..

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e Table of Contents
I

Chapter 1: How to Use the Casebook ...................................................., ........................................ 4

Chapter 2: Etiquette and the Interview Process .............................................................................. 5
Chapter 3: Behavioral Interview Overview .................................................................................... 7
Chapter 4: Case Interview Overview ............................................................................................ 19
Chapter 5: Case Frameworks and Tools ....................................................................................... 24
Chapter 6: Mock Case Interviews ................................................ ,................................................ 48
Chapter 7: Brain Teasers and Market Sizing ..........,..................................................................... 54
Chapter 8: Cases ........................................................................................................................... 58
/i. Hungry Hospital (Deloitte) ..... ... ... .............................................................:. 59
vi Beverage Manufacturer (McKinsey) ...................................................... ,.............................. 61

./3. Fruit Juice (Bain) ................................................................................................................... 64

.,/ 4. Consumer Packaged Goods (Bain) .......................................... ;................... :......................... 67
/5. Sandwich Shop (OC&C) ....................................................................................................... 70
. I
v6. Rental Cars and Frequent Flyer Miles (BCG) .................................................................... :.. 72
/
,/7. Household Appliances (Siemens Management Consulting) ................................................. 75

f ../ 8. Domino's Pizza (Bain) .......................................................................................................... 78

/9. Singapore Cellular Phone Market (Bain) .............................................................................. 81

vrQ. Spanish Trains (McKinsey) ............................................................................................... 83

11. MVNO Market Entry (BCG) ............................................................................................. 85
Y- v 12. Your Town, USA (McKinsey) ........................................................................................... 89
13. CD Ripping Service (BCG) ............................................................................................... 91
j/14. Brazilian Highway ............................................................................................................. 93
v 15. Store Label Tissue Manufach1rer ....................................................................................... 95
16. French Cars (OC&C) ......................................................................................................... 97

2008-2009 Case Book 2

;

17. Insurance company merger (a connect) ............................................................................. 99

vfs. Casual Diner (Bain) .................................................................., ...................................... I 02

/19. Retail Medical Products (Bain) ........................................................................................ I 05

vfu Utility company (Bain) .................................................................................................... 108

21. Healthcare Acquisition (BCG) ......................................................................................... 112
\1.22. Tire Manufacturer (BCG) ................................................................................................ 116
23. Gasoline Consumption at Fast Food Drive Thrus (L.E.K.) ............................................. 119
l/24. Golf Club Producer (McKinsey) ...................................................................................... 122.
25. Loyalty card scheme for Canadian supermarket (McKinsey) ......................................... 126

1- /26. Greeting Card Company (OC&C) ................................................................... ,................ 130

vz1. Kiki's Coffee (OC&C) ..................................................................................................... 132

-/. \/28. Rolls Royce (Bain) ............................ :.............................................................................. -137

/29. Credit Card Referrals (OC&C) ........................................................................................ 139

v80 .
.-3i.
32.
Fancy Tmck (McKinsey) ................................................................................................. 141

Sample Case from McKinsey .......................................................................................... 144

Big Pharma vs. Biotech ............. , ...................................................................................... 150

2008-2009 Case Book 3

\
 Chapter 1: How to Use the Casebook

To get the most value from this book, do the following:

1. To understand interview expectations, read Chapter 2.
2. To prepare for behavioral interview questions, read Chapter 3 and practice thoroughly for your
behavioral interviews.
3. To prepare for case questions, review Chapters 4, 5 and 6. Much of this material will be familiar
to you from your various classes at Sloan and from other case prep resources.
4. To practice your interview technique, use Chapters 7 and 8. Do not just read through these
chapters. Read a case only if you intend to give it to a classmate or if you have already been
given the case. Simply reading through the cases at the back of this book will not prepare you for
consulting interviews.
Case interviews are practiced by giving interviews to each other, with one classmate taking on the role of
the interviewer. When giving an interview to your classmate, mn though an actual45-minute interview.
Include some behavioral questions at the start. Keep the tone as serious as you would expect in a live
interview.

