.  Interviewee  should  noFce  that  independent  restaurants  are  
- The  client  serves  various  customer  
the  largest  customer  category  and  revenue  source,  and  that  there  is  a  
categories  (shown  in  Exhibit  1).    
number  of  other  customer  types  of  similar  revenue  contribuFons  
- Customer  sensiFviFes  are  (highest  to   comprising  the  rest.    
lowest):    
§ Exhibit  2:  Hand  out  when  interviewee  idenFfies  share  of  wallet  as  a  
- Price   relevant  parameter,  in  search  of  revenue  growth  from  exisFng  customer  
- convenient  delivery   types.  Interviewee  should  generate  a  key  insight  that  Healthy  Foods  Co's  
share  of  wallet  is  already  large  for  the  customers  who  bring  in  the  largest  
- help  with  locaFon  planning   revenues.  The  opportunity  for  growth  therefore  is  in  the  smaller  revenue-­‐
- help  with  menu   generaFng  customers.    
- web  site  development   § Exhibit  3:  Hand  out  when  interviewee  recognizes  that  in  order  to  find  the  
smaller  customer  types  with  highest  revenue  growth  potenFal,  (s)he  needs  
- inventory    
the  plot  of  the  size  of  the  wallet  vs.  the  current  client's  share  of  wallet  for  
- Help  with  management  opFmizaFon     that  customer.  The  customers  with  large  wallets,  where  the  client  has  small  
§ Compe==on     share  of  wallet,  are  at  the  moment  the  best  candidates  to  achieve  increase  
in  revenue  from.  Interviewee  should  idenFfy  hospitals  and  hotels  as  the  
- The  client  is  one  of  the  market  leaders  and   customers  with  largest  potenFal  for  revenue  growth.  
is  not  loosing  the  market  share  
 

177
Key elements to analyze
Topic  1  being  tested   Topic  2  being  tested   Topic  3  being  tested  

§ IdenFfy  the  main  customer  types  and   § Share  of  wallet  analysis,  using  Exhibit   § Wallet  size  vs.  share  of  wallet  
their  current  contribuFons  to  the   2  
client's  revenues,  using  Exhibit  1  

Notes  to  interviewer   Notes  to  interviewer   Notes  to  interviewer  

§ The  interviewee  will  probably  explore   § The  interviewee  should  recognize  that   § The  bigger  their  wallet  and  the  smaller  
opportuniFes  for  growth  in  the   share  of  wallet  in  the  highest-­‐revenue-­‐ client's  share  of  wallet,  the  larger  the  
independent  restaurant  category.  If   generaFng  customer  categories  is   revenue  growth  opportunity  for  the  
they  inquire  about  customer   already  high,  and  that  the  client  is   client.    
saFsfacFon  and  sensiFviFes,  provide   already  a  key  provider  for  a  lot  of   § Using  Exhibit  3,  the  interviewee  
informaFon  from  the  "clarifying   them.   should  idenFfy  the  hospitals  and  the  
informaFon"  secFon,  and  emphasize   § Ask  the  interviewees  to  list  all  opFons   hotels  as  the  most  promising  
that  the  needs  of  this  segment  are   to  increase  revenue  and  the  reasons   candidates  for  revenue  growth  given  
already  met.     behind.   their  large  wallets  and  small  client's  
§ The  interviewee  should  inquire  about   § Help  interviewee  to  reach  that  the   share  of  wallet.  The  interviewee  
the  share  of  wallet  in  the  customer   growth  opportunity  in  the  smaller   should  idenFfy  the  strongest  
categories  to  get  a  be_er  idea  on   revenue-­‐generaFng  customers,  where   sensiFviFes  these  clients  would  have  
where  the  growth  opportuniFes  lie.   client's  share  of  wallet  is  smaller.  Now   and  suggest  ways  to  increase  client's  
the  interviewee  should  formulate  the   share  of  wallet  there.  
criteria  to  prioriFze  among  the  smaller    
revenue-­‐generaFng  customer  types:  
the  bigger  their  wallet  and  the  smaller  
client's  share  of  wallet,  the  be_er.  

178
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ In  the  current  business,  the  largest  growth  opportuniFes  lie  in  customer  segments:  
§  hospitals  and  hotels.    
§ The  interviewee  should  suggest  ways  to  be_er  serve  those  customers  and  increase  client's  share  of  wallet  there,  
capturing  significant  new  revenues  due  to  the  large  size  of  those  clients'  wallets.  

Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  interviewee  should  idenFfy  share  of  wallet  as  an  important  parameter,  quickly  recognize  that  there  is  
li_le  opportunity  for  growth  in  the  largest-­‐revenue-­‐generaFng  customers,  and  come  up  with  the  size  of  wallet  vs.  
share  of  wallet  plot  as  a  good  prioriFzaFon  tool  for  idenFfying  promising  customer  categories  for  the  client's  
revenue  growth.  

179
Exhibit #1: Total Market Revenues by Customer Type

Revenues by Customer Type

Independent restaurants
Chain restaurants
Hospitals
School cafeterias
Grocery stores
Other

180
Exhibit #2: Client’s Share of Wallet

0%   10%   20%   30%   40%   50%   60%   70%  

A  
Customer   Client  is  Primary  food  
Probability  (A:   product  supplier  
Highest,  X:  Lowest)  
B  

Client  is  one  of  many  

C  
food  product  
suppliers  

X  

181
Exhibit #3: Wallet Size vs. Share of Wallet

Wallet Size vs. Share of Wallet for the Smaller-Revenue-Generating

Customer Categories

600
500 Hospitals
400 Hotels
Wallet Size [$M] 300 School cafeterias
200 Grocery stores
100 Chain restaurants
0
0 10 20 30 40 50 60
Share of Wallet [%]

182
Case 24: High Q Plastics
By: Erin Brooks (Kellogg Class of ‘11), Edited By: Uri Kalir (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client,  High  Q  PlasFcs,  is  an  automoFve  parts  supplier  in  the  U.S.  They  primarily  manufacture  and  sell  plasFc  
injecFon-­‐molded  parts,  such  as  grills,  door  handles,  decoraFve  trim  etc.,  to  automoFve  customers.    
§ The  client  has  two  primary  revenue  sources:  large  automoFve  OEMs,  and  anermarket.  The  client  has  recently  seen   8
declining  profits,  primarily  due  to  increased  price  compeFFon  from  new  overseas  compeFtors  in  China.  Annual  profits   Quants.
have  declined  from  $50M  to  $20M  over  the  past  few  years.  
§ What  is  the  reason  behind  declining  profitability?  How  can  High  Q  improve  profits?  Can  they  reach  $100M  in  profits  by   5
2014?   Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:  Industrial   Spend  first  15  min  on  fit   § The  interviewee  should  examine  the  following  MECE  
Goods   quesFons  about  the  compeFFve  dynamics  of  the   Comp. Als
§ Tell  me  about  your   Creativity
§ Level  of  Difficulty:   industry:  
greatest  challenge,  and   Ops.
Medium   § Industry:  What  is  the  sales  volume  trend?  What  is  the  %  of  
how  you  overcame  it.  
§ Case  Format:   demand  and  growth  of  OEM  vs.  anermarket  segment?  Is  one  of  
Improving  Profitability;   § What  is  the  best  way  to   these  segments  more  profitable  than  the  other?  
Cost  ReducFon   deal  with  a  difficult  client   § Compe5tors:  Who  are  they?  What  is  their  relaFve  market  share?  
§ Concepts  Tested:   who  does  not  agree  with   What  are  their  prices  vs.  our  clients’?  What  is  their  cost  structure  
vs.  our  clients’?  Do  they  have  a  technology  or  quality  compeFFve  
- CompeFFve   your  recommendaFons?  
advantage  relaFve  to  our  client?  
Analysis     § Revenue:  How  have  our  clients’  prices  changed  in  recent  years?  
- CreaFvity   Have  they  declined  across  all  customers  and  products?  
- OperaFons   § Costs:  What  trends  is  our  client  seeing  in  their  cost  structure?  
Increasing  labor  or  material  costs?  

183
Clarifying answers and case guide
Clarifying  answers  to  provide   Ques=ons  and  Hand-­‐out  Guide  

Industry  Characteris=cs/Market  Economics   1. What  key  quesFons  would  you  ask  an  industry  expert  in  order  to  be_er  
- AutomoFve  sales  overall  sFll  growing   understand  the  reasons  behind  High  Q’s  declining  profits?    
steadily,  driven  by  emerging  markets   2. The  CEO  of  High  Q  wants  to  know  if$100M  in  annual  profits  is  achievable  by  
- AutomoFve  manufacturing  is  leaving  the   2014.    What  would  you  need  to  know  in  order  to  determine  this?    What  data  
U.S.   would  you  ask  for?  
Client  Characteris=cs   3. What  ways  can  you  think  of  to  increase  revenues?    What  ways  can  you  think  
of  to  reduce  costs?  
- Client  is  currently  one  of  the  leaders  in  this  
category   4. Our  client  is  planning  on  implemenFng  lean  manufacturing  across  all  4  of  its  
U.S.  plants,  in  order  to  provide  cost  savings  and  increase  profits.    Hand  out  
- Client  has  U.S.-­‐based  manufacturing  
exhibit  1.      
- Revenues  have  been  slowly  declining  over  
• The  client  is  expecFng  to  produce  80%  of  2010  volumes  in  2014.    They  are  also  
last  5  years   planning  on  reducing  prices  by  10%  due  to  increased  compeFFon.  
- Client’s  products  are  of  a  higher  quality   • Lean  manufacturing  implementaFon  across  all  plants  will  provide  an  addiFonal  
than  most  Chinese  compeFtors’  products   20%  savings  in  raw  material,  and  30%  savings  in  labor.  
Compe==ve  Dynamics   • What  is  the  change  in  profits  the  High  Q  CEO  can  expect  from  2010  to  2014,  
- AutomoFve  OEM  customers  are  looking  to   based  on  this  informaFon?  
reduce  cost,  driving  increased  price   5. High  Q  ‘s  CEO  has  also  asked  us  to  take  a  look  at  compeFFve  dynamics  
compeFFon  among  parts  suppliers   among  the  automoFve  OEMs,  in  order  to  predict  any  increase  in  profits  from  
increased  sales.    Hand  out  exhibits  2  and  3.      
• Based  on  the  informaFon  given,  what  do  you  expect  High  Q  will  see  in  
addiFonal  profits  due  to  Toyota’s  predicted  30%  increase  in  market  share  in  
truck  and  SUVs?  
6. Please  summarize  your  findings  to  the  CEO,  including  any  other  potenFal  
opportuniFes  to  increase  High  Q’s  profits  over  the  next  few  years.  

184
Solution and recommendations

Solu=on  &  Recommenda=ons  

1. The  interviewee  should  examine  the  following  MECE  quesFons  about  the  compeFFve  dynamics  of  the  industry:  
a) Industry:  What  is  the  sales  volume  trend?    What  is  the  %  of  demand  and  growth  of  OEM  vs.  anermarket  
segment?    Is  one  of  these  segments  more  profitable  than  the  other?  
b) Compe=tors:  Who  are  they?    What  is  their  relaFve  market  share?      What  are  their  prices  vs.  our  clients’?    What  is  
their  cost  structure  vs.  our  clients’?  Do  they  have  a  technology  or  quality  compeFFve  advantage  relaFve  to  our  
client?  
c) Revenue:  How  have  our  clients’  prices  changed  in  recent  years?    Have  they  declined  across  all  customers  and  
products?  
d) Costs:  What  trends    is  our  client  seeing  in  their  cost  structure?    Increasing  labor  or  material  costs?  
2. In  order  to  understand  if  $100M  in  profits  by  2014  is  achievable,  you  would  need  to  know  the  annual  qty  of  units  sold,  
the  selling  price,  and  the  clients’  fixed  and  variable  costs.    Profit  =  Q*(P-­‐VC)  –  FC  
3. The  interviewee  should  come  up  with  2-­‐3  ways  each  for  cost  reducFon  and  increasing  revenues:  
a) Reduce  Cost:  find  alternaFve  material  sources,  invest  in  process  automaFon  to  reduce  labor,  consolidate  mulFple  
manufacturing  sites  to  reduce  SG&A  costs,  relocate  close  to  customers  to  reduce  transportaFon  costs.  
b) Increase  Revenue:  segment  customers  to  determine  sensiFvity  to  price,  increase  markeFng  in  anermarket  
segment,  negoFate  long-­‐term  contracts  with  OEM  customers.  

185
Solution and recommendations (2)

Solu=on  &  Recommenda=ons  

4. The  interviewee  should  use  the  informaFon  provided  in  Exhibit  1  to  calculate  the  following  profitability  for  each  plant  in  2014,  and  
walk  the  interviewer  through  the  calculaFon  steps.    It  is  important  to  first  note  that  revenues,  labor,  and  material  will  decrease  by  
20%  due  to  the  reduced  quanFty  output  from  each  plant,  plus  the  addiFonal  20%  savings  in  material  and  30%  in  labor.  Revenue  
will  decrease  by  an  addiFonal  10%,  in  a  cost  cuong  maneuver.  Overhead  costs  will  not  change.    

*all  figures  a re  i n  $  million  USD.

Plant  A Plant  B Plant  C Plant  D
Revenues 72.0 72.0 72.0 72.0
Labor 11.2 22.4 33.6 16.8
Material 35.2 25.6 12.8 22.4
Overhead 20.0 15.0 15.0 30.0
   
Net  Profits 5.6 9.0 10.6 2.8
 
Total  2014  Profits 28.0
 
Additional  Profits 8.0
   
 From  this  calculaFon,  the  interviewee  should  reference  back  to  quesFon  2.    Even  with  the  lean  manufacturing  implementaFon,  
High  Q  is  sFll  a  long  way  from  the  CEO’s  goal  of  $100M  in  annual  profits,  and  this  is  therefore  not  a  realisFc  target.    A  strong  
interviewee  should  note  the  importance  of  aligning  a  client’s  expectaFons.    
 

186
Solution and recommendations (3)
Solu=on  &  Recommenda=ons  

5. The  interviewee  should  be  able  to  use  the  informaFon  provided  in  the  Exhibits  to  calculate  the  following  revenue  growth  (“Sales”  
figures  below  are  in  units/vehicles).  Rounded  answers  ($13  or  $14M)  are  fine,  given  that  interviewee  has  already  demonstrated  
math  proficiency.  
2010 2014
 
U.S.  Auto  Market                16,000,000
U.S.  Truck  &  SUV  Sales                    3,200,000
Toyota  Truck  &  SUV  Sales                            320,000            1,280,000
High  Q's  Toyota  Qty.  Sold                            224,000                    896,000
High  Q's  Toyota  Revenues $                4,480,000 $  17,920,000
Additional  Revenue $  13,440,000

6. The  interviewee  should  concisely  summarize  the  overall  goal  of  the  case  (to  increase  High  Q’s  declining  profitability  due  to  new,  
low-­‐cost  compeFFon),  and  main  findings  from  each  quesFon,  and  a  recommendaFon  (yes,  High  Q  should  implement  the  lean  
manufacturing  iniFaFve,  while  recognizing  that  this  iniFaFve  alone  will  not  hit  the  CEO’s  total  profit  goal  in  2014).    The  
interviewee  should  also  generate  a  list  of  addiFonal  opportuniFes  that  were  not  explored  in  the  case,  including:  
a) ConsolidaFon  of  the  4  manufacturing  plants  (especially  Plant  D,  with  its  high  overhead  costs)  
b) Pursue  growth  in  the  anermarket  segment  of  their  business  
c) Diversify  their  business  into  plasFc  injecFon-­‐molded  parts  for  other  industries  (outside  of  automoFve),  with  less  price  
compeFFon  

 
187
Exhibit #1: High Q’s 2010 Financials, By Facility

*all  figures  a re  i n  $  million  USD.

Plant  A Plant  B Plant  C Plant  D
Revenues 100 100 100 100
Labor 20 40 60 30
Material 55 40 20 35
Overhead 20 15 15 30
Net  Profits 5 5 5 5

188
Exhibit #2: 2010 U.S. Automotive Market

2010 U.S. Automotive Sales

20%

38% Compact cars

Full-size cars

Trucks & SUVs

42%

*Addi=onal  Informa=on  
2010  U.S.  AutomoFve  Sales  =  16  Million  vehicles      

189
Exhibit #3: U.S. Automotive OEM Market

OEM Truck / SUV Market Share

2010-2014
45%
40%
40%
35% 33%
31%
30%
25% 21% 20% 19% 2010
20%
14% 2014
15%
10%
10% 7%
5%
5%
0%
Ford GM Chrysler Toyota Nissan
*Addi=onal  Informa=on  
High  Q  supplies  70%  of  Toyota's  business      
Avg.  Price  of  High  Q  products  sold  to  Toyota  =  $20  

190
Case 25: Salty Sole Shoe Co.
By: Meredith Tierney (Kellogg Class of ’11), Edited By: Uri Kalir (Kellogg Class of ‘12)

Case  Ques=on  

§ Your  client  is  a  large  retail-­‐focused  private  equity  firm  that  owns  Salty  Sole,  a  leading  designer  of  junior  women’s  
footwear,  primarily  targeFng  the  14  –  22  year  old  age  group.    Salty  Sole  was  purchased  last  year  by  the  private  equity  
firm  expecFng  to  realize  substanFal  profits  upon  sale  in  2012  by  increasing  the  company’s  EBITDA.    The  situaFon,  
7
however,  is  that  due  to  a  current  recession,  annual  profit  has  only  grown  modestly  post  the  acquisiFon  and  is  not  on   Quants.
track  to  generate  the  double-­‐digit  returns  that  the  private  equity  firm  originally  anFcipated.      
§ How  can  the  company  increase  profitability  and  achieve  the  private  equity  firm’s  return  on  investment  objec5ves?   6
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:        Retail   Spend  first  15  min  on  fit   § The  case  primarily  tests  an  understanding  of  
Apparel   profitability  and  profitability  growth  strategies   Creativity
§ Tell  me  about  a  problem  
§ Level  of  Difficulty:   you  faced  in  your   § Begin  by  reading  the  case  quesFon  and  asking  the   Acct.
Micro.
Medium   professional  life,  how   interviewee  to  take  a  few  moments  and  then  explain  
you  resolved  it,  and   how  they  would  like  to  proceed  in  the  client’s  problem  
§ Case  Format:    
what  the  results  were.  
Improving  profitability  
§ Tell  me  about  a  Fme  
§ Concepts  Tested:  
when  you  worked  in  a  
- CreaFvity   contenFous  or  high-­‐
- AccounFng   stress  situaFon  and  how  
you  handled  it.  
- Microeconomics  

191
Clarifying answers and handout guide

Clarifying  answers  to  provide   Guide  to  handouts  

Industry  Characteris=cs/Market  Economics   • Aner  asking  the  case  quesFon,  the  interviewee  should  draw  a  framework  that    
outlines    the  basic  concept  that  profit  is  driven  by  revenue  (price  and  volume)  
- Client  is  the  market  leader  in  junior  
and  cost  (fixed  and  variable)  
women’s  footwear  in  the  U.S.  only.  
- Apparel  industry  is  characterized  by   • Exhibit  1  –  Hand  out  aner  interviewee  presents  his/her  framework.    
cyclicality  due  to  economy  and   - What  observaFons  can  be  made  from  this  chart?  
consumer  preferences.   - Interviewee  should  point  out  that  the  company  experienced  significant  
  growth  during  the  pre-­‐recession  years,  but  a  decline  and  only  gradual  pick-­‐up  
Client  Characteris=cs   following.    
- Client  designs  and  distributes  footwear  
- Interviewee  should  pick-­‐up  on  the  fact  that  the  change  in  net  sales  is  not  due  
to  discount  retailers  (like  Kohl’s)  and  is   to  increased  discounts/allowances  (remains  1%  throughout  years).    
considered  mid-­‐priced.  
- Client  outsources  all  manufacturing  on  a   - On  the  cost  side,  interviewee  should  note  that  variable  costs  remained  flat  at  
fixed-­‐contract  basis  (i.e.  manufacturing   50%  and  fixed  costs  remained  flat  
costs  with  outsourced  providers  fall   • Exhibit  2  –  Hand  out  when  discussing  revenue  /  increasing  volume.    
under  Fixed  Costs  for  simplicity).   - Note  that  the  “casual”  footwear  market  is  used  as  a  proxy  for  the  junior  
  women’s  category  in  which  the  client  competes  and  is  the  market  leader.  
Compe==ve  Dynamics   - What  observaFons  can  be  made  from  this  chart?  
- Client  follows  a  “me-­‐too”  strategy  and  
- Candidate  should  note  that  the  client  is  already  the  market  leader  with  
follows  fashion  rather  than  invenFng  it   greater  than  35%  share  and  that  the  industry  is  not  projected  to  grow.  
then  offering  lower  prices  than  name  
brands  (i.e.  not  subject  to  fashion  risk).    
- Client  competes  on  the  basis  of  trendy  
fashion  and  value  pricing.  

192
Key elements to analyze

Costs   Revenue  

§ Using  Exhibit  1,  have  a  quick  discussion  about  the   § Once  interviewee  determines  that  cost  is  not  the  issue,  have  a  
company’s  cost  structure.   discussion  on  the  components  of  revenue  –  price  and  volume.    

Notes  to  interviewer   Notes  to  interviewer  

• Fixed:    Interviewee  should  note  that  fixed  costs  are  not   § Price:    Interviewee  should  ask  if  pricing  has  remained  constant  
extremely  high  (about  23-­‐25%),  but  could  be  an  area  for   over  Fme  or  if  the  company  has  adjusted  its  pricing  to  reflect  
improvement.  Ask  how  interviewee  would  reduce  fixed   lower  consumer  discreFonary  income.    
costs?  Examples  include:  renegoFate  contracts,  find   § Ask  what  consideraFons  the  interviewee  would  have  when  
cheaper  manufacturing  partners,  etc.     considering  adjusFng  price?  
- State  that  in-­‐fact  fixed  costs  cannot  be  adjusted   § Answers  should  be  price  sensiFvity  /  elasFcity,  cost  
based  on  the  company’s  research.   structure,  brand  equity  (dilute  brand  through  price  
• Variable:  Interviewee  should  note  that  variable  costs  are   decrease  but  compete  with  more  upscale  brands  if  
approximately  50%  of  sales.  Ask  how  interviewee  would   increase).    
think  about  reducing  variable  costs?  Examples  include:   § State  that  pricing  has  remained  constant  at  an  average  
reduce  labor/sales  force,  use  technology,  renegoFate  /   of  $25/unit.  The  company  has  determined  that  it  would  
volume  purchase  materials  
not  be  prudent  to  adjust  pricing  based  on  industry  
- State  that  variable  costs  are  currently  at  the  lowest   research.  Interviewee  can  now  determine  the  number  of  
possible  rates  based  on  market  research.   pairs  of  shoes  sold  for  later  in  the  case.  

193
Key elements to analyze
Revenue  (cont’d)  

§ Now  that  the  interviewee  has  hopefully  zeroed-­‐in  on  the  fact  that  the  issue  is  volume,  ask  how  many  units  must  be  sold  by  2012  in  
order  for  the  private  equity  firm  to  achieve  a  20%  return  on  the  investment  in  Salty  Sole  Shoe,  which  equals  approximately  $300  
million  sale  value  (give  this  number).  Note  that  interviewee  should  ignore  discounts/allowances  for  simplicity.    

Notes  to  interviewer   Market  Size  

• Interviewee  should  determine  that  if  the  sale  value  needs  to   • Show  the  candidate  Exhibit  2  when  he/she  notes  that  
be  $300mm  in  2012,  then  EBITDA  will  need  to  be  $300  /  6.5   market  size/share  would  be  helpful.  
=  $46.15  (round  up  to  $50  million).   • Candidate  should  note  that  the  client  is  already  the  market  
• The  formula  to  determine  how  many  pairs  of  shoes  must  be   leader  with  greater  than  35%    and  that  the  market  size  is  
sold  to  reach  that  EBITDA  level  is  as  follows:   not  projected  to  increase.  
• $50,000,000  =  $25*v  –  (.5  *  25  *  v)  –  15,000,000   • This  should  lead  to  the  conclusion  that  the  client  can  
increase  volume  by  stealing  share  and/or  new  products  in  
• $65,000,000  =  12.5v  
other  categories.  
• V  =  5,200,000  pairs  of  shoes  
• Interviewee  should  note  that  this  is  more  than  double  the  
2008  and  2009  volume  levels.    
• Ask  what  the  interviewee  would  want  to  know  to  determine  
if  this  volume  is  feasible?  Answer:  market  size  /  share.  

194
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ The  interviewee  should  zero-­‐in  on  the  fact  that  since  cost-­‐structure  is  fixed  and  price  is  also  fixed,  volume  is  the  only  
real  way  to  increase  profitability.    
§ However,  volume  must  more  than  double  in  order  to  achieve  the  growth  desired  by  the  private  equity  firm  for  a  
20%  return,  which  could  be  difficult  given  recession  and  the  fact  that  the  industry  as  a  whole  isn’t  growing.    
§ Interviewee  should  recommend  potenFals  strategies  for  achieving  that  volume  growth  while  outlining  the  risks  of  
each:  1)  Volume:    new  products  /  geographies  /  distribuFon  channels  (internaFonal?);  increase  markeFng  to  steal  
share;  acquire  growth  (brands);  adjust  product  mix  to  higher-­‐margin  products.  2)  Price:    add  value  /  features.  3)  
Risks:    Capacity,  cannibalizaFon  if  new  products.  

Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  interviewee  will  quickly  idenFfy  that  volume  is  the  issue  by  Fcking  through  the  parts  of  the  profitability  
equaFon.  
§ An  excellent  interviewee  will  also  ask  about  product  mix  and  quesFon  the  50%  gross  margin.    Interviewer  should  
note  that  it’s  assumed  that  all  products  have  the  same  margin,  but  that’s  a  great  quesFon.    
§ An  excellent  interviewee  will  also  note  that  since  the  company  is  not  projected  to  have  to  adjust  discounts  /  
allowances,  then  it  probably  has  a  good  product  that  is  highly-­‐valued  by  customers  and/or  this  may  be  aggressive  
projecFng.  

195
Exhibit #1: Client Financial Estimates

Salty  Sole  Financial  Estimates

($  in  millions)
2006A 2007A 2008A 2009E 2010E 2011E 2012E
Sales 50.00 65.00 60.00 61.00 62.00 65.00 70.00
Less:    Discounts/Allowances (0.50) (0.65) (0.60) (0.61) (0.62) (0.65) (0.70)
Net  Sales $49.50 $64.35 $59.40 $60.39 $61.38 $64.35 $69.30
%  Increase  /  Decrease 20.0% 30.0% (7.7%) 1.7% 1.6% 4.8% 7.7%

Cost  of  Goods  Sold 24.75 32.18 29.70 30.20 30.69 32.18 34.65
Fixed  Costs 15.00 15.00 15.00 15.00 15.00 15.00 15.00
Total  Costs 39.75 47.18 44.70 45.20 45.69 47.18 49.65

EBITDA $9.75 $17.18 $14.70 $15.20 $15.69 $17.18 $19.65

Sale  Multiple 6.50x 6.50x 6.50x 6.50x 6.50x 6.50x 6.50x
Purchase/Sale  Price $111.64 $95.55 $98.77 $101.99 $111.64 $127.73
Return  on  Investment 2.7%

Note:    Acquisition  occurred  on  December  31,  2006.

196
Exhibit #2: Market Size and Share

U.S. Casual Footwear Market Size and Share

$56B $58B $57B $58B

100%
Competitor 5
90%
Competitor 4
80%
Competitor 3
70%
Percent  Market  Share

Competitor 2
60%

50%
Competitor 1
40%

30%
Salty Sole
20%

10%

0%
2006 2007 2008 2009

197
Case 26: Plastic World
By: Milija Medic, Edited By: Peter Manoogian (Kellogg Class of ‘12)

Case  Ques=on  

§ Our  client  is  a  private  equity  firm  interested  in  PlasFcWorld,  a  plasFc  packaging  manufacturer.    
§ Plas5cWorld’s  owners  are  reques5ng  $25M.  The  offer  is  final.  Should  our  client  buy?  
3
Quants.

4
Structure

Case  tracker   Fit  Ques=ons   Guide  to  interviewer  

§ Industry:      Financial   Spend  first  15  min  on  fit   § The  case  primarily  tests  the  ability  to  gain  insight  from  
Services   quan=ta=ve  data  ,  value  a  company  and  find  poten=al   Org. Chg.
§ Tell  me  something  about  
§ Level  of  Difficulty:   improvements…  As  such,  it  is  a  liFle  bit  more  data-­‐ Mkt. Share
yourself  that  is  not  listed   Cust. Stgy
Medium   driven  than  the  average  case.    
on  your  resume.  
§ The  interviewee  should  focus  on  the  company  value  –  
§ Case  Format:    M&A   § What  was  the  most   the  recommendaFon  regarding  the  offer  depends  on  it  –  
§ Concepts  Tested:   difficult  problem  you   and  on  feasibility  of  idenFfied  profit-­‐improving  changes.  
- OrganizaFonal   solved  in  your  previous   § The  interviewee  should  be  able  to  come  up  with  the  key  
changes   job,  business-­‐wise?   improvements  if  (s)he  invests  some  effort  in  
- Market  share   understanding  the  price  drop  and  its  relaFonship  to  the  
- Customer  strategy   sales  force  incenFves.  S(he)  should  also  come  up  with  
innovaFon-­‐related  costs  from  the  pressure  from  the  
customers  and  how  to  push  back.  

198
Clarifying answers and case guide

Clarifying  answers  to  provide   Guide  to  handouts  

Plas=cWorld  Characteris=cs   Begin  by  handing  out  exhibit  #1  aner  staFng  the  case  quesFon.  
- Makes  plasFc  packaging  for  beverages,   Exhibit  1  –  Hand  out  aner  introducing  case  
cosmeFcs,  household  and  automoFve   - What  observaFons  can  be  made  from  this  P&L  statement?  
chemicals  
- Products  are  top  quality,  they  have  350   - Interviewee  should  calculate  the  profit  margin  (-­‐6%),  noFce  that  
sales  volume  is  growing  but  revenues  are  dropping,  and  infer  that  
sets  of  molds,  with  different  materials,  
finish,  colors,  always  innovaFng   the  cause  may  be  pricing  (more  detail  on  next  page)  
- Overall  product  mix  has  not  changed  in   - To  check  if  it’s  an  industry-­‐wide  or  company-­‐specific  drop  in  
recent  years   profitability,  they  should  request  compe55on  profitability  data  
- The  sales  force  is  “the  best  in  breed”,   Exhibit  2  –  Hand  out  if  the  candidate  requests  compeFFon  data  
they  hold  market  share,  and  they  are   - Note  that  it’s  a  company-­‐specific  problem  
compensated  on  market  share  
- Two  years  ago  they  invested  further  in   - Push  the  interviewee  to  postulate  what  would  be  a  realisFc  profit  
equipment  for  product  innovaFon   margin  goal  for  PlasFcWorld  based  on  this  industry  profitability  data  
(more  detail  on  next  page)  
Customers  
- PlasFcWorlds’  customers  exhibit  strong   Exhibit  3  –  Hand  out  aner  discussion  of  Exhibit  2  
loyalty   - SensiFvity  analysis  indicates  that  the  company  would  be  worth  the  
offered  $25M  if  the  profit  margin  was  brought  from  –6%  to  0%  
- They  are  experiencing  increasing  
pressures  in  their  industries  to  innovate   - Interviewee  should  invesFgate  the  profitability  drop  and  the  low  
the  plasFc  packaging   prices  further  and  suggest  opFons  to  get  PlasFcWorld’s  profitability  
in  line  with  the  industry,  and  their  feasibility  

199
Key elements to analyze
Sales  Force  Incen=ves   Profit  Margin  Improvement  Feasibility  

§ Using  Exhibit  1,  What  could  be  the  reasons  behind  what   § Use  Exhibit  2  to  conclude  it’s  a  client-­‐specific  problem,  use  
is  in  the  data?   Exhibit  3  to  discuss  company’s  value  if  the  profit  margin  is  
increased  to  the  industry  average.    