Be focused and aware of how you can improve. Use the feedback form provided in this book to reflect on
your case interview and discuss with your "interviewer" what you could have done better ai:td how you
compare to others who have also received the same case. It is good both to practice repeatedly with a
small teain who can track your progress, and also to practice with a large number of classmates for
variety. You want to get used to different interview styles, to hear more feedback, and to observe what
works and what doesn't.
Challenge yourself during these practice sessions to be more dynamic, more insightful, to drive the case
harder, to exude confidence, to remain calm and be yourself. Find your "case voice" by January so that
come interview time, you are a pro .

2008-2009 Case Book 4

 Chapter 2: Etiquette and the Interview Process

The Rules
'

Your performance in this area affects not only you, but the reputation of MIT Sloan, its students, and
its alumni. Your professionalism says a lot about you and MIT Sloan. Any lack of professionalism
will have an even greater and more lasting effect Here are the rules of interviewing:
Follow through on your commitments. Don't leave corporate presentations early. If YOJl
must, sit by the door and be discreet If you sign up for an interview or a company dinner -
go. If you must cancel, do so well in advance so someone else can have your spot.
Be early. A 9:00 a.m. interview means you should be in with your interviewer at 9:00, not
taking off your coat and signing in. If they are running late and this impacts your schedule, be
gracious and work with the coordinator to remedy the situation.
Be prepared. Employers are very sensitive to people who come in and try to "wing it". This
reflects poorly on both you and MIT Sloan. If you aren't genuinely interested, don't take the
spot from someone who might really want it This especially applies to second round
interviews if you already have an offer from another film!
Celebrate discreetly. Once you get a job offer, you will have the urge to go singing through
the streets. Just remember, many of your fiiends are still looking and for them the

disappointment is mounting .
Collaborate, don't compete. By helping one another out, we will all be prepared to do our
best This will encourage more companies to recruit at MIT Sloan and for those already here,
to hire a greater number of students. It's also good to keep in mind that thoseclassmates you
are now prepping with may be able to help you again in the future.

Format
The "typical" consulting interview for a summer intemship consists of two rounds. The first round is
a screening round. You will nonnally interview with two consultants from the finn, one consultant for
each interview. If you do well, you will be invited back for a second round. This usually consists of
two to four interviews with different consultants. They will often be senior consultants or partners
from your desired office or specialty.
Each interview lasts from a half hour to 45 minutes. The first pmtion of your screening round
interviews will usually be the "personal interview" lasting about 15 minutes and followed by a case
question
Firms use the behavioral interview to assess whether you will be a strong consultant and whether you
"fit" with their firm. They may test whether you have researched their firm appropriately to make an
informed decision if they make you an offer. The personal interview also measures your client-
interaction skills and your overall leadership and sense of achievement

2008-2009 Case Book 5

 What to Take to the Interview
Some interviewers will have a pad of paper and a pen for you to take notes during the case portion of
the interview, but don't count on it. <'
A pad of paper, either lined, blank or graph, depending on your preference.
A pen or pencil, your preference.
Copies of your resume in case the interviewer doesn't have a copy in their packet.
Leather portfolios (or MIT-branded faux leather portfolios) are a good way to carry your
paper, pens/pencils, business cards and resume into and out of an interview.

2008-2009 Case Book 6

 Chapter 3: Behavioral Interview Overview

You may be tempted to just practice case interview questions and "wing it" through the behavioral
portions. Avoid this temptation!
The behavioral portion of the interview is just as important as the case. If you do poorly on the
behavioral interview, a perfect performance on the case will not save you.
Your interviewer is just as interested in how you "fit the finn" as how you "crack the case."

Behavioral sets tone for entire

Time interview Total
(Minutes) 2-5 10-20 20-35 3-5 45-55

The game Is on! LONG walk down As you are both Jntervlewerwllllead Interviewer may probe
the hall to the sitting down and with questlon(s) more deeply Into stories
Interview room .. "warming up"

Have deep detan ready

Have b!o Be ready to lead Bey our Draw on your core Be thoughtful and
Internalized with sma!\ talk charming self content engage vJillingly
Be ready and Use b!o Info If Don't be luUed Be ready for the STAY crisp I structured
eager to get appropriate Into false comfort unexpected Tie to sk!Hs
started Don't try too hard Be ulsp and and flrm culture
Firm, not structured
crushing, lie to consulting
handshake s.tc:i!ls I firm culture

Preparation
The key to perfonning well in the personal interview portion is preparation. You need to anticipate
the questions your interviewer will ask and have a story that incorporates your skills and ties them to
your desire and qualifications to be a management consultant with the fitm you are pursuing. Don't
forget that the "personal interview" extends throughout the recruiting process.
There are five key points to remember for a successful personal interview.
Understand what consultants do and what they are looking for
Know MIT Sloan
Know yourself
Know the firm
Listen well
Many behavioral interview questions come directly from your resume. Have a story ready for every
line in your resume in the event that the interviewer points to a bullet on your restmte and says, "Tell
me more about that."
As you go tluough the interview process, you will receive tough questions that probe not only your
intentions and intellect, but also your psyche and personality. Your delivery is as important as what
you say. Be self-aware and honest as you practice interviewing. Tty to see yourself as interviewers
will see you.

2008-2009 Case Book 7

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What Firms Look For

These diagrams outline key characteristics of the qualities consultingfin!IS desire in applicants and
which parts of the interview will help you demonstrate these skills.

Firms are continually testing three

key skills
Leadership

Company
Recruiting
Events

Problem Solving Client Interaction

Case

How to give them what they are testing for

Master basics" and must have" stories
11 11

Know your resume and your past

Concise, direct, and structured

Key-issue driven

Maturity and demeanor

Credibility and honesty

The interview starts at the handshake

2008-2009 Case Book 8

Know MIT Sloan's Reputation
Be aware of the perceptions recruiters have even before they meet you. Try to break the negative
reputation and reinforce the positive. Below we have included the results of a study conducted by the
CDO where recruiters were asked their opinions of Sloan students.

Positive Impressions of MIT Sloan

Sloanies are academically brilliant with outstanding quantitative skills
Sloanies are approachable and friendly
Sloanies are practical

Negative Impressions of MIT Sloan

Some recruiters believe Sloanies are not team oriented
Sloanies are less business savvy than other MBA students as result of large numbers of
engineers and students with technical backgrounds
Sloanies are less polished than candidates from other top programs in terms of self-
presentation at company events and interviews
Sloanies don't have the strongest interpersonal and communication skills
Sloanies often demonstrate depth vs breadth in interviews. We tend to drill down too deep
into individual problems and forget to look at cases from a high-level view.
Sloanies don't sell themselves strongly in interviews
Finally, some recruiters believe that Sloanies are under-prepared for their interviews
Now that you know these negative stereotypes, work to defy them. Show that in addition to being a
smart, helpful, numbers person, you are also a creative, thoughtful, well-mannered, personable, and
savvy business student ready to sell ideas to clients that will positively impact their bottom line.
Make sure to cite examples of teamwork. Be on time and dress properly for your interview; remember
that an interviewer is checking whether he/she can put you in front of a client. To demonstrate
breadth in the case analysis, skim the surface of the most salient issues and then go into detail when
prompted by the interviewer.

Know Yourself
Create a story of yourself and your experiences. Describe how your life and career have developed so
that a job with fitm X is the next logical step in reaching your goals. Be ready to walk through your
resume and fill in the details. For instance, why did you make the moves you made? What have been
the most significant decisions you have made? What were the challenges and what were the
triumphs?
This is a chance to set yourself apart from other applicants. Give the interviewer something to
remember you by: an "alias." Tell an interesting stmy, talk about a unique skill or talent, be distinct.
Given employers' perceptions of Sloan students, you should be prepared to emphasize teamwork,
communication skills, and business savvy.