Notes  to  interviewer   Notes  to  interviewer  

• Exhibit  1  –  PlasFcWorld  has  experienced  a  steady  drop  in   § Exhibit  2  -­‐  the  candidate  should  idenFfy  the  profitability  
revenues  while  the  sales  volume  has  been  growing.     problem  is  client-­‐specific,  all  compeFtors  are  profitable.    
• There  are  three  major  points  to  idenFfy:  1)  the  profit   § Exhibit  3  –  the  observaFon  from  the  graph  is  that  the  
margin  is  dropping  and  negaFve;  2)  given  the  unchanged   company  would  be  worth  the  $25M  if  PlasFcWorld  
product  mix  and  increasing  sales  volume,  the  drop  in   increased  profit  margin  from  –6%  to  0%.  If  the  profit  
revenues  is  caused  by  a  reducFon  in  prices;  3)   margin  reached  the  industry  average,  the  company  would  
depreciaFon  change  –  it  was  equipment  investment.   be  worth  $40M.  
• The  interviewee  should  find,  asking  independently  or  with   § Now  the  quesFon  is  how  easily  can  the  profitability  be  
your  help,  that  sales  force  is  compensated  based  on   increased  above  zero  (making  the  company  worth  more  
market  share.  This  gives  the  sales  force  incenFve  to  drop   than  the  $25M).  The  sales  force  incenFve  change  is  easy  to  
the  prices.   make.    
• Interviewee  should  ask  about  the  product  quality  and   § Looking  for  other  high-­‐impact  improvements,  the  dense  
customer  loyalty  to  discard  price  compeFFon  as  the   product  line  and  constant  innovaFon  is  the  next  largest  
reason  to  drop  prices.  The  products  are  high-­‐quality  and   candidate.  Eliminate  some  molds  to  cut  costs,  mindful  of  
customers  are  loyal,  so  most  of  them  would  buy  even  at  a   innovaFon  pressures  in  PW’s  clients’  industries.  
higher  price.  

200
Solution and recommendations

Solu=on  &  Recommenda=ons  

§ Our  client  should  accept  the  $25M  offer  and  boost  the  profitability  (and  value)  of  PlasFcWorld.  
§ The  client  should  engage  in  the  following  easy-­‐to-­‐implement  changes:  
§ Compensate  sales  force  based  on  company  earnings  instead  of  market  share.  
§ Simplify  the  product  line  -­‐  eliminate  some  of  the  350  molds  to  cut  costs  while  leveraging  the  superior  sales  
force  to  maintain  client  saFsfacFon.    
§ Examine  the  industry  best  pracFces  to  find  other  areas  for  improvement.    

Bonus/Guide  to  an  Excellent  Case  

§ An  excellent  interviewee  will  quickly  idenFfy  the  pricing  as  the  issue  behind  the  revenue  decrease  and  lay  out  
potenFal  causes  for  the  price  drop,  finding  the  sales  force  incenFve.  
§ AddiFonally,  a  strong  interviewee  will  immediately  noFce  that  the  company  would  be  worth  more  than  $25M  if  its  
profit  margin  was  at  the  level  of  industry  average.  
§ A  framework  comprehensive  enough  to  find  the  product  line  size  problem  would  be  a  plus.  

201
Exhibit 1: PlasticWorld P&L statement in the past three years

2009 2008 2007

Sales ($) 18,824,000 19,180,000 19,650,000
Volume (units) 36,200,000 34,250,000 32,750,000
COGS ($) 9,050,000 8,900,000 8,650,000
SG&A ($) 7,500,000 7,200,000 7,300,000
Depreciation ($) 3,450,000 3,450,000 2,250,000
EBIT ($) -1,176,000 -370,000 1,450,000

202
Exhibit 2: PlasticWorld and Industry Peers Profit Margins

Industry Peers Profit Margins [%]

-10 -5 0 5 10 15

Competitor A

Competitor B

Competitor C

Competitor D

Competitor E

Competitor F

PlasticWorld

203
Exhibit 3: PlasticWorld Valuation by Profit Margin

PlasticWorld Valuation Sensitivity Analysis

50
45
company valuation [$M]

40
35
30
25
20
15
10
5
0
-10 -5 0 5 10 15
profit margin [%]

204
Case 27: Zoo Co.
By: Aneri Jambusaria (Kellogg Class of ’11), Edited By: Ron Mantel (Kellogg Class of ‘15)

Case Question

§ Our  client  is  a  zoo  that  is  thinking  about  acquiring  a  famous  zebra  from  an  African  preserve.  
§ It’s  a  huge  investment,  but  they  believe  the  new  zebra  would  be  a  great  contribuFon  to  their  animal  community.  You  
have  been  engaged  to  help  decide  whether  this  is  a  good  idea.  What  would  you  consider  when  trying  to  help  your  client   7
make  this  decision?   Quants.

5
Structure
Case tracker Fit Questions Guide to interviewer

§ Industry:    Financial   Spend  first  15  min  on  fit   § Even  though  the  client  is  a  Zoo,  we're  undertaking  a  
Services   similar  process  to  what  is  done  when  underwriFng  an  
§ Describe  a  recent   Invest.
insurance  policy.  The  case  evaluates  basic  concepts,  but   B/E
§ Level  of  Difficulty:   unpopular  decision  you  
involves  many  calculaFons  and  use  of  financial  and   Basic NPV
Medium   made.  What  was  the  
assessment  techniques.  
result?  
§ Case Format: M&A   § Key  case  objecFves:  
§ Concepts Tested: § Tell  me  about  a   1. Investment  ValuaFon  –  Walk  through  the  
successful  business   valuaFon  process  for  an  asset    
- Investments  
relaFonship  you  built   2. Breakeven  Analysis  –  Determine  the  revenue  
- Break-­‐even  Analysis   with  a  client,  boss,  or   increase  needed  for  a  posiFve  NPV  
- Basic  NPV   peer  in  your  previous   3. Risk  Assessment  –  Should  the  zoo  should  use  an  
job.     insurance  contract  to  hedge  downside  risk?  
§ Rounding  numbers  is  generally  okay  but  should  not  be  
done  to  the  extreme  as  it  will  alter  the  results  

205
Zoo Co: Clarifying answers and case guide
Clarifying  answers  to  provide   Guide  to  case  /  Guide  to  handouts  

Data  to  provide  when  asked   • The  interviewee  should  think  about  performing  a  break  even  and  a  
- 300K  people  visit  the  zoo  yearly     sensibility  analysis.    Anerwards,  they  need  to  think  about  performing  
- Admission  is  $15     a  risk  assessment  (only  when  you  reach  this  point  you  should  deliver  
- Benefits  from  acquisiFon  could  lead  to   exhibit  1)  
increased  a_endance.    Another  zoo  that   • They  should  start  by  asking  about  the  benefits  and  costs  associated  
acquired  a  similar  zebra  had  an  8%   with  zebra  acquisiFon  (Len)–  Share  with  interviewee  aner  probing  
increase   quesFons  are  received  
  • Using  the  data  on  the  len  to  calculate  benefit  to  zoo  from  acquisiFon  
Costs  from  zebra  acquisiFon     –  Determine  whether  or  not  this  zebra  purchase  makes  financial  sense  
- Immediate  costs:  acquisiFon  fees,   for  the  zoo,  using  the  NPV  value  
transportaFon  costs,  and  new  faciliFes.  
- Food,  health  costs  and  addiFonal  trainers   • Using  the  cost  and  benefit  data  provided,  the  interviewee  should  
are  part  of  annual  maintenance  costs     calculate  the  NPV  of  the  acquisiFon    
- AcquisiFon  cost:  $235K     • Assume  that  a;endance  benefits  are  realized  immediately  and  
- New  faciliFes:  $850K     maintained  thereaJer  
- TransportaFon:  $110K     - Annual  benefits  =  (300K)*($15)*(0.08)  =  $360K  
- Annual  maintenance:  $90K     - Upfront  costs  =  $235K  +  $850K  +  $110K  =  $1.195M  
- Discount  rate  =  20%  Assume  that  
- Annual  costs  =  $90K  
immediate  cost  are  paid  today,  and  
annual  costs  and  benefits  are  realized   - NPV  =  -­‐$1,195K+(($360K  -­‐  $90K)/0.20)  =  $155K  
beginning  next  year  and  sustained  into   • ConFnue  by  asking  quesFons  in  next  page  
perpetuity,  even  thought  the  Zebra  will    
not  live  on  to  perpetuity  
 

 
206
Zoo Co: Key elements to analyze

Break-­‐even  analysis   Risk  assessment  

§ Zoo  Co.  is  concerned  about  using  the  other  zoo’s   § Since  the  zoo  is  very  risk-­‐averse,  they’re  interested  in  
a_endance  benefits  as  a  proxy.  They  think  that   hedging  some  of  their  downside  risk.  An  insurance  
a_endance  could  increase  by  less  than  8%.    What   company  has  offered  to  provide  the  Zoo  with  a  constant  
analysis  could  you  perform  to  address  their   revenue  to  increase  revenue  to  $250,000  per  year  if  
concerns?  What  is  the  breakeven  a_endance   a_endance  increases  are  less  than  or  equal  to  5%  (if  
increase  required?     revenue  is  $135K,  the  insurance  will  give  the  Zoo,  $115K.      
In  exchange,  the  insurance  company  wants  the  zoo  to  pay  
1%  of  the  zoo’s  total  annual  revenues  as  a  premium.  What  
might  you  do  to  determine  if  this  was  a  good  deal?    

Notes  to  interviewer   Notes  to  interviewer  

§ The  interviewee  should  determine  that  a  sensiFvity  /   § The  interviewee  should  recognize  that  addiFonal  
breakeven  analysis  of  the  NPV  calculaFon  with  lower   informaFon  is  needed,  and  that  a  market  research  study  
a_endance  increases  will  help  confirm  that  the   could  aid  in  this  process    
project  sFll  makes  sense    
§ Hand  out  Exhibit  1  aner  the  interviewee  idenFfies  this  
§ See  calculaFons  page     noFon  
§ The  interviewee  should  use  the  market  research  to  
determine  the  probable  a_endance  increase  

207
Zoo Co: Calculations
Math  ques=ons  

1. What  is  the  breakeven  a_endance  increase  required?    

2. Do  you  think  the  insurance  company  is  providing  a  good  deal  to  the  zoo?  

Calcula=ons  

1. Break-­‐even:          =  -­‐$1,195,000+((revenue-­‐$90,000)/0.20)    
     ($1,195,000)x  .20  =  revenue-­‐$90,000    
     revenue  =  $239,000  +  $90,000  =  $329,000  (*required  addiFonal  revenue  to  break  even)  
 
       $329,000  =  (300,000)  x  (15)  x  (%  increase)  
     %  increase  =    ($329,000  /  $4.5M)  =  7.3%  
         
AJer  handing  over  exhibit  1  
2. Annual  cost  to  zoo:            1%  of  total  zoo  revenues  =  (0.001)*($4,752,000)  =  $47,520    
 Annual  expected  benefit  to  zoo  =  ($250,000  -­‐  $225,000)*(0.20)  +  ($250,000  –  135,000)*(0.40)  =  $33,000    
     Costs  >  Benefits,  so  this  is  not  a  good  deal      

208
Zoo Co: Solution and recommendations

Solu=on  &  Recommenda=ons  

§ It  is  unlikely  that  the  zebra  acquisiFon  is  a  good  idea  for  the  zoo  to  undertake  given  the  informaFon  provided.  At  
other  zoos,  a_endance  has  gone  up  substanFally  due  to  a  new  zebra;  however,  based  upon  our  market  research,  it  
seems  less  likely  that  we  can  breakeven  on  the  investment  through  increased  a_endance.  We  have  received  an  
insurance  contract  to  help  miFgate  some  of  the  downside  risk;  however,  it  is  too  expensive  to  create  value.    
§ In  order  to  make  the  investment  more  palatable,  we  may  consider  negoFaFng  with  the  insurance  company  to  
either  increase  the  revenue  benefits  provided  or  decrease  the  premium  cost.  

Bonus/Guide  to  an  Excellent  Case  

Excellent  cases  will:    

§ IdenFfy  that  we  can  use  another  zoo's  a_endance  increases  as  a  proxy  for  esFmaFng  our  own  a_endance  increases  
§ NoFce  in  Exhibit  1  that  it  is  unlikely  that  a_endance  will  increase  sufficiently  enough  for  the  zoo  to  break  even  
§ NoFce  that  the  insurance  company's  premiums  and  benefits  are  both  impacted  by  a_endance  increases;  so  if  
a_endance  increases  are  always  greater  than  5%,  the  zoo  will  be  paying  even  more  but  geong  no  benefit    
§ NoFce  that  the  insurance  company's  contract  is  essenFally  an  opFon;  so  a  different  structure  to  the  contract  may  
be  more  suitable  for  the  zoo  

209
Exhibit 1: Market research findings

Exhibit 1: Market Research Findings

Possible Attendance Annual Revenue Probability

Increases

3% Increase $135,000 20%

5% Increase $225,000 40%

7% Increase $315,000 30%

9% Increase $405,000 10%

Expected Additional $252,000

Annual Revenue
Plus: Current Annual $4,500,000
Revenue
Expected Total $4,752,000
Annual Revenue

210
Case 28: Money Bank Call Center
By: Guruprasad Sankaranarayanan (Kellogg Class’12)

Case Question

§ Our  client  is  a  large  financial  services  firm  with  mulFple  locaFons  around  the  world.  Part  of  their  service  offering  includes  
a  24  hour  helpline.  The  client  has  their  call  centers  in  New  York  and  Paris.  
8
§ The  client  has  recently  acquired  a  small  firm  (Firm  B)  in  order  to  expand  its  reach  in  a  parFcular  geography.  Firm  B  
Quants.
provides  a  subset  of  the  services  and  has  its  call  center  located  in  the  Philippines  
§ The  client  has  asked  us  to  determine  its  strategy  going  forward  for  handling  customer  calls.  In  parFcular  they  want  us  to   9
look  into  the  call  center  operaFons.  
Structure

Case tracker Fit Questions Guide to interviewer

§ Industry:      OperaFons  /   Spend first 15 min on § This  is  a  typical  outsourcing  case  with  some  elements  of    
financial  services   fit § Use  a  framework  that  covers  the  most  important  
areas  of  M&A  and  cost  cuong   Mkt. Size
§ Level  of  Difficulty:     § Tell  me  about  a  Fme   Due Diligence
§ Read  the  exhibits  to  assess  the  cost  effecFveness  
when  you  have  to   Organization
 Medium   and  efficiency  of  the  3  locaFons  
convince  a  difficult  client  
§ Case  format:  Market   § Discuss  qualitaFve  informaFon  on  the  acquired  
to  follow  your  
Size   company  –  products,  culture,  customers  etc  
recommendaFons  
§ There  is  no  right  or  wrong  recommendaFon,  as  it  will  
§ Concepts  being  tested:   § What  is  the  achievement   depend  on  the  interviewees  assessment  of  the  
- Financial  Analysis   you  are  most  proud  of?   qualitaFve  concerns  
§ Key  case  steps:  
- OrganizaFonal  fit  
1. Evaluate  exisFng  and  potenFal  cost  structure  
2. Explore  alternaFves  /  ideas  for  implementaFon  
3. Make  a  recommendaFon  based  on  the  data  
 
211
Clarifying answers and case guide

Clarifying answers to provide Guide to case / Guide to handouts

The  following  informaFon  can  be  provided   Case  structure  –  The  interviewee  should  dran  in  a  couple  of  minutes  a  
to  the  interviewee  if  asked:   framework  that  covers  the  most  important  areas  in  this  case.  
  § Op=ons    
Client  Characteris=cs   § No  changes  –  maintain  all  3  call  centers  
- Provides  full  range  of  financial  services  
§ Close  Firm  B’s  call  center  and  route  calls  to  one  of  the  exiFng  
for  individuals  and  small  organizaFons  
- Acquired  firm  was  started  5  years  ago   locaFons  
and  is  sFll  run  by  the  original  founders   § Consolidate  to  a  single  locaFon  
§ Company  
Nature  of  call  center   § Comparison  of  services  offered  at  the  3  call  centers  /  product  
- New  employees  are  college  graduates   mix  
with  basic  knowledge  of  financial   § Metrics  for  evaluaFng  call  center  performance  (cost  /  call,  
services  and  products  
calls  /  rep  etc)  
- Fluency  and  English  and  several  
European  languages  required  
Specifics  to  outsourcing  –  The  interviewee  should  include  specific  
Regulatory  environment   concerns  to  the  industry  such  as  employment  regulaFons,  quality  of  call,  
- Very  difficult  to  lay  off  employees  in  the   infrastructure  capabiliFes  etc  
Paris  locaFon  –  significant  costs  will  be  
incurred  
- Philippines  government  encourages  
investment  in  the  country  –  significant  tax  
advantage  possible  
 