2008-2009 Case Book 9

Know the Firm
You can leam about the consulting firms by attending their recmiting and MCC-sponsored
presentations. Use these opportunities to ask the consultants questions. If you are interested in a firm,
be sure to call the recmiting manager or a consultant you have spoken with and get more infonnation
about the work and culture. Your best resource may be your classmates who worked at the firm prior
to MIT Sloan or who interned there over the summer. As you leam more about the fll1ll, you arealso
building a network of people who know you and hopefully want to work With you after graduation.
Keep a 1unning list of contacts and people in your network.
What does the firm pride itself on? What makes them unique? If a firm prides itself on being a
thought leader, show how you have been a thought leader or why being part of a fum that leads the
industry is irnpmiant to you. You must also know the basics about a company, such as where their
offices are located and .how they are stmctured. Yau do, however, want to show some initial
understanding and then ask for clarification. For example, ask, "I understand that your firm is
structured around 5 industry practice groups. Could you please elaborate on how this structure works
in respect to a typical client engagement?"
To get you stmied, the following are a list of questions that may help your evaluation They
are useful to know, but you may come across as not having done your homework if you ask them
during an interview. The information is readily available from company websites, presentations, and
recmiting paraphemalia:
Is the fmn (office) stmctured by industry or functional group, or are most consultants
generalists?
What is the fnm's business focus? Strategy? Reorganization? M&A? Operations? IT? PE
due diligence? Some combination?
What are the fnm's client types? Fortune 100, Fortune 500, middle market, start-ups?
How does the fll1ll fit into/affect my career goals in the short-term and the long-run? Both
inside and outside the fll1ll?
How many engagements is a consultant on at a time?
What is the firm's ownership stmcture? Independent, cmporate subsidimy, public?
What is the lifestyle like? Number of days in/out of office, hours/week, travel?
What is the financial package? Are there any important fringe benefits?
What percentage of summer hires get full-time offers? What percentage accepts?
How fast has the finn growth been over the past few years? What are the implications of that
growth (or lack of growth)?
Ifi were to leave the fll1ll, what smi of organization might I join?

2008-2009 Case Book 10

 Handling the Interview
Listen Carefully
Insights and clues are all around you. Even before your interview begins, keep an ear open for any
useful information. Many companies post consultants in the waiting room to greet you. Ask them
why they joined the company and what they like most about it. Use your notes from company
presentations. What are the buzz words they use to describe themselves and the people they hire? You
very likely may be asked what you thought about the presentation. In the interview, pay attention to
your interviewer. What makes them look interested? What do they ask you to elaborate on? If you are
weak in one response ("Did you receive any academic awards in college?" - "Uh, no."), listen for a
chance to show your skills in another way.

Answer the Questions

Roger Cameron, a recruiter for companies that pursue MBA-level talent, suggests a four-step process
to use when answering your interviewer's questions: 1
1. Listen. Actively and eagerly listen to each word the interviewer says. Show signs of listening
by nodding your head and moving your eyes. Make eye contact but don't make your
interviewer uncomfortable by staring him or her down. Look away eve1y 5 to 7 seconds.
Don't try to "butt in" and answer the interviewer's question before he or she is finished.
2. Reflect. Take a moment to think about the question and how you will answer. A few seconds
of silent thought and a well delivered answer are much better than a rambling, quick
response.
3. Organize your answer in your mind.
4. Deliver your answer.

Questions for the Intetviewer

Towards the end of the interview, the interviewer will ask if you have any. Be ready with two or three
intelligent questions that will show your interest and preparation and provide you with any
information you feel you need. Don't ask something that is obvious in the brochure or web page or
was stated clearly at the presentation. Do ask questions that were not answered in either forum to
demonstrate that you paid attention and to demonstrate your genuine interest.
1. Industry questions (What is the future of consulting? Etc.)
2. Firm-specific questions to show you have done your homework
3. Background of interviewer
4. Career path at the fi1m

1
Much of the information in these sections is from Roger Cameron's books, PCS to Corporate America: From
Military Tactics to Corporate Interviewing Strategy and Your Career Fast Track Starts in College, and the book
Power Interviews: Job-Winning Tactics from Fmtune 500 Recruiters by Neil Yeager and Lee Hough.

2008-2009 Case Book 11

 Closing the Interview
'.'

' As the interview winds down you need to close the interview. Be personal, sincere and upbeat.
Express what impresses you about the firm and state that you look fonvard to a follow-up interview
or to receiving an offer fiom the film.
Ask when you can expect a phone call with the results of the interview so you can be available to
receive it. This way, you will be able to ask for feedback about your performance in the interview
process. Keep in mind that the greeting and recruiting staff outside your interview room may provide
this information to you after your interview. Never ask, "So how did I do?" during the interview or
the walk back to the hotel lobby.

Rescuing a Poor Interview

What if you feel your interview didn't go well and you didn't get out information about yourself that
is crucial to your getting the job? If you're getting positive nonverbal feedback from the interviewer,
don't do anything. Ask your smart questions and close the interview.
However, if you're getting a negative reaction from your interviewer and if strong positive factors in
your background were not brought out by the interviewer's questions; you might want to say
something like, "I do have some questions for you. However, before I ask them, I think there are
some things I need to tell you about myself that I have not yet shared with you today."
Be positive and do not remind your interviewer of a negative issue that came up in the interview. This
is a last ditch technique to rescue a poor interview, so be smart and very selective in using it.

Thank-You Notes
Your interviewers spend a lot of their precious time and effort to travel to visit you and you should
express your sincere appreciation. A "thank you" email is an appropriate way to share your th.anks.
Don't thank your interviewer for the time they spent interviewing you. Iostead, focus on how much
you enjoyed the time spent with them learning about the firm and mention a specific topic from your
conversation. Don't ask questions in your letter that require a response from your interviewer. You
want to motivate him or her to send you to the next round or give you an offer
Some candidates will send hand-written thank-you notes to their interviewers. This is not an
expectation or a requirement and often the decision will have already been made by the time the note
is received. Notes will not get you a job. That said, if yon feel that you would like to send thank-you
notes to your interviewers, be sure to send them on the same day as your interview! The sooner your
thank-you note arrives, the more likely your interviewer will remember you.

Getting Feedback
Whether you get the job or not, you want feedback about your performance throughout the interview
process. This includes asking what specific factors or issues differentiated those who made it to the
next round fiom those who did not. When possible, be home when the interviewer calls with the
results and ask for specific feedback that will help you in future interviews. If you can't be home for
the phone call, call the interviewer or recruiting manager and ask for a phone appointment to discuss
your perfmmance. Most interviewers and finns are happy to help you and give you feedback, even if
you didn't get the job.

2008-2009 Case Book 12

Behavioral Interview Questions
The following questions are typical of the personal, behavioral or resume interview. They allow the
interviewer not only to ask questions about your resume, but also to evaluate your ability to speak
concisely and clearly. When you practice these questions with your friends, remember to structure
each answer and limit the length of your response. The longest personal interview you will have will
be 30 minutes or less, so taking all of that time to talk about your favorite class at Sloan is probably
not a good idea.
You should have a 1 sentence ("newspaper headline"), 3 sentence, 1 minute and 3 minute version of ,
each story.
Get feedback from your practice partners and ask them what they perceive your strengths and
weaknesses to be. The interviewer will be speaking with many people in a matter of hours, so try to
present three distinguishing aspects of yourself that you want the interviewer to remember you by.
Be prepared to answer all of the following questions. Good approaches to answering these questions
can be found in materials from the MIT Sloan Career Development Office and in Neil Yeager and
Lee Hough's book, Power Interviews: Job-Winning Tactics from Fortune 500 Recruiters. These are
some sample questions:

Personal Story
How would you describe yourself? How would your close friends describe you?
\) Tell me about a professional situation in which you impacted your peers. /
Are you a "details" or a "big picture" person? Why?
Have you ever had to compromise your ethics? When and how?
(), What accomplishment(s) makes you the. most proud? Why?
Describe an experience where you failed. What did you leam from this?
What are your greatest strengths and weaknesses?
Where do you see yourself in 3 years? 5 years? I 0 years?
What is the most important thing not on your resume?
Why should I bother reading your resume?
What makes you a more interesting candidate than anyone else I interviewed today?
Are you competitive?
How will you know when you have become a success?
Why Consulting?
Why do you think you would make a good consultant?
Why do you want to be a consultant?
Q7
What do you think it takes to make a good consultant?
t'-
'--/
, Describe a situation in the past where you bad to analyze and solve a problem.