212
Key elements to analyze

Outsourcing  

§ Compare  the  efficiency  of  the  3  locaFons  –  possible  explanaFons  for  variance  
§ IdenFfy  the  cost  effecFve  opFon  –  how  is  this  impacted  by  integraFon  cost  

Note  to  interviewer  

§ When  asked,  the  interviewer  should  provide  data  from  exhibit  1.  Key  takeaways  from  the  exhibit  are:  
§ Total  cost  incurred  by  the  2  firms  is  $9.6M  
§ Philippines  can  process  20  calls  /  employee  /  day  (200  days  per  year)  at  $6  per  call  
§ Currently,    we  have  space,  infrastructure  necessary  to  expand.  Assume  overhead  is  variable  in  this  
case.  To  process  total  call  volume  Philippines  will  need  250  employees  to  handle  the  traffic  –  total  
cost  including  overheads  is  $6.0M.  Total  cost  savings  from  closing  centers  is  $7.8M,  net  =  $1.8M  
§ The  interviewee  should  realize  that  this  does  not  account  for  all  the  costs,  including  hiring  and  training  
costs.  When  prompted  inform  the  interviewee  about  a  1  Fme  cost  of  $5M  (includes  severance  for  NY  and  
Paris,  expanding  the  Philippines  facility)  implying  that  the  move  is  not  profitable  

Calls / employee Cost / call

New York 40 7
Paris 33.3 9
Philippines 20.0 6

213
Key elements to analyze (contd.)

Outsourcing  

§ Prompt  the  interviewee  to  explore  ways  to  make  outsourcing  to  Philippines  feasible  
§ Inform  the  interviewee  that  the  CEO  requires  our  soluFon  to  be  at  least  cost  neutral  by  year  2  

Note  to  interviewer  

§ The  interviewee  needs  to  idenFfy  the  difference  in  calls/employee  between  the  New  York  and  
Philippines  locaFons  
§ Ask  the  interviewee  to  assume  that  the  best  pracFces  can  be  transferred  and  
implemented  within  3-­‐6  months  
§ PotenFal  cost  savings  if  Philippines  achieves  same  effecFveness  as  New  York  
§ #  employees  required  =  1.3M  calls  /  40  (calls  /  employee  )  *  200  (days  /  year)  =  163  
§ New  employee  cost  is  3.25M  
§ Ask  interviewee  to  assume  overheads  double  which  results  in  total  cost  of  3.85M  
§ Other  quesFons  interviewee  needs  to  consider  
§ Does  Philippines  has  sufficient  space  and  capacity  to  handle  the  expansion  
§ Will  the  client  be  able  to  acquire  sufficient  talented  personnel  within  the  short  Fme  
frame  
§ Customer  saFsfacFon  with  the  new  locaFon?  
§ Legal  constraints  /  requirements  in  NY  and  Paris  –  how  quickly  can  we  lay  off  the  staff  

214
Solution and recommendations
Solu=on  &  Recommenda=ons  

§ This  is  an  open  ended  case.  The  interviewee  needs  to  jusFfy  the  recommendaFon  based  on  the  qualitaFve  
consideraFons.  
§ A  good  recommendaFon  would  include  3  secFons:  
1. RecommendaFons:  if  the  recommendaFon  to  outsource  the  interviewee  needs  to  highlight  the  risks  
associated  with  outsourcing  and  nature  of  the  acquired  firm.  If  the  recommendaFon  uses  any  other  
approach  sufficient  jusFficaFon  needs  to  be  given  to  overcome  the  cost  savings  
2. Risks  
• Risks  associated  with  increasing  capacity  ~100%  -­‐  people,  infrastructure,  service  quality  ,  gaps  in  
knowledge  transfer,  organizaFonal  changes  etc  
• ReputaFonal  impact  -­‐  do  customers  noFce  difference  in  service,  can  the  compeFtor  leverage  this  to  
steal  customers?  
3. Next  steps:  If  outsourcing,  some  of  the  next  steps  would  be  analyzing  the  infrastructure  requirements  and  
capabiliFes,  finding  the  right  talent,  ensuring  smooth  transfer  and  implementaFon  of  best  pracFces  etc.  

Bonus/Guide  to  an  Excellent  Case  

§ Excellent  interviewees  need  to  address  the  qualitaFve  informaFon  provided  in  the  case:  nature  of  merger,  nature  of  
markets  being  served  etc.  
§ The  interviewee  should  explore  the  opFon  of  improving  effecFveness  of  the  Philippines  locaFon  without  being  
prompted  to  do  so.  

215
Exhibit 1

Call center performance – FY2010

Center Call / year Employee Overhead #

cost / year cost/year Employees
($)
New York 600,000   50,000   450,000   75  

Paris 400,000   50,000   600,000   60  

Philippines 300,000   20,000   300,000   75  

216
Case 29: Thompson Healthcare
By: Aaron Mowery (Kellogg Class of ‘13)

Case  Ques=on  

§ Our  client  is  Thompson  Healthcare,  a  health  insurance  firm  located  in  the  Midwest.    
§ Customers  pay  Thompson  a  fixed  monthly  premium  per  person  covered  under  the  plan.  In  exchange,  Thompson  pays  for  
all  health  services  that  each  member  requires  (e.g.,  physician  care,  prescripFon  medicaFons,  hospitalizaFon).  
§ In  recent  years,  Thompson’s  financial  and  compeFFve  posiFon  has  begun  to  erode,  and  the  CEO  has  retained  our  firm  to   8
help  them  determine  what  is  causing  the  problem  and  how  to  fix  it.   Quants.

9
Case  tracker   Fit  Ques=ons   Guide  to  interviewer   Structur
e
§ Industry:    Healthcare   Spend  first  15  min  on  fit   Read  to  the  Interviewee  before  beginning:  
This  case  is  based  on  a  real  McKinsey  study,  and  has  been  
§ Level  of  Difficulty:   § Tell  me  about  a  Fme  
forma_ed  as  a  McKinsey-­‐style  structured  case.  
Medium   when  you  failed.  
  Profitability
§ Case  format:  Cost   § Share  me  a  Fme  when   Before  asking  you  any  quesFons  about  the  case,  I  will  give   Sales
reducFon   you  faced  a  difficult   you  the  background  that  you  will  need.       Channel
situaFon  in  a  team  and     strategy
§ Concepts  being  tested:  
how  you  solved  this  .   There  are  a  number  of  issues  that  I  would  like  to  cover  with  
- Cost  management   you  today;  please  do  not  be  surprised  if  I  seem  to  change  
 
- Sales  channel   topics  abruptly.  
strategy  
- Economic  value  
analysis  

217
Clarifying answers and case guide
Clarifying  answers  to  provide   Guide  to  case  /  Guide  to  handouts  

Client  CharacterisFcs   § State  the  informaFon  to  the  len  aner  reading  the  iniFal  prompt,  the  
• Thompson  Healthcare  is  a  mutual  insurance   interviewee  should  be  able  to  develop  a  variant  of  the  following  
company,  meaning  all  of  its  profits  are   quesFon:  
returned  to  members  in  the  form  of  lower   How  can  Thompson  Healthcare  reduce  its  total  cost  to  serve  its  
premiums  the  following  year.  As  such,   policy  holders?    
Thompson  does  not  seek  to  maximize  profit  
 
–  it  seeks  to  minimize  cost.  
§ Ideally,  the  interviewee  should  be  able  to  break  down  the  quesFon  
• Thompson’s  prices  reflect  underwriFng  of  
risk  and  the  underlying  cost  to  serve  a   into  two  parts:  
customer   1. Managing  medical  costs  
2. Managing  administraFve  costs  
CompeFFve  Dynamics    
• Market  share  is  steady,  despite  presence  of   § This  case  is  forma_ed  as  a  McKinsey-­‐style  structured  case.  You  should  
major  naFonal  health  insurance  company  in   ask  the  interviewee  the  quesFons  on  pages  3-­‐7  of  this  case  directly  
the  market  (United  Healthcare  -­‐  UHC).     and  move  on  to  the  next  page  when  the  interviewee  has  answered  
• UHC  has  a  30%  market  share.   the  quesFon  sufficiently.  
• UHC  typically  expects  to  earn  a  5%  profit    
margin.      

Local  industry  CharacterisFcs/Economics  

• The  naFonal  average  rate  of  medical  cost  
inflaFon  is  10%  over  the  past  five  years.  
• Thompson  has  seen  medical  cost  inflaFon  
of  12%  over  the  past  five  years.  
• UHC  has  seen  medical  cost  inflaFon  of  10%  
over  the  past  five  years.  

218
Key elements to analyze
1
Problem  structure  

What  factors  would  you  consider  in  order  to  understand  Thompson’s  eroding  financial  posiFon?    

Note  to  interviewer  

§  The  interviewee  should  lay  out  a  structure  for  analyzing  the  case.  
§ The  interviewee  could  have  determined  that  revenue  is  not  relevant  to  this  case  based  on  
informaFon  given  in  the  iniFal  prompt  on  page  1  and  2,  so  the  interviewee  should  focus  on  
cost.  
§ Costs  in  this  case  break  out  into  fixed  costs  and  variable  costs:  
§ Variable  costs  (medical  costs  –  claims  made  by  policyholders)  
§ Fixed  costs  (administraFve  costs  –  e.g.,  markeFng  &  sales,  underwriFng,  finance,  HR)  
§ Specifically,  we  will  need  to  understand  how  these  costs  have  changed  in  recent  years.    

219
Key elements to analyze
2
Ini=al  hypothesis  

Medical  costs  are  the  largest  component  of  Thompson’s  costs.  However,  Thompson’s  medical  
costs  are  increasing  faster  than  the  naFonal  average.  What  are  some  potenFal  reasons  why  this  is  
taking  place?  What  potenFal  opportuniFes  could  you  explore  to  reverse  this  trend?  

Note  to  interviewer  

§ Medical  cost  =  (Number  of  claims)  *  (Cost  per  claim)    

§ PotenFal  answers  include:  
§ DeducFbles  are  low,  leading  members  to  see  doctors  for  minor  medical  issues  -­‐>  
increase  deducFbles  to  make  members  more  conscious  of  costs  
§ Thompson  pays  more  for  procedures  than  average  -­‐>  conduct  benchmarking  study  to  
determine  what  compeFtors  charge  for  various  procedures  
§ Thompson  insures  an  older  populaFon  than  average  -­‐>  increase  markeFng  efforts  
toward  younger  customers  
§ Thompson  insures  a  sicker  populaFon  than  average  -­‐>  enhance  wellness  programs  

220
Key elements to analyze
3
Second  hypothesis  

In  addiFon  to  medical  costs,  administraFve  costs  for  Thompson  are  also  higher  than  average.  The  biggest  driver  of  this  
phenomenon  is  a  high  cost  of  sales.  Thompson’s  policies  are  sold  through  independent  agents.  All  independent  agents  
work  with  a  “General  Agency”  which  acts  as  a  sales  support  organizaFon.  How  much  does  Thompson  pay  in  
commissions  each  year?  What  are  some  potenFal  approaches  Thompson  could  take  to  reduce  its  cost  of  sales?  What  
potenFal  strategic  issues  exist  with  these  approaches?  

Note  to  interviewer  

AddiFonal  informaFon  to  provide  aner  interviewee  explains  how  they  would  calculate  commission  expense  
§ Commission  (10%  of  annual  premiums)  is  paid  to  the  General  Agency,  which  passes  a  share  to  the  independent  
agent.  Total  commission  paid  is,  on  average,  $25  per  agent,  per  month.    
§ Interviewee  should  idenFfy  the  need  for  #  of  agents.  Give  the  number  500,000    if  asked.  
§ Total  commission  expense  =  $25  *  500,000  *  12  =  $150,000,000  
 
§ PotenFal  approaches  to  reduce  cost  of  sales:  
§ Reduce  commission  percentage    
§ Cap  commission  to  a  certain  level  per  year  
§ Change  commissions  structure  from  percent  of  premium  to  flat  fee  (percent  of  premium  increases  at  the  rate  
of  medical  cost  inflaFon  every  year)  
 
§ PotenFal  risks  with  these  approaches:  
§ Agents  could  shin  business  from  Thompson  to  another  carrier  that  pays  higher  commission  
§ Agents  would  lose  incenFve  to  sell  if  their  commission  is  capped  

221
Key elements to analyze
4
Next  level  of  analysis  

The  team  has  decided  to  pay  a  flat  commission  directly  to  agents,  and  to  pay  the  General  Agencies  a  separate  
fee  for  the  support  services  they  provide  to  agents.  If  the  total  commission  paid  to  both  parFes  is  set  at  $20  
per  member  per  month,  what  share  should  be  given  to  the  General  Agencies?  
(If  interviewee  is  unsure  of  “what  share”  means,  explain  they  should  find  the  maximum  amount  that  should  be  
allocated  to  the  General  Agencies.)  

Note  to  interviewer  

Addi=onal  informa=on  
§ General  Agencies  perform  three  acFviFes:  training,  applicaFon  processing,  and  performance  management.      
§ If  Thompson  were  to  perform  these  acFviFes  internally,  they  would  cost:  
§ Training:  $6,000,000  
§ ApplicaFon  processing:  $9,000,000  
§ Performance  management:  $15,000,000  
Poten=al  approach  
§ The  total  cost  of  the  acFviFes  that  General  agencies  perform  is  $30,000,000  (=$6,000,000  +  $9,000,000  +  
$15,000,000).  
§ There  are  500,000  members  and  12  months  in  a  year.    
§ The  maximum  amount  of  money  Thompson  should  be  willing  to  pay  the  General  Agencies  for  the  acFviFes  
performed  is  the  per  member,  per  month  cost  of  these  acFviFes  ($30,000,000  /  (500,000  *  12)  =  $5  

222
Wrap-up
5
Final  recommenda=ons  

Taking  into  account  what  you’ve  learned  thus  far  as  well  as  your  own  addiFonal  hypotheses,  what  
iniFaFves  would  you  recommend  to  the  CEO  at  this  point?    

Note  to  interviewer  

§ Our  client  should  take  acFon  to  reduce  both  medical  costs  and  administraFve  costs.  
§ At  this  point,  the  interviewee  should  synthesize  the  findings  from  the  interview  into  several  
clear  iniFaFves,  for  example:  
§ Enhance  markeFng  efforts  to  a_ract  more  young  customers  and  bring  down  the  average  
claims  per  member.  
§ Conduct  a  benchmarking  study  to  determine  opportuniFes  for  reducFons  in  payments  
for  medical  services.  
§ Change  the  commission  structure  to  flat  fee  per  member  per  month.  This  achieves  the  
goal  of  reducing  commission  expense,  while  at  the  same  Fme  keeping  an  agent’s  
incenFve  to  sell  more  business.  
§ Strong  interviewees  will  demonstrate  the  ability  to  analyze  issues  using  a  clear  structure  and  
will  draw  out  the  implicaFons  of  their  analysis.  The  quanFtaFve  calculaFons  in  this  case  are  
elementary,  but  the  process  to  get  to  them  is  somewhat  more  complicated.  