2008-2009 Case Book 13

 Leadership
What does leadership mean to you?
What have you done that demonstrates your ability to lead?
Describe the best/worst manager you have ever worked for.
Teamwork
What have you done outside of MIT Sloan that demonstrates you work well in a team
environment?
Academics & Sloan
Why did you MIT Sloan? Why business school? What have you leamed?
What has been your best experience at MIT Sloan? Yom most frustrating?
What has been your favorite class? Your least favorite? Why?
Have you been satisfied with your grades?
What is your GPA? Your GMAT score? Your SAT's (this was really asked a few times)? Be
ready to explain if it's below average.
What is your concentration at MIT Sloan?
What do you do for fun at MIT Sloan?
Interests
What book(s) have you read recently? Tell me about it(them).
What magazines do you read?
What are your geographic/industry preferences?
Why Our Firm?
What are your ctiteria for selecting a ftrm? How would you choose from multiple offers?
Why do you want to work at our fum? Why us instead of another consulting fum?

(\f'j) Why should we hire you?

(Y Where else are you applying and why?
vif' }/'!!- If you were offered the job right now, would you take it?
e. -."""
\ 'Q Finally, read the Wall Street Joumal, especially during the interview season, so you can chat about
current events on the walk to the interview suite.

2008-2009 Case Book 14

 "Why .. ?" Questions
These questions probe your ability to reason and come to a quality conclusion. Your interviewer may
also use these questions to test for consistency in your responses. The best approach to any "Why?"
question is to form a comparison between the positives and negatives of the options you had when
making your choices.
For example, if the interviewer were to ask, "Why did you choose the Special Operations Forces over
flying fighter jets?", a good response would be: "Flying fighters is obviously a sexy business, but
there are some negatives to it. You spend most of your time practicing skills that you will never have
the opportunity to use and you rarely travel outside the United States. The Special Operations Forces
gave me the opportunity to fly very impmiant missions, even during peace-time, and to live for long,
periods of time in many countries."
Know your resume cold and be prepared to elaborate on any point included in it. When preparing for
your interview, ask "Why?" about all facts on your resume and any major events in your life or the
story you have built around your experiences.

"Tell me about a significant accomplishment."

The interviewer wants to know that you were able to break a significant and complex goal down into
parts, deal effectively with ambiguity, work well with others to accomplish the goal, and bring the
work to a successful conclusion that had an impact on the mission of your employer. Here's a
framework to use when answering this question:
1. What is the accomplishment? State the accomplishment immediately. Don't make your
interviewer guess.
2. What is the significance of it? Your interviewer probably doesn't have a clue about what
you used to do. Succinctly describe why your accomplishment was impmiant to the goals of
your employer.
3. Tell the interviewer how yon accomplished it. How did you break down the problem and
lead your team in solving it? What did you learn about yourself? Here's where you can show
the qualities that will make you a great consultant.

"What is your greatest strength and weakness?"

Neil Yeager and Lee Hough suggest in their book, Power Interviews: Job-Wioning Tactics from
Fmtune 500 Recruiters, a three-step process to answering this question:
1. Clearly identify your greatest strength.
2. Identify a weakness that could also be perceived as a strength. Avoid'the "weakness that
is too obviously a strength" tactic, as it can easily be perceived as insincere. So don't say
things like, "I tend to work too hard." T1y stating a minor weakness that you can fix and show
how you are making progress addressing it. However, whatever you do, don't cough up a list
of weaknesses for your interviewer to choose from.
3. Point to the benefit of your strength and weakness to the firm. Your interviewer will not
be impressed if your greatest strength has no relevance to being a great consultant. Likewise,
you're also smlk if your greatest weakness is that you dislike long hours, traveling, or
working with people.

2008-2009 Case Book 15

Questions for the Interviewer
As time mns out your interviewer will likely ask if you have any questions. This is your opportunity
to demonstrate your knowledge and cmiosity about the firm. Always have three ol' four relevant
questions prepared before you go into any interview.
Keep in mind that the purpose of questions is two-fold. First and most importantly, the right
questions will help you make the right decisions about where you want to work. Second, you want to
articulate why you are interviewing with this finn and why you fit in with the company and their
culture.
The following are possible topics that you may want to tailor specific questions around. Remember,
over-generalized and generic questions (such as 'What is the culture of the fum?") are unlikely to get
you more than a textbook answer and won't gain you points with your interviewer. Instead, tailor
your question to a specific aspect of the firm.
How does the fitm staff for engagements? Regionally, nationally, intemationally? In reality,
is staffing a somewhat self-managed process?
What are the entry-level position responsibilities? Case leadership responsibilities? What is
the career progression path and timeline for the fum?
What is the natme of the fitm's training and development? How is staffing. balanced to
incorporate the needs of the fum, the needs of the client, and the personal development needs
of the ftrm's consultants?
What is the engagement design? Team size, client involvement, engagement length, team
hierarchy and make-up? Instead of asking questions about the average (the typical
interviewer response is 'it depends on the case') ask about a specific case the interviewer is
currently working on to get' a 'flavor' for what it might be like.
\Vhat are people like? Homogenous, diverse, individualistic?
Is the culture of the fum entrepreneurial, stmctured, client focused, empiricaVanalytical?
Could you describe a typical week at the office?
Do you see the focus of the firm shifting in the future? (applicable to niche consulting fnms)
What kind of mentoring program do you offer?
Does your ftrm do pro bono work? Could you please describe the work?
How does the firm spread knowledge intemally, especially among geographically dispersed
offices?