223
CONTENTS

How to use this book 1

Typical case flow 2
Fit interview tips 3
KCC 2014 cases 4
Industry primers 5
Industry Research Overview

A  tailored  approach  to  industry  research  can  help  you  prepare  

§ Provides  insight  into  industry-­‐wide  trends  and  revenue/cost  drivers    
o Allows  you  to  make  a  more  nuanced  framework  or  tack  on  an  addiFonal  piece  of  
industry-­‐specific  analysis  
o May  point  you  toward  sources  of  issues  in  cases  
o Can  be  helpful  in  Q&A  with  your  interviewers  about  their  own  work  
§ Spend  your  limited  Fme  well  
o No  need  for  extensive  research  on  industries  in  which  you  already  have  significant  prior  
experience  or  knowledge  
o Read  high-­‐level  industry  summaries  (such  as  those  on  the  following  pages)  to  gauge  
whether  anything  is  completely  new  to  you  
o Consider  reading  in-­‐depth  guides  for  industries  that  
o Are  completely  new  to  you  
o You  seek  to  specialize  in  
o You  know  will  come  up  in  interviews  (e.g.,  due  to  industry  focus  of  firm)  

225
List of Industry Overviews

This  sec=on  includes  brief  overviews  of  19  industries  that  are  likely  to  come  
up  in  interviews  
 § Industrial  Goods   § Banking  and  Financial  Services  
§   Energy   § Media  and  Entertainment  
§   Airlines   § Telecom  
§ AutomoFve   § Retail  
 
§ Online  Services  and  Storage   § Household  Durables  
 
§ Computer  Sonware   § Household  Non-­‐durables  
 § Hardware  and  Digital  Devices   § Restaurant  
§   Semiconductor   § Non-­‐alcoholic  Beverages  
§   PharmaceuFcals   § Beer,  Wine  and  DisFlled  Spirits  
§ Medical  Devices   § Mining  and  Precious  Metals  
 
§ Hospital  FaciliFes   § UFliFes  
 
§ Healthcare  Payers  

226
Industrial Goods

Overview   Trends   Drivers  

• Large  and  diverse  industry  that   • Tighter  consumer  spending  has  led  to   Revenue  
provides  products/services  primarily   reduced  producFon  and  stagnant   • New  Product  InnovaFon  
used  to  produce  other  goods   growth  for  the  industry   • Product  quality  and  reliability  
• Main  sectors   • Industry  has  seen  increasing   including  aner-­‐sales  service  
– Electrical  Equipment  and   consolidaFon  over  the  past  few  years;   • Specialized  products  for  various  
Components   Most  sub-­‐segments  are  Oligopoly  
– Industrial  AutomaFon/Heavy   customer  segments  
Machinery   • Emerging  markets  are  key  for  growth  
– ConstrucFon  and  Engineering   as  they  are  quickly  developing  and   Cost  
– Aerospace  &  Defense   increasing  producFon  capacity  for  a   • Raw  materials  including  oil,  
variety  of  goods   natural  gas,  metals,    
• Key  Players  include:  GE,  Siemens,  
Cummins,  Boeing,  Lockheed  MarFn,   • Local  assembly  is  common  since   • Human  capital  costs  including  
Northrop  Grumman,  Eaton,   components  are  easier  to  ship  than   engineers,  labor/manufacturing  
Honeywell,  Raytheon,  3M,  Caterpillar,   finished  goods   force  and  sales  force  
Emerson  Electric,  Fluor,  Tyco,  Waste  
Management,  Bosch  Rexroth   • R&D  

227
Energy

Overview   Trends   Drivers  

Major  E&P  players  like  BP,  ExxonMobil,   New  Legisla=on  Post  –BP  oil  spill  the  industry   Revenue  Drivers  
Pertrobras,  Aramco  are  involved  in  both   is  likely  to  experience  major  changes.     Outside  Factors:  economic  environment  (GDP  
upstream  and  downstream.   • A  hodgepodge  of  oversight  agencies   growth),  supply,  consumpFon  and  demand  
  granted  excepFons  to  rules,  as   level,  oil  and  gas  inventories.  
Upstream  Steps:     government  agencies  needed  to  both   Prices  of  oil,  gas,  and  refined  products  are  the  
1. ExploraFon:  Finding  oil,  including   foster  and  police  the  industry   most  watched  factor  in  energy.  
geological  exploraFon,  research,  and   • A  mix  of  companies  is  in  charge  of  each  rig,   Key  measures:  Supply  and  demand  of  oil  and  
purchasing/leasing  land.  Offshore  is   and  their  interests  are  not  always  in  sync   natural  gas,  rig  count,  rig  uFlizaFon  rates,  rig  
leased  from  gov’ts  through  aucFons   (see  delays  under  overview,  eg  for   dayrates  and  daily  margins  
2. Drilling.  Companies  drill  exploratory  wells   maintenance)   Drilling  companies:  provide  the  rigs  and  
to  determine  size;  if  saFsfactory,  add’l   operate  them,  either  on  a  project  or  long-­‐
wells  are  developed.  OverheaFng  can   Foreign  countries  maintain  their  own  oil   term  contract  basis,  with  rates  charged  by  the  
cause  explosions  (“blowouts”).   standards   day  (popular  among  offshore  drilling),  foot  
3. Well  CompleFon.  Post  drilling,  engineers   drilled,  or  all-­‐inclusive  basis.  
put  cement  in  the  walls   State-­‐owned  oil  companies  like  Saudi  Aramco   Wide  range  of  services,  including:  pressure  
Steps  1-­‐3  are  onen  contracted  out  from  E&P   and  Petrobras  are  siong  on  enormous  oil   pumping,  wireline,  direcFonal  drilling  and  
firms  to  firms  like  TransOcean.  Delays  are  very   reserves,  but  cannot  exploit  it  as  efficiently  as   measurement  while  drilling  (MWD),  and  
expensive  ($500k  a  day),  and  may  be  charged   public  companies   marine  support  
to  contractors;  but  E&P  firms  make  decisions      
  New  players  in  China  (supported  by   Cost  Drivers  
Downstream  Steps:  ProducFon  à  Refining  à   government)  is  entering  the  OEM  and   Upstream  -­‐  exploraFon  and  producFon  
MarkeFng   shipping  industry   expenditures;  Midstream  –  transportaFon,  
  and  storage  costs;  Downstream  –  refining  and  
Liability  for  spills  is  extremely  costly  ($1-­‐4k   markeFng  costs.  
per  barrel  spilled,  205M  gallons  est.  spilled)   OPEC:  influences  global  price.  
   

228
Airlines

Overview   Trends   Drivers  

• Airlines  provide  air  transport  services  for   MERGERS     Revenue  Drivers  

passengers  and  freight   The  industry  has  seen  a  lot  of  consolidaFon  in   Airlines  have  been  really  creaFve  to  add  
• The  industry  was  deregulated  in  1978  free   recent  years.  There  are  3  major  US  carriers,   several  revenue  streams  to  their  business  
from  government  control  of  fares,  routes,   down  from  6  a  few  years  ago  (eg,  United/ • Passenger  fares  
merger  and  acquisiFons.  This  helped  to   ConFnental  Delta/Northwest)   • Mail  and  cargo  charges  
completely  transform    air  travel  from  a     • Meals  /  alcohol  in  flights  
luxury  to  a  mass-­‐market  service   BANKRUPTCY:   • In  flight  entertainment  
  Mergers  primarily  happened  as  the  due  to   • Extra  baggage/seat  prices    
INDUSTRY  STRUCTURE:   several  airlines  filing  for  bankruptcy  and   Customers  are  broadly  categorized  as:  
Major  Airlines:  revenues  >  $1B   going  out  of  business   • Leisure:  highly  price  sensiFve  
Na=onal  Airlines:  revenues  $100  M  -­‐  $1B   There  has  been  a  barrage  of  bankruptcies  in   • Business:  not  price  sensiFve,  hard  to  reach  
Regional  Airlines:  revenues  <  $100M   the  industry.  More  than  20  airlines  have  filed    
• Airlines  is  a  low-­‐margin  industry   for  bankruptcy  in  the  last  decade   Cost  Drivers  
    Airline  industry  is  capital  and  labor  intensive  
COMPETITION   Poten=al  problems  of  declining  revenue:   Fuel:  Fuel  costs  are  highly  volaFle  and  can  
• Price  CompeFFon:  airlines  compete  to   • Inefficient  network:  look  at  route   range  anywhere  from  25%  -­‐  40%  of  the  total  
provide  the  lowest  fares  to  the  passengers   profitability  and  see  if  some  of  the  routes   cost  for  an  airline  
• To  a_ract  leisure  travelers  they  adverFse   could  be  eliminated   Labor:  costs  in  2009  was  26%  of  the  total  cost.  
huge  discounts   • Poor  use  of  fixed  capacity:  increase   Labor  is  unionized,  and  pilots  have  few  
• Niche  players  like  JetBlue,  Southwest,  and   volumes  to  tackle  this  issue   subsFtutes  
Spirit  have  entered     • Includes  pilots,  a_endants,  ground  services,  
  dispatchers,  maintenance,  customer  service  
Equipment:  is  around  10%  of  the  total  cost  
• Some  airlines  lease  fleets  rather  than  buy  
   
 

229
Automotive

Overview   Trends   Drivers  

The  automoFve  industry  is  engaged  in  the   US  share  of  global  market  shrinking:  In  2009,   Revenue  Drivers  
design,  producFon,  markeFng,  sale,  and   China  overtook  the  US  as  the  largest  market   Factors  affec=ng  new  car  sales:  changes  in  
servicing  of  motor  vehicles.   for  new  vehicles.  US  accounted  for  16.3%  of   style,  engineering,  safety,  quality,  cost  and  
  global  demand.   availability  of  gasoline  and  insurance.  
New  light  vehicle  sales  in  the  US  expected  at   Demand  in  developing  markets,  including  the   Price  increases  are  limited.  Rising  
11.7  million  for  2010.  Volume  increase  is   BRIC  economies,  is  projected  to  outstrip  that   compeFFon  in  NA  and  Europe  has  restricted  
forecasted  in  2011,  to  13.5  million.   of  the  world’s  mature  markets.   manufacturers’  pricing  power.  
Heavy  capital  commitments  required  to  keep   US  and  global  sales  to  advance.  ProducFon  in   Demand,  sales  rise  during  sustained  
pace  with  product  development  and  model   NA  was  up  70%  in  the  first  quarter  of  2010.   economic  growth  and  plenFful  employment.  
changeovers.   Europe  may  lag.   Tac=cs  to  s=mulate  demand:  discounts  and  
Demand  is  naturally  affected  by  economic   Companies  in  China,  Russia,  India  to  make   cash  rebates,  (dealers’  discounts,)  financing  at  
environment.   acquisi=ons  in  the  US.   lower  interest  rates,  eliminaFng  opFons  on  a  
Auto  parts  manufacturers  highly  fragmented:   Alterna=ve  fuel  and  hybrid  vehicles  –  All   model  to  offer  a  low-­‐priced  alternaFve.  
produce  original  parts  and  accessories  for   automakers  are  developing  the  technology:    
new  vehicles,  replacement  parts,  and   ethanol,  methanol,  natural  gas,  and  electricity   Cost  Drivers  
accessories  for  older  vehicles,  or  both   derived  from  ba_eries  or  solar  power.   Capital  expenditures  of  2010:  GM  $6.0  billion,  
  Auto  parts  –  online  procurement  has  changed   Ford  $4.5-­‐5  billion,  Toyota  $8.1  billion.  
Labor  is  onen  unionized  and  wields  power.     the  business,  with  increased  transparency   Costs  breakdown:  plants,  raw  materials,  
  pressuring  selling  prices  for  commodity  items.   design,  producFon,  labor,  distribuFon,  
Compe==on   Bankruptcy:  GM,  Chrysler,  GMAC  (auto   markeFng,  and  customer  service.  
Extremely  compe==ve.  The  US  is  the  world’s   lender)  and  suppliers  filed  for  bankruptcy  and   Suppliers:  number  shrinking,  due  to  
most  compeFFve  auto  market.   some  for  bailouts  in  08/09   globalizaFon,  reduced  volume  from  US  
Detroit  Three  losing  market  share:  GM,  Ford,   Distribu=on:  Main  channel  is  –  dealership   automakers,  high  material  and  labor  costs.  
and  Chrysler.  The  top  three  foreign  companies   model.  Rapid  consolidaFon  in  recent  years.   Oil  prices  and  raw  material  prices  
have  a  combined  US  market  share  of  41.5%:     Cost  cu}ng  tac=cs:  higher  unit  producFon  
Toyota,  Honda,  and  Nissan.   volume,  savings  on  parts  and  labor,  improved  
  manufacturing  efficiencies.  

230
Online Services and Storage

Overview   Trends   Drivers  

The  online  industry  consists  of  companies   CLOUD  COMPUTING:   Revenue  Drivers  
that  provide  virtual-­‐environment  services  and   A  wide  variety  of  service  providers  are  ba_ling   In  the  consumer  market,  most  services  are  
products,  including  data  search,  cloud  data   over  the  right  to  provide  consumers  with  free   given  for  free,  where  most  revenues  come  
storage,  social  networking,  big  data  analyFcs,   cloud  based  services,  most  notably  storage   from  adverFsing  and  data  collecFon.  Some  
music  and  video  streaming,  e-­‐Stores  (fashion,   (DropBox,  Google  Drive,  Amazon  Cloud  Drive),   services/products  are  given  for  a  subscripFon  
media,  etc.),  news  and  gaming.   producFvity  (Google  Docs,  Microson  Office   fee,  and  some  (usually  e-­‐retailers)  usually  
  Live),  CRM  (Salesforce)  and  professional   come  from  direct  sales.  In  the  business  sector,  
INDUSTRY  STRUCTURE:   services  (Quickbase,  [Link]).   the  ability  to  provide  experFse  to  increase  
Total  Revenues:  ~$1.8Trillion     value  for  clients,  where  many  companies  are  
Industry  Leader  in  Revenues:     BIG  DATA:   quickly  transiFoning  themselves  from  
Google  ($29.3  Billion)   The  huge  amount  of  informaFon  out  there   convenFonal  services  firms  into  “one-­‐stop-­‐
  serves  not  only  as  an  opportunity  for   shop”  firms,  mostly  among  consulFng  
COMPETITION   companies  to  study,  analyze  and  predict   companies,  accounFng  firms  and  technology  
• InnovaFon:  companies  try  to  differenFate   market  trends,  but  also  as  an  essenFal  tool  for   firms,  allow  such  companies  to  charge  service  
themselves  by  invesFng  heavily  in   survival.   fees.  
innovaFon,  or  “the  next  big  thing”,  such  as    
Customer  base  is  very  broad,  i.e.  not  limited  
YouTube,  Facebook  or  eBay,  most  of  which   CYBER  SECURITY:  
solely  to  ultra-­‐techy  consumers,  but  also  to  
are  monopolies  in  their  own  specific  market.   Both  in  the  private  sector,  where  many  have  
sophisFcated  business  people,  organizaFons  
• In  the  consumer  world,  major  players   already  entrusted  the  web  with  their  most  
and  consumers  with  low-­‐to-­‐intermediate  
include  online  services  companies  such  as   inFmate  informaFon,  including  bank  accounts,  
level  of  technical  experience.  
Google  or  DropBox,  e-­‐Retailers  such  as   emails  or  work,  and  in  the  more  global  aspect,  
Amazon  and  Gilt,  entertainment  providers   cyber  warfare,  spying  and  intelligence   Cost  Drivers  
such  as  NetFlix  and  Hulu,  and  social   gathering  have  all  increased  the  need  for   The  online  industry  relies  heavily  on  
networks  such  as  Facebook  and  Twi_er.  In   highly  developed  cyber  security  services,  to   innovaFon  (a  large  porFon  of  which  comes  
the  business  arena,  companies  such  as  IBM,   protect  both  corporate  secrets  and  peoples’   from  M&As  of  startup  companies),  customer  
McKinsey,  Accenture  and  other  professional   lives.   relaFons  and  IT  infrastructure.  ConvenFonal  
services  companies  are  taking  the  lead.   costs  such  as  physical  stores,  fragmented  
  inventory  space  and  manpower  are  very  low.  

231
Computer Software

Overview   Trends   Drivers  

The  sonware  industry  includes  businesses  for   DIGITAL  TRANSFORMATION:   Revenue  Drivers  
development,  maintenance  and  publicaFon  of   For  the  last  few  years,  there  is  an  apparent   The  industry  experienced  very  few  changes  in  
sonware,  including  producFvity  suites,  games,   slowdown  in  growth  in  the  sonware  industry,   such  respect,  as  revenues  are  based  mostly  
mobile  apps,  hardware-­‐specific  sonware  (both   where  gains  are  achieved  through  operaFonal   online  and  retail  sales,  service  and  client  
firmware  and  custom  made  sonware)  and   performance  rather  than  technological   support  fees,  annual  subscripFons  and  licensing  
operaFng  systems  (including  mobile  pla€orms).     innovaFon,  and  growth  is  accomplished  through   fees.  
  mergers  rather  than  organic  development.  Due  
to  convenience  issues,  piracy  and  security  risks   The  customer  base  has  changed  in  the  past  
INDUSTRY  STRUCTURE:  
couple  of  years:  regular  consumers  are  
Total  Revenues:  $303Billion  (in  2010)   related  to  sonware-­‐based  ecosystems,  the  tech  
world  is  moving  towards  online  services  and   interested  more  in  simple  friendly  sonware  
Industry  Leader  in  Revenues:    
rather  than  sophisFcated  do-­‐it-­‐all  sonware,  and  
Microson  $69Billion  (in  2010)   mobility.  Other  than  switching  to  other,  sonware  
developers  are  also  either  focus  on  smaller  &   businesses  are  worried  that  constant  innovaFon  
 
simpler  versions  for  the  consumer  market   will  harm  their  compeFFveness  if  they  commit  
COMPETITION  
to  the  wrong  sonware,  and  are  interested  more  
• Sonware  companies  compete  not  only  with   (mobile  apps)  or  on  much  more  sophisFcated  
sonware  for  the  business  market,  mostly  for   in  “renFng”  a  dynamic  sonware  rather  than  
other  sonware  companies,  but  also  with  other  
CRM,  IT  systems,  database  and  online  services.   buying  a  product  that  requires  high  
technology-­‐based  services  providers,  by  
implementaFon  costs.  Therefore,  the  sonware  
focusing  on  specific  clients  –  whether  by    
MICROSOFT  RISE  AGAIN(?):   industry  focuses  on  the  2  “extremes”:  the  
creaFng  simple  and  cheap  mobile  apps  for  
relaFvely  low-­‐tech  customers  and  ultra-­‐
clients  on  the  go,  or  niche  experFse-­‐based   Despite  overwhelming  criFcism  regarding  its  lack  
of  innovaFon  and  inability  to  create  value  in  the   sophisFcated  ones.  
products  for  sophisFcated  clients.  
• Major  players  include  very  large  companies   longer  term,  Microson  managed  to  retain  its   Cost  Drivers  
such  as  Microson,  IBM,  Oracle,  Symantec  and   dominance  in  the  producFvity  sonware  market   The  biggest  cost  sonware  companies  
Adobe,  which  focus  on  the  working   with  its  Office  cash-­‐cow,  while  introducing  the   tradiFonally  faced  was  related  to  the  
environment,  and  of  smaller  companies  such   much  anFcipated  Windows  8  OS,  which  draws   development  of  the  products.  In  the  past,  the  
as  Electronic  Arts,  which  focus  on  gaming   posiFve  a_enFon.   huge  allure  of  the  sonware  industry  was  its  
across  mulFple  pla€orms.   relaFvely  low  operaFonal  costs  once  the  
  product  has  been  developed,  and  such  costs  
have  shrunk  even  more  in  the  last  few  years  due  
to  online  distribuFon.  However,  piracy  has  
plagued  most  of  the  sonware  industry  and  
increased  the  cost  of  protecFng  the  companies’  
intellectual  property.  

232
Hardware and Digital Devices

Overview   Trends   Drivers  

The  Computer  Hardware  industry  consists  of   MOBILE  COMPUTING:   Revenue  Drivers  
companies  engaged  in  assembling  and   During  the  last  decade,  we  experienced  a   Companies  seek  to  add  revenue  streams  to  
manufacturing  computers,  computer   major  shin  from  desktop  compuFng  to   their  business  
hardware  and  computer  peripherals,   compuFng-­‐on-­‐the-­‐go,  mainly  due  to  growing   • App  and  digital  content  stores  for  
including  storage  devices,  keyboards,   popularity  of  smartphones  and  the  emergence   Smartphones  and  Tablets  
printers,  monitors,  mouse  and  other  poinFng   of  tablet  computers  (see  below).  Cloud   • AdverFsing  through  mobile  apps  
devices,  Webcams  and  PC  cameras.   compuFng  reduced  the  need  for  physical   • CollaboraFon  with  peripheral  product  
  storage,  while  constant  improvement  in  speed   manufacturers  (such  as  keyboards,  casing,  
INDUSTRY  STRUCTURE:   and  reliability  of  mobile  internet  connecFvity   headphones  and  audio  systems)  and  with  
Total  Revenues:  $842.1  Billion   allow  consumers  to  communicate,  work  and   mobile  telecommunicaFons  companies.  
Industry  Leader  in  Revenues:     play  anyFme  and  anywhere.  The  recent    
Apple  ($156.5  Billion)   growth  also  led  to  increased  revenue  by   Customer  base  is  very  broad,  not  limited  
  component  manufacturers  (ARM,  Broadcom,   solely  to  ultra-­‐techy  consumers,  but  also  to  
COMPETITION   Samsung)  and  demand  for  online  services.   sophisFcated  business  people  and  consumers  
• Price/Feature  CompeFFon:  companies  try  to   Tablets  and  smartphones  are  esFmated  to   with  low-­‐to-­‐intermediate  level  of  technical  
differenFate  either  by  selling  at  low  prices   have  cannibalized  more  than  20%  of  the   experience  
and  relying  on  complementary  products,  or   computer  industry.    
by  increasing  consumer  benefit  through     Cost  Drivers  
innovaFon  and  features.   TABLET  WARS:   The  hardware  industry  relies  heavily  on  
• Major  players  include  manufacturers  such  as   Despite  conFnuous  dominance  by  the  iPad   component  manufacturers,  which  are  
Apple  and  Samsung,  but  also  Google,  which   (50.4%  market  share),  industry  behemoths   exposed  to  variance  in  material  prices),  
does  not  manufacture  but  has  tremendous   such  as  Microson  (Surface),  Google  (Nexus),   environmental  regulaFon,  and  cost  of  labor  
influence  over  the  industry  due  to  its   Amazon  (Kindle)  fiercely  compete  over  the   (as  most  manufacturing  is  done  in  developing  
Android  mobile  operaFng  system  and  its   tablet  industry,  though  most  profits  do  not   countries).  Hardware  companies  are  also  
collaboraFon  with  manufacturers  such  as  LG.   come  from  units  sold  but  from  complementary   required  to  invest  heavily  in  R&D.  
  products  (such  as  apps  and  cases).    

233
Semiconductor

Overview   Trends   Drivers  

Industry:   Growth:   Revenue:  

The  research,  development,  producFon,  and   • Semi-­‐conductor  industry  is  highly  cyclical   Revenue  =  Price  of  chip  x  quanFty  sold  
markeFng  of  semi-­‐conductors   • Companies  face  constant  highs  and    
  lows  for  demand  of  their  product   • Due  to  Moore’s  law  and  the  compeFFve  
Products:   • Growth  trends  track  closely  with  demand  for   nature  of  the  industry,  it  is  not  uncommon  for  
Industry  is  made  up  of  four  product  categories:   personal  computers,  cell  phones,  and  other   the  price  of  a  new  chip  can  fall  by  as  much  as  
1. Memory  –  Memory  chips  are  temporary   electronic  equipment   50%  in  a  short  Fme  period  
storehouses  of  data  and  pass  informaFon  to     • By  nature  of  the  process,  there  is  a  long  lead  
and  from  computer   Trends:   Fme  with  product  releases,  so  it  may  take  
2. Microprocessors  –  central  processing  unit   TradiFonally,  semi-­‐conductor  companies  have   years  before  a  company  sees  revenue  for  
that  contain  the  basic  logic  to  perform  tasks   controlled  the  enFre  producFon  process,  but  in   certain  products  
3. Commodity  Integrated  Circuit  –  “standard   order  to  be  lean,  efficient,  and  effecFve,  they  are    
chips”  –  produced  in  large  batches  for   moving  away  from  that  model:   Costs:  
rouFne  processing  purposes   • Successful  companies  must  be  smaller,  faster,   • Semi-­‐conductor  companies  live  and  die  by  
4. Complex  SOC  –  “System  on  a  Chip”  –   and  cheaper   their  ability  to  be  cost  efficient  
integrated  chip  with  enFre  system’s   • Chip  makers  are  beginning  to  delegate   • Constant  pressure  from  market  and  
capability  on  it   manufacturing  to  foundry  companies  (whose   customers  to  develop  be_er,  cheaper  
  sole  business  is  manufacturing)   products  in  a  short  Fme  frame  
Key  Ra=os/Terms:   • NoFceable  increases  in  specialized  designers   • As  noted  above,  each  product  has  a  long  lead  
Moore’s  Law  –  number  of  transistors  on  a  chip   and  chip  testers   Fme,  so  a  company  will  incur  costs  for  a  long  
doubling  every  two  years     Fme  before  that  product  generates  any  
“Fabless”  Chip  Makers  –  semi-­‐conductor   Compe==on:   revenue  
companies  that  carry  out  design  and  markeFng,   • “Fabless”  companies  overcome  barriers  to   • As  noted  in  “Trends”,  historically  complete  
but  outsource  the  actual  manufacturing   entry  related  to  large  capital  requirements   process  companies  have  outsourced  some  of  
R&D/Sales  –  research  and  development   • Foundries  gaining  supplier  power  because  of   the  producFon  process  in  order  to  be  more  
expenses  as  a  percent  of  sales  –  want  high  %   cuong-­‐edge  equipment  and  producFon  skills   lean  and  cost  efficient  
Yield  –  #  of  operaFonal  devices  out  of  all  mfg.   • Intense  rivalries  between  companies  
 

234
Pharmaceuticals

Overview   Trends   Drivers  

• Historically  among  the  world’s  most  profitable   • The  growth  of  the  industry  has  been  supported  by   Revenue  
industries   an  aging  populaFon  (in  developed  markets),   • New  products  –  premium-­‐priced  
lengthening  of  the  life  expectancy,  and  rising   breakthrough  therapies  that  open  new  
• Total  domesFc  expenditures  for  prescripFon  
incidence  of  chronic  diseases   markets  
drugs  were  roughly  $234.1B  in  2008,  and  is  
increasing   • Emerging  markets  are  leading  industry  growth;   • Patent  protecFon  –  commercial  life  of  a  
CAGR  is  expected  to  be  14-­‐17%  through  2014   branded  drug  is    approximately  10  years  
• Worldwide  sales  are  expected  to  increase  
5-­‐8%  per  year  (similar  figures  in  the  US),  and   • Patent  expiraFons  are  expected  to  peak  in   • OTC  –  some  pharmas  are  introducing  OTC  
reach  $1.1  trillion  in  sales  by  2014   2011-­‐2012;  resulFng  revenue  loss  has  forced  many   versions  to  combat  generics  when  patents  
companies  to  downsize  to  maintain  high  levels  of   expire  
• In  2009,  the  US  and  Europe  markets  made  up   profitability   Cost  
approximately  39%  and  32%  of  the  world  wide   • R&D  –  costs  higher  than  any  other  industry;  
• Large  pharma  companies  are  increasingly  relying  
market  followed  by  Asia,  Africa,  and  Australia   can  take  10+  years  for  new  drug  
on  purchasing  or  partnering  with  young  /  niche  
(12.7%),  Japan  (11.3%),  and  LaFn  America   development  
firms  to  create  growth  
(5.7%)  
• UncertainFes  introduced  by  PPACA  (“Obamacare”)   • Sales  and  MarkeFng  –  US  companies  spend  
• Typically  high  economic,  regulatory  and  legal   and  lagging  drug  approval  Fmes  by  FDA  is  expected   approximately  $20B/year  on  promoFons  
barriers  to  entry   to  slow  growth  
• Insurers  are  geong  increasingly  more  stringent  on  
which  medicaFons  they  will  reimburse  
 

235
Medical Devices

Overview   Trends   Drivers  

Industry  Defini=on:  any  healthcare  product  that   Growth:  industry  revenue  is  projected  to  grow   Revenue  Drivers:    
achieves  its  intended  purpose  not  through   on  average  6.6%/yr.  from  2012  to  2017   -­‐ expanding  emphasis  on  healthcare  in  
chemical  acFon  or  being  metabolized   Trends:   developing  countries  
  -­‐ UncertainFes  introduced  by  PPACA   -­‐ standardizaFon  of  regulatory  requirements  
Products:  devices  range  in  complexity  from   (“Obamacare”)  and  lagging  device  approval   across  countries  
tongue  depressors  to  mulF-­‐million  $  imaging   Fmes  by  FDA  is  expected  to  slow  growth   -­‐ Growth  in  elderly  populaFon  means  increased  
equipment.       -­‐ PPACA  contains  med  device  tax  -­‐will  cost  the   demand  for  devices  
-­‐ Most  common  are  surgical  appliances/ industry  $20  billion  over  the  next  decade   -­‐ Improved  paFent  longevity  due  to  higher  
supplies,  surgical  &  medical  instruments,   -­‐ Increased  government  regulaFon  around  the   quality  healthcare  
electro-­‐medical  equipment,  in-­‐vitro  diagnosFc   globe  threatening  growth   -­‐ InnovaFon  in  product  development  due  to  
substances,  irradiaFon  apparatus  (typically  x-­‐ -­‐ Recent  difficulFes  in  retaining  qualified   strong  scienFfic  progress  
ray),  dental  &  ophthalmic  (eye)  goods   manpower  to  design  and  produce  devices    
-­‐ Aging  populaFon  and  increased  access  to  care   Cost  Drivers  
Key  Stats:    US  industry  includes  about  11,000   should  help  stem  some  of  losses  from  forces   -­‐ Research  and  development  
companies  with  combined  annual  revenue  of   menFoned  above   -­‐ Regulatory  approval  and  compliance  process  
over  $150  billion.    Globally,  the  industry   -­‐ Growing  a_enFon  to  healthcare  in  developing   -­‐ Federal  and  local  taxes  
generates  annual  revenue  over  $400  billion.   markets   -­‐ Sales  and  markeFng  operaFons  
Major  markets  include  the  US,  Japan,  Germany,    
France,  and  Italy.   Compe==on:  increasingly  sophisFcated  
-­‐ Industry  is  concentrated:  50  largest   pharmacologic  products,  growth  in  prevenFve  
companies  account  for  ~60%  of  revenue   medicine  
   
Major  Companies:  include  Baxter  InternaFonal,   Barriers  to  entry:  high  for  small  players;  
Boston  ScienFfic,  Johnson  &  Johnson,  Medtronic,     economies  of  scale  and  access  to  capital  are  
GE  &  St.  Jude   criFcal  to  negoFate  complex  regulatory  and  
  approval  processes  
   
   
  236
Hospital Facilities

Overview   Trends   Drivers  

Acute  care  hospitals  –  5,815  in  2008.  Non   Pa=ent  Protec=on  and  Affordable  Care  Act   Sources  of  Revenue:  
profit  enFFes  account  for  82%  of  this   (PPACA)  (“ObamaCare”)  reforms  aspects  of   Inpa=ent  admissions:  Has  remained  flat  at  
segment.  Total  revenues  in  2008:  $608  billion.   the  private  health  insurance  industry  and   ~118  admissions/1000  populaFon  
Revenue  CAGR  (04-­‐08)  –  5.4%   public  health  insurance  programs,  increases   Procedures:  Decrease  in  admissions  result  of  
 Rehabilita=on  hospitals  (both  stand-­‐alone   insurance  coverage  of  pre-­‐exisFng  condiFons,   a  shin  towards  procedures  performed  on  an  
units  &  those  a_ached  to  a  larger  facility)  –   expands  access  to  insurance  to  over  30  million   outpaFent  basis  rather  than  in  hospital  
203  in  2008   Americans,  and  increases  projected  naFonal   Reimbursement  rates:  Controlled  by  gov’t  
Psychiatric  hospitals  –  447  in  2008;  Avg.   medical  spending  while  lowering  projected    
length  of    stay  has  remained  stable  at  9-­‐10   Medicare  spending.     Demand  Drivers:  Increase  in  unemployment  
days     à  loss  of  employer-­‐based  health  coverage  
Specialized  hospitals  –  orthopedics  (25);   Shortage  of  Physicians  and  Nursing  staff  :  As   Decline  in  the  rate  of  elecFve  procedures  
obstetrics  &  gynecology  (13);  chronic  disease   the  populaFon  ages  the  shortage  of  primary   ShiL  towards  procedures  performed  in  
(4);  eye,  ear,  nose,  and  throat  (6);  &   care  physicians  would  aggravate   outpaFent  facility  or  physicians’  offices  that  
tuberculosis  and  other  respiratory  diseases     Highly  regulated  by  the  government  which  is   don’t    require  an  overnight  hospital  stay  
Nursing  homes  –  15,531  in  2008,  occupancy   a  key  buyer  for  the  hospital  industry     New  medical  technologies  reduce  or  
rate  ~84%   Gov’t:  account  for  47%  of  healthcare  spend   eliminate  the  need  for  hospitalizaFon  
Assisted-­‐living  facili=es,  and  home  healthcare   Healthcare  reform  will  extend  healthcare   Increasing  influence  of  third-­‐party  payers,  
services.   insurance  coverage  to  approximately  32   Ageing  populaFon  
million  of  the  previously  uninsured  by  2019    
  Cost  Drivers  
Consolida=on:  To  reduce  costs,  nonprofit   Labor  Costs  (Doctors,  Nurses,  Admins)  
chains  or  individual  nonprofit  hospitals  being   Uncompensated  Care:  high  %  bills  not  billed  
acquired  and/or  entering  into  JV   to  insurance  is  wri_en  off  as  bad  debt  
arrangements  with  the  for-­‐profit  chains   Taxes:  non-­‐profits  are  exempt  from  some  
taxes  

237
Healthcare Payors

Overview   Trends   Drivers  

WHAT  PAYORS  DO:   HEALTHCARE  REFORM   REVENUE  DRIVERS  

• Underwrite  (assume  risk  of,  assign  premiums   Directly  pressures  payors’  bo_om  lines  by:   Payor  revenues  are  largely  dependent  on  
for)  health  insurance  policies     • EliminaFng  coverage  caps,  denials  based  on   external  factors:  
• Provide  admin  services  for  self-­‐funded  plans   pre-­‐exisFng  condiFons,  etc.   • Total  health-­‐related  expenditures  
(e.g.  employers  providing  benefits  with  own   • Increasing  medical  loss  raFos  (%  premium   • Number  of  physician  visits  
funds)     dollars  payers  must  spend  on  healthcare,   • Number  of  employed  individuals  
• Help  manage  individuals’  care   with  remainder  going  to  admin  and  profit)     • Age  of  populaFon  
• Increasing  gov.  scruFny  of  premium  hikes   • RegulaFon  and  legislaFon  
KEY  INDUSTRY  STATISTICS:   • Forcing  payors  onto  exchanges  for   Payors  also  a_empt  to  steal  market  share  from  
• Revenues/Profits:  $707.4B  /  28.3B  (4%)   individuals;  more  price  compeFFon,  less   one  another  by  differenFaFng  on:  
• CAGR  ‘07-­‐’12  /  ’12-­‐’17:  2.8%  /  5.1%   G&A  scale  than  with  employer  groups   • Steeper  discounts  on  provider  charges    
• Number  of  businesses:    927   However,  the  law  will  bolster  top-­‐line  growth   • Broader  network  coverage  
  by  growing  the  insured  populaFon   • Lower  administraFve  fees  
PRIMARY  PLAN  OFFERINGS:     • Add-­‐on  services  (e.g.  case  management)  
• Fee-­‐for-­‐service:    Provider  paid  on  one-­‐off   COMPETITION   • A_racFveness  to  individual  consumers  (once  
basis;  paFent  choice  not  restricted   • The  top  four  payors  have  ~35%  share;  the   exchanges  go  live  in  2014)  
• Health  maintenance  org:  Payer  and  provider   rest  of  the  market  is  fairly  fragmented    
integrated  and  pre-­‐paid;    cheaper,  but   • Slow  but  steady  consolidaFon  expected  to   COST  DRIVERS  
paFent  choice  limited   conFnue  given  profitability  issues   • Purchases  of  medical  and  Rx  services/  
• Preferred  provider  org:  Mix  of  FFS,  HMO       products)  comprise  ~72%  of  costs;  
• High  deduc=ble:  Lower  premiums  but  higher   MACROECONOMIC  ENVIRONMENT   influenced  by  uFlizaFon  and  cost  inflaFon.  
out-­‐of-­‐pocket  obligaFon;  paFent  has   • Recession  precluding  payors  from  increasing   • RelaFve  to  other  sectors  of  healthcare,  the  
incenFve  to  use  services  efficiently   premiums  in  line  with  healthcare  cost   health  insurance  industry  is  neither  capital  
• Pharmacy  benefits   inflaFon   nor  labor  intensive.      
   

238
Banking and Financial Services

Overview   Trends   Drivers  

Diversified  Financial  Services  firms:  large   As  a  result  of  recent  financial  crisis,   Revenue  Drivers  
financial  conglomerates  (e.g.  JP  Morgan  Chase   regula=ons  have  increased  (controlled  by   Commercial  Banks  earn  money  by  reinvesFng  
&  Co.)  which  combine  insurance,  securiFes,   Treasury  Department,  The  Federal  Reserve,   customer  deposits  in  higher-­‐yielding  funds  or  
and  lending  businesses   House  and  Senate  bills)   lending  at  higher  rates  and  charging  
    transacFon  fees  
Consumer  finance  firms:  primarily  lend   The  US  government  intervened  in  2007-­‐09  to   Investment  Banks  charge  fees  for  advising  
money  to  consumers:  mostly  through  small  to   lend  money  to    banks,  insurers,  and  other  key   corporate  and  governmental  clients  on  
midsized  loans  ($1,000  to  $75,000).  The  main   players  to  keep  the  financial  system  afloat.     mergers,  acquisiFons,  restructuring,  and  debt  
products  include  home  equity  loans,  credit     and  equity  issuances  
card  loans,  etc   Consolida=on  of  banks   Insurance  Companies    earn  money  by  taking  
  Trend  towards  large  “financial  supermarkets”   in  monthly  premiums  from  customers,  who  
PE/VC  firms:  invest  in  and  help  manage  or   like  CiF  may  be  reversing,  as  many  large  banks   receive  a  payout  if  an  event  occurs  
guide  businesses  with  hopes  of  company   sold  off  divisions  for  needed  cash  during  the   Credit  Card  Companies  (Visa  /  Discover)  earn  
growth  resulFng  in  profits  from  a  later  sale   downturn   fees  from  customers  and  merchants  by  
    handling  the  complex  processing  necessary.  
(AddiFonal  Types  under  Drivers)   Post-­‐  financial  crisis,  many  financial   AMEX  does  the  same,  but  also  lends  the  
  insFtuFons  have  stopped  proprietary  trading,   customer  money.    
Interest  Rates  are  at  zero,  meaning  banks  will   or  placing  bets  with  their  own  assets.    
make  no  money  by  invesFng  in  government     Cost  Drivers  
bonds.  This  is  the  federal  reserve  encouraging   The  Dodd-­‐Frank  act,  which  has  not  been  fully   Research  (whether  to  buy/sell  securiFes,  or  
banks  to  lend  money   implemented,  includes  new  and  consolidated   suggest  a  specific  merger)  
  federal  regulatory  agencies,  stricter  capital   Salary  and  benefits,  supplies,  insurance.    
Customer  deposits  in  banks  are  FDIC  insured   requirements  for  banks,  and  regulates  the   Losses  on  investments  like  loan  defaults  
up  to  $250,000,  meaning  the  government  will   trading  of  certain  deriva=ves.     Risks,  such  as  a  sudden  demand  from  many  
make  you  whole  if  the  bank  loses  that  money   customers  to  redeem  their  money  

239
Media and Entertainment

Overview   Trends   Drivers  

• Media  and  entertainment  companies  create,   MACROECONOMICS:   Revenue  Drivers  

license  and  /  or  distribute  content  (TV  shows,   Consumer  and  adverFsing  spending  on  M&E   Depending  on  the  company’s  focus,  the  below  
movies,  music,  news,  video  games,  books,   is  Fed  to  economic  growth,  though  some   revenue  mix  differs.  There  has  been  a  lot  of  
magazines,  radio  shows,  adverFsing,  etc.)     segments  (cable,  internet  access)  are  resistant   experimentaFon  in  adapFng  these  business  
• The  industry  has  long  been  known  for   to  downturns  and  /  or  more  impacted  by   models  to  digital  age:  
conglomeraFon;  developing  and  acquiring   secular  trends.  Annual  growth  slowed  in  2008   • Consumer  /  end-­‐user:  More  of  a  focus  on  
mulFple  brands  and  mulFple  distribuFon   and  the  industry  retracted  by  2.4%  in  2009.   subscripFons,  mulF-­‐device  access  and  free  
channels  for  their  disseminaFon   Growth  has  rebounded  to  ~4.5%  since  then.   or  “freemium”  with  micro-­‐transacFons  
    • Adver=sing:  More  of  a  focus  on  direct  
INDUSTRY  STRUCTURE:   DIGITAL:   response  and  tying  ad  exposure  to  
Total:  Global  revenues  of  $1.5  T   The  biggest  long-­‐term  issue  for  industry   purchases  or  clicks,  also  use  of  web  usage  
Consumer  /  End-­‐User  Spend:  $1  T   players  is  how  to  put  content  online.  The   data  to  micro-­‐target,  raising  privacy  issues  
Adver=sing  Spend:  $500  B   internet  poses  a  number  of  challenges:   • Licensing  /  distribu=on:  More  focus  on  
• The  leading  10  companies  in  the  industry   • Lowered  barriers  to  entry  for  creaFng  /   retransmission  fees  TV  networks  charge  to  
account  for  one  third  of  revenue   distribuFng,  increasing  compeFFon   cable  cos.  and  revenue  shares  with  online  
• This  includes    some  cable,  telecom,   • Increased  piracy  due  to  high-­‐speed   marketplaces    
hardware,  sonware  and  internet  spend   connecFons  and  illegal  download  sites    
which  is  hard  to  split  from  “content”   • Consumer  expectaFons  of  lower  priced  /   Cost  Drivers  
• Other  naFonal  or  regional  conglomerates   free  content,  available  on-­‐demand   The  M&E  industry  is  labor  intensive  in  terms  
and  digital  startups  comprise  remaining   • New  intermediaries  and  lack  of  standards   of  costs  for  “creaFve”  talent  and  sales  staffs,  
revenue   (Google  search,  iOS  vs.  Android  app   which  can  comprise  40%  -­‐  50%  of  costs  for  a  
  pla€orms,  new  ad  formats)   company  or  project  (one  movie).  Marke=ng  
  • Limitless  adverFsing  inventory  and  less   also  represents  a  large  porFon  of  costs,  given  
consumer  a_enFon,  reducing  ad  prices   the  compeFFon  for  consumer  a_enFon.  
• DistribuFon  and  standing  out  harder  given   Capital  investments  in  digital  technologies  
huge  libraries  (Amazon  books,  iTunes)   represent  a  newer  but  growing  area  of  cost  
 

 
240
Telecom

Overview   Trends   Drivers  

Industry:   Growth:   Revenue:  

Made  up  of  companies  that  allow  people  to   • Growth  in  this  industry  comes  from  services   Revenue  =  subscripFon  fee  x  #  of  subscribers  
connect  all  over  the  world    through  a  complex   delivered  over  mobile  networks    
networks  of  phones,  mobile  phones,  and     • SubscripFon  fee  structure  will  vary  by  service  
internet-­‐linked  PCs.   Trends:   offering  and  telecom  company  
  • DeregulaFon  and  innovaFon  changed  the   • Companies  will  try  to  maximize  their  
Products:   compeFFve  landscape  of  this  industry   revenue  through  the  structure  of  
This  is  not  a  comprehensive  list,  but  it  does   • Telecom  companies  are  beginning  to  expand   their  fee  arrangement  
provide  examples  of  products  from  the  Telecom   out  of  telecom  and  into  enter  other  industry   • Must  be  very  conscious  of  industry  
industry:   spaces   pressures  related  to  fee  structure  
• Telephone   • An  example  of    this  is  Comcast   • Bundling  services  is  a  common  pracFce  in  the  
• Fiber  opFcs   entering  the  media  and   industry  in  order  to  maximize  revenue  
• High-­‐speed  internet   entertainment  industry   • Another  opportunity  for  telecom  companies  
• Radio   • The  reverse  is  also  true    where  outside   to  make  revenue  is  to  provide  network  
• Satellite  communicaFons   industry  companies  are  expanding  into  the   connecFvity  to  other  telecom  companies  
• Cell  phone  networks   telecom  industry,  e.g.  Google  Fiber    
  Compe==on:   Costs:  
Key  Ra=os:   • The  telecom    industry  requires  large  capital   • Fierce  compeFFon  in  an  essenFally  
Churn  Rate  –rate  at  which  customers  leave  for  a   investments  upfront,  which  creates  a   commodity  market  has  led  to  cost  
compeFtor.  Telecom  industry  has  highest  churn   potenFal  barrier  to  entry  for  new  entrants   compeFFon  between  companies  
rate  of  any  industry.   • No  significant  supplier  power  due  to  large   • Efficient  billing  systems  are  a  way  for  
Average  Revenue  Per  User    (ARPU)  –   quanFty  of  equipment  suppliers   companies  to  decrease  cost  and  improve    
understand  purchase  level  for  each  user   • Growing  buyer  power  due  to  access  to   margins  
Broadband  –  high-­‐speed  internet  access  tech   subsFtutes  and  the  telecom  becoming  a   • Expanding  a  company’s  network  and  service  
Telecommunica=ons  Act  –  sFmulate   commodity   offering  are  large  cost  drivers  
compeFFon  in  the  industry   • DeregulaFon  and  recepFveness  of  the  market   • Smaller  players  may  have  to  pay  for  
  has  made  this  industry  incredibly  compeFFve   connecFvity  which  will  increase  their  costs  
     
 
241
Retail

Overview   Trends   Drivers  

• Retail  trade  makes  up  $3.8  trillion  in   • The  industry  has  generally  been  negaFvely   Revenue  
sales  (second  largest  US  industry)   impacted  by  the  economy  (discount   • PromoFons    –  retailers  drive  traffic  
retailers  have  done  best)   through  price  reducFons  and  in-­‐store  
• Retail  industry  is  comprised  of  the  
• Due  to  frequent  price  promoFons,  lower   displays  
following  sub-­‐industries:  
– General  merchandise   profit  margins  are  common  in  the  industry   • Consumer  spending/confidence  –  
– Apparel   • Retailers  are  expanding  their  share  of   retail  industry  is  leading  indicator  for  
– Consumer  electronics   private  label  brands   economic  condiFons  (discount  
– Home  improvement   retailers  generally  do  be_er  in  bad  
• Many  specialty  retailers  are  selling  
– Office  supplies   Fmes  than  specialty  retailers)  
services  to  differenFate  themselves  from  
– Drug  retail   Cost  
rivals  
– AutomoFve  retail   • Inventory  management  –  criFcal  to  
– Best  Buy  –  Geek  Squad,  Staples  –  Copy  
– Specialty   minimize  cost,  increase  response  
Centers,  Pet  Smart  –  Grooming  and  
– Food  retail   Fmes  and  increase  profitability  
Training    
– Hypermarkets/super-­‐centers   • Real  Estate  –  number  of  stores  and  
• Online  sales  are  increasing  faster  than   locaFon  decisions  are  important  
tradiFonal  retail  sales  (currently  3-­‐4%  of   given  high  fixed  costs  
retail  industry  revenue)  

242
 Household Non-Durables

Overview   Trends   Drivers  

Industry  Defini=on:  Manufactured  products   Revenue  

Growth:  Category  is  expected  to  grow  at  a  low  
with  useful  life  <  3  years   • Household  products  cash  flow  generally  
to  moderate  pace;  most  growth  from  
Products     even  throughout  the  year  
emerging  economies  
• Household  –  soap,  detergent,  cleaning,   • Personal  care  products  are  seasonal  with  
paper  towels,  pet  care…  (US  Revenue  ~ Trends:   loading  in  first  half  of  year  
$100B  per  year)   • Industry  concentraFon   • New  product  innovaFon  
• Personal  care:  hair  care,  cosmeFcs,   • Power  of  key  customers  (Wal-­‐Mart)   • MarkeFng/PromoFons  
fragrances,  skin  care,  oral  care…(US   • Focus  on  export  growth  to  tap  into  middle   • Brand  equity  /  loyalty-­‐  insulates  against  
Revenue  ~$250B  per  year)   class  in  emerging  economies   switching  &  price  wars  
Major  Companies:  P&G,  Colgate-­‐Palmolive,   • Brand  raFonalizaFon/opFmizaFon   Costs  
Ecolab,  Henkel  KGaA,  SC  Johnson,  Nestle,   • Private  label  gaining  share  and  improving     • Capital  intensive  significant  investment  to  
Georgia  Pacific,  Kimberly  Clark,  InternaFonal   in  quality    
improve  efficiency    
Paper,  Estee  Lauder,  J&J,  L’Oreal,  Unilever     • Pressure  for  environmental  sustainability,   • Significant  spends  on  markeFng.  sales  and  
Compe==on:  Markets  tends  to  be   compliance  and  product  safety   R&D  
concentrated   • Increase  cost  and  scarcity    of  raw  materials   • Raw  materials  costs  significant  as  much  as  
• Scale,  shelf  placement  at  retail  criFcal  and   • Growing  demand  for  organic  /   50%  of  revenues  
promoFons  criFcal   environmentally  friendly  products  
• Futures  contracts  to  protect  cost  of  inputs  
• Small  companies  compete  through  product   • R&D–  more  advanced  compounds  /  mulF-­‐ • Environmental  and  other  regulatory  
specializaFon  or  targeFng  local  markets   use  products   compliance  in  producFon  /  waste  disposal  

243
 Household Durables

Overview   Trends   Drivers  

Industry  Defini=on:  highly  durable  goods   Growth:    Despite  recession,  demand   Revenue  
useful  for  at  least  3  years     surging  as  emerging  markets  (India,  China,   • Cash  flow  partly  seasonal    (holidays,  
Mexico…)  buy  basic  goods  due  to   real-­‐estate  purchases)  
Products:  industry  if  onen  classified  into   • Long  purchase  cycle  means  goods  sold  
emerging  middle  class  real  estate  
two  segments:   on  higher  margin  
expansion  and  access  to  credit  
• Electronics    (Brown  Goods)  –  TVs,  A/V,   • Demand  onen  Fed  to  fluctuaFons  in  
computers,  cameras,  tools  (>$500B   Trends:   real-­‐estate  market    
globally)   • Slowing  housing  market  in  the  US  has   • InternaFonal  compeFFon  puong  
• Appliances  (White  Goods)  –   directly  impacted  purchases   downward  pressure  on  price  
Refrigerators,  AC,  microwaves  (~$160B   • Raw  material  costs  for  appliances  (oil   • Planned  obsolescence    
globally)   and  precious  metals)  increasing   • SFff  compeFFon  and  discounFng  
• Home  furnishings/furniture  are  also   • US  manufacturers  losing  market  share   Costs  
onen  considered  durables  (~$400   to  foreign  producers     • Onen  carry  large  inventories  
globally)   • Demand  for  products  that  work  with   • Capital  intensive  manufacturing  and  
smart  grid  technology   R&D  processes  
Major  Companies:  GE,  Sony,  Samsung,  LG,  
• Shin  from  brick  and  mortar  to  internet   • Compliance  with  regulaFon  re:  
Apple,  Whirlpool,    Panasonic,  Xerox,  
purchases   producFon  and  waste  disposal    
Cannon,  Philips,  Furniture  Bands  
• ScruFny  re:  “dumping”  products  in   • Currency  translaFons  and  tariffs  impact  
InternaFonal,  IKEA  
compeFtor  markets     profit    
Compe==on:  A/V  competes  with  PCs  and   • Recent  scandals  re:  working  condiFons   • Supplier  network  and  sourcing  
games  for  in-­‐home  entertainment   in  factories     • DistribuFon  network  and  shipping  

244
Restaurant

Overview   Trends   Drivers  

• Restaurant  industry  makes  up  $604   • Growth  and  profits  have  been  hurt  by   Revenue  
billion  in  sales   soaring  food  and  energy  prices   • Food  and  beverages  (usually  the  
• Explosive  growth  overseas,  especially  in   higher  margin  products)  
• Restaurant  industry  is  comprised  of  
the  following  sub-­‐industries:   QSR  industry,  due  to  strong  economic   • Merchandise  
– Quick-­‐service  restaurants  (QSR)   growth  and  growing  middle  class  in   • Catering  
– Full-­‐service  restaurants   emerging  markets  
• Franchising  fees  
• One  of  the  largest  private  sector   • Health  and  wellness  concerns  conFnue  to  
• Licensing  
employers  (~13M  jobs)   pose  problems  for  QSRs  and  have  resulted  
in  healthier  menu  opFons    
• Many  QSRs  operate  as  franchises   Cost  
• Newer  “fast  casual”  restaurants  like  
• Labor  –  largest  cost  for  restaurant  
Chipotle  and  Panera  threaten  to  steal  
operators  
market  share  from  both  QSR  and  full-­‐
service  restaurants   • Raw  materials  –  accounts  for  roughly  
a  third  of  sales  
• In  general,  restaurants  have  been  
negaFvely  impacted  by  the  economy  and   • Real  Estate  –  number  of  restaurants  
reduce  consumer  spending   and  locaFon  decisions  
• Other  –  product  innovaFon,  
consumer  research  

245
Non-Alcoholic Beverages

Overview   Trends   Drivers  

Non-­‐alcoholic  beverages:  (NA)  industry  is   Growth  in  soda  is  flat.  Bo_led  water’s  growth   Revenue  Drivers:  
highly  concentrated:  89%  of  US  retail  sales  are   will  conFnue  well  into  the  future  because  of   Increasing  market  share:  
a  few  companies:  Coca-­‐Cola,  PepsiCo,  and   increasing  demand  for  natural,  organic   new  segments  (incl.  internaFonal,  especially  
Cadbury  Schweppes  PLC  (Dr.  Pepper  &  7UP)   products.   emerging  markets)  
  More  manufacturers  work  with  consumers  to   new  products  (incl.  acquisiFons  of  niche  lines)  
Main  NA  beverage  categories:  1)  Carbonated   understand  their  packaging  preferences   expanding  distribu=on  channels  (cooperaFng  
son-­‐drinks  2)  Bo_led  water  (fastest  growth)  3)     with  Wal-­‐Mart  Stores,  etc)  
Juice  drinks  4)  Sports  drinks   Hispanics,  followed  by  Asian-­‐Americans  are   Squeeze  exis=ng  users  more  (premium  labels,  
fastest  growing  segments.     complementary  products  such  as  Coke  and  
  chips)  
The  low-­‐carbohydrate  trend  is  virtually   Innova=on  in  product  and  merchandising  
nonexistent  outside  of  the  United  States  and   strategies,  such  as  the  use  of  mobile  internet  
the  United  Kingdom     and  online  shopping  
Many  US  consumers  believe  that  the  “be_er-­‐  
for-­‐you”  subsFtutes  do  not  taste  as  good  as   Cost  Drivers  
the  tradiFonal  brands,  and  a  large  majority  of   Packaging  –  the  cost  of  plasFc  increases  over  
them  remain  commi_ed  to  tradiFonal  high-­‐ the  years  
carb,  high-­‐sugar  foods.     Taxes    -­‐  on  inputs  (eg  sugar)  and  vice  taxes  
  (falls  on  end  users  –  reduces  demand)  
Compe==on   Wages  within  the  industry  are  noFceably  
Energy  drinks  is  a  growing  and  compe==ve   higher  than  the  naFonal  average  
segment.  These  drinks  turn  into  fashion    
among  youngsters.  
Barriers  to  entry  –  not  high  for  small  players,  
however  economies  of  scale  and  brand  are  
important  issues  
 
 
  246
Beer, Wine & Distilled Spirits

Overview   Trends   Drivers  

Beer/Malt  Beverages:  major  products  are  malt   Growth:   Revenue  Drivers:  

beverages,  primarily  beer.  Major  companies:   Beer  –  forecast  to  grow  at  3%  CAGR  between   Increasing  market  share:  
Anheuser-­‐Busch  InBev  (Belgium),  SABMiller  (UK),   2012-­‐2016   new  segments  (incl.  internaFonal,  especially  
Heineken  (Netherlands),    MolsonCoors    &  Boston   Wine  –  forecast  to  grow  at  2%  CAGR  between   emerging  markets)  
Beer  (US)     2012-­‐2016   new  products  (incl.  acquisiFons  of  niche  lines,  
-­‐ Top  sellers:  Budweiser,  Bud  Light,  Heineken,   Dis=lled  -­‐  forecast  to  grow  at  3%  CAGR  between   increasing  variety  of  products)  
Corona,  Skol,  Stella  Artois   2012-­‐2016   expanding  distribu=on  channels  (cooperaFng  
Tends:   with  Wal-­‐Mart  Stores,  increasing  importance  of  
Wine:  make  wine  and  brandies  from  grapes.     Beer  –  ConsolidaFon:  8  largest  brewers  account   convenience  stores)  
Major  companies:  ConstellaFon  Brands,  E&J   for  ~90%  of  industry  revenue;  success  of  small,   Squeeze  exis=ng  consumers  more  (premium  
Gallo,  &  Jackson  Family  (US),  Veuve  Clicquot   independent  cran  brewers  have  influenced   labels,  other  occasions  for  use)  
Ponsard  (France),  Gruppo  Italiano  Vini  (Italy)   larger  brewers;  growing  popularity  for  seasonal   Innova=on  in  product  development,  packaging  
Viña  Concha  y  Toro  (Chile)   brews   and  merchandising  strategies,  such  as  new  
-­‐ Red  &  white  containing  ≤14%  ABV  (60%  of   Wine  –  reliance  on  restaurant  sales  Fes     flavored  malt  beverage  varieFes,  use  of  mobile  
market);  Brandy,  &  other  wines  (15%);  Dessert   performance  to  food  service  sector,  increasing   internet,  sports  and  other  event  promoFon  
wine,  coolers,  &  effervescents  (~10%)   demand  from  baby  boom  generaFon,    
  agritourism  (winery  visits)   Cost  Drivers  
Dis=lled:  disFll,  blend,  or  mix  liquors.  Major   Dis=lled  –  mixed  fruity  drinks  increasingly   Packaging  &  Other  raw  input  costs  –  conFnue  to  
companies:  Brown-­‐Forman  (US),  Diageo  (UK),   popular,  flavored  malt  beverages  evolving,  rise  in   rise  over  Fme  
Kweichow  Moutai  (China),  &  Pernod-­‐Richard   grain  prices   Shipping  –  heavy  products  and  rising  gas  prices    
(France)   Compe==on:  Beer,  Wine,  DisFlled  compete   Taxes  &  Regula=on  –  complex  three  Fer  
-­‐ Major  products:  whiskey  &  bourbon  (10%   against  each  other.  Energy  drinks   distribuFon  system  and  heavy  federal/state  
industry  revenues);  cordials  &liqueurs  (10%);   Barriers  to  entry:  not  high  for  small  players,   taxaFon  
gin  (5%).  Other  products  include  vodka,   however  economies  of  scale  and  brand  are  
specialty  liquors  &  bo_led  cocktails   important  issues  
   
   
 
247
Mining and Precious Metals

Overview   Trends   Drivers  

Industry:   Growth:   Revenue:  

Includes  the  construcFng  and  operaFng  mines  as   Growth  of  each  precious  metal  will    be  unique   Revenue  =  output  x  the  selling  price  of  gold  
well  as  building  and  operaFng  producFon   compared  to  other  precious  metals    
faciliFes.       • Prices  are  determined  by  market  forces  
  Gold   • Output  varies  by  demand    and  market  price  
Products:   • Growth  for  gold  is  inversely  related  to  the   • Low  operaFng  costs  allow  a  mine  to  have  
Products  include  a  wide  variety  of  precious   stock  market  (i.e.  it  has  a  negaFve  beta),  so   higher/more  stable  outputs  at  lower  market  
metals  including  gold,  silver,  copper,  diamonds,   the  gold  market  experienced  large  growth   price  points  and  therefore  increase  revenue  
and  lead.  Gold  is    the  most  popular  precious   during  the  recent  recession,  but  has   • E.g.  if  it  costs  a  company  $250/ounce  
metal  for  investors.   decreased  since  the  recovery  of  the  market   to  produce,  then  they  will  not  
  produce  unFl    the  price  for  gold  
Industry  Structure:   Trends:   increases  over  $250/ounce  
• Industry  is  not  verFcally  integrated   • Most  gold  that  is  mined  today  is  used  for   Costs:  
  jewelry  as  opposed  to  currency  or  other   Main  costs  of  producFon:  
Three  types  of  firms   possible  uses  for  gold  and  other  precious   Loca=on  –  Understand  cost  in  certain  areas  and  
1. ExploraFon  –  explore  and  prove  gold  exists   metals   risk  due  to  poliFcal  unrest  
2. Development  –  develop  mines  on  sites  that   • Technology  has  greatly  changed  the  mining   Ore  Quality  –  Oxide  ores  are  be_er  because  it  is  
have  proven  that  the  precious  metal  exists   industry  making  it  more  efficient   easier  to  extract  the  precious  metals  
3. ProducFon  –  full-­‐fledged  mining  companies   Mine  Type  –  Most  underground  mines  are  more  
  Compe==on:   expensive  than  open  pit  mines  
Key  Ra=os/Terms:   • High  capital  requirements  creates  a  deterrent    
Mine  Produc=on  Rates  –  quanFty  produced   to  entry  to  potenFal  new  entrants   • Company’s  must  manage  costs  in  order  to  
Scrap  Recovery  –  supply  of  metals  from  sources   • Government  regulaFons  are  main   maintain  good  financial  health  and  
other  than  mines,  e.g.  old  jewelry   consideraFon  for  supply  concerns   producFon  levels  in  the  face  of  volaFle  gold  
Future  Sales  by  Producers  –  indicates  producers   • SubsFtutes  are  other  precious  metals   prices  
expectaFons  on  future  gold  prices   • Do  not  compete  on  price,  but  do  compete  for   • Producers  usually  publish  their  cost  of  
Bullion  –  refined  metal  that  is  high  quality   land  with  other  companies   producFon  in  their  annual  report  

 
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Utilities

Overview   Trends   Drivers  

Industry:   Growth:   Revenue:  

Generate,  manage,  and  provide  electrical  power   • ConsumpFon  of  electricity  expected  grow   Revenue  =  $  per  megawa_  per  hour  x  uFlizaFon  
to  the  general  populaFon   rapidly  as  the  world  becomes  increasingly    
  “electrified”   • Wholesale  electricity  prices  are  no  longer  set  
Historically  the  industry  was  run  by  monopolies,   • Energy  InformaFon  AdministraFon  (EIA)   by  regulatory  agencies  
but  is  now  disintegraFng  into  the  following  four   projects  that  40%  more  electric  generaFng   • This  heightens  the  risk  of  
supplier  segments:   capacity  will  be  needed  by  2020  to  meet   uncontrollable  price  increases  
  growing  demand   • Forwards  and  future  opFons  provide  energy  
Supplier  Segments:   • Short  term  direcFon  of  the  market  sFll   buyers  (not  at  the  consumer  level)  the  tools  
Generators  –  Create  electrical  power   remains  a  risky  bet   to  help  hedge  against  large  volaFlity  in  price  
Energy  Network  Operators  –  Sell  access  to  their      
networks  to  retail  service  providers   Trends:   • UFlizaFon  will  vary  by  uFlity  company    and  
Energy  Traders  and  Marketers  –  buy  and  sell   UFlity  companies  are  undergoing  major  changes   their  market  strategy  
energy  futures  and  derivaFves.  Help  secure   due  to:   • See  the  “Growth”  secFon  for  more  
electricity  at  a  stable,  predictable  price   • Regulatory  changes   informaFon  on  short  term  and  long  term  
Energy  Service  Providers  and  Retailers  –  sells   • Demand  fluctuaFons   uFlizaFon  projecFons  
energy  to  end  user   • Price  volaFlity    
  • New  compeFFon   Costs:  
Key  Ra=os/Terms:     • There  are  high  fixed  costs  upfront  in  order  to  
Power  Purchase  Agreements  (PPA)  –  contract   The  once  stable  industry  has  become  much  more   build  new  generaFon  plants  
between  power  producer  and  its  customers   unstable  and  risky   • A  lot  of  capital  is  required  to  enter  the  market  
MegawaF  Hour  –  basic  industrial  unit  for  pricing   Compe==on:   • Marginal  costs  are  relaFvely  low,  i.e.  it  is  not  
electricity   • High  barriers  to  entry  due  to  large  capital   costly  to  offer  one  more  kilowa_-­‐hour  to  one  
Load  –  amount  of  electricity  delivered   requirements  and  significant  regulaFon   more  person  
Federal  Energy  Regulatory  Commission  (FERC)  –   barriers   • Economies  of  scale  are  a  very  effecFve  way  to  
oversees  rates  and  service  standards   • Fierce  rivalry  between  compeFtors  because   reduce  costs  in  this  industry  
  product  is  a  commodity  
   

249
Additional Industry Research Resources

Several  sources  may  help  you  further  research  specific  industry  topics  
§ For  a  basic  overview  
§ Industry  overviews  provided  on  consulFng  firm  websites  
§ For  more  in-­‐depth  background  on  industry  context  and  trends  
§ Vault  industry  guides  (note:  these  are  lengthy!)  
§ Investopedia  –  h_p://[Link]/features/industryhandbook/  
§ For  in-­‐depth  informaFon  on  revenue  and  cost  drivers  
§ Standard  &  Poor’s  NetAdvantage  guides,  which  include  guidance  on  how  to  effecFvely  
analyze  and  value  companies    
§ For  up  to  date  informaFon  on  industry  developments  
§ WSJ  (can  be  accessed  for  free  on  CMC  website’s  FacFva  link)  

All  of  these  resources  are  public  or  can  be  accessed  via  CMC’s  Research  
Guide  portal  
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