2008-2009 Case Book 16

 l
Master Your "Must Have" Stories
There are a handful of "must have" stories that every candidate must be ready to tell. Have at least
two strong stories to tell about
Leadership
Problem Solving I Impact
Influence
Taking initiative and achieving a difficult goal

Characteristics of any good story include:

You are the protagonist
o "I did", not 'We did"
It involves other people, whom you led, influenced, convinced despite opposition ...
There was a significant challenge for you - it really demonstrates your qualities, and you
grewlleamed/developed as a result
It answers the question that was' asked
It is succinct, structured, but does not sound rehearsed

Be Structured!
Write out each ''Must Have" story as an outline with several layers of detail from the one-sentence
"headline" to the most detailed description of what you thought, felt, said, and did.
Practice telling each story at multiple levels, with a style that both structured and natural. Demonstrate
that you can get to the "key issue" of any story in a stmctured fashion while still talking about your own
experience in a natural way. This is harder than it sounds, so stati early!
A pyramid stmcture, much like you have used in Communications classes, is appropriate for most stories.
Make a "Story Matrix"
For each of your ''Must Have" stolies, there's a good chance it fits into more than one type of stmy (for
example, a story could be suitable for "leadership" as well as for "problem solving". Use a "Story Matrix"
in a spreadsheet or other tool to track which stories you've developed and what types of stories they are.

2008-2009 Case Book 17

 Example "Story Matrix"

Practice questions that directly Involve your core content

Practice adapting small details of your core content
)1
'i
',.

The "cheat sheet" below is a useful synopsis of how to excel in !be behavioral interview

n
"
How to excel?

1. Understand what firms are looking for

2. Master your content
Identify "basics" and have" stories
Know your resume "3 levels deep"
11
Get used to thinking on your feet
3. Master your delivery
Succinct and structured
Keyissue driven
Real and honest delivery
4. Practice, practice, practice
5. Be real, passionate, and engaging

2008-2009 Case Book 18

Chapter 4: Case Interview Overview

The friendly banter about your illustrious accomplishments is over and the interviewer says, "So, our
client is a major manufacturer of toilets in Liechtenstein ... " Beads of sweat drip jiwn your forehead,
stinging your eyes as you struggle to follow the facts your interviewer is giving. You fear your
interViewer can hear your heart pounding through your chest as the room begins to slowly spin. Maybe
you should have gone to lmv school after all ...
A case question is simply a word problem based on a real consulting situation. The purpose of the case
question is not to see if your deodorant works. The interviewer is assessing you along several dimensions
that are important for a good consultant:
1. How do you analyze the problem? Do you employ a relevant framework to organize your
thoughts and structure yow analysis of the case question? Or do you apply the "shotgun
approach" to problem solving, jumping from one idea to another without any logical flow?
2. Are you comfortable with ambiguity? Or does uncertainty make you nervous?
3. Can you differentiate important information from extraneous information? What additional
details do you ask for? Do you use the "80/20 rule" to focus on the most important questions and
to hone in on the most relevant data?
4. Are you focused on finding an actionable answer? Can you distill a complex, ambiguous
problem down to a clear recommendation and a reasonable course of action?
The case interview question usually follows 10 minutes of formal or informal personal interview
questions in a 45-minute interview. Some firms devote one interview in a round to behavioral questions
and the other one or two interviews to case questions. You will know what type to expect before walking
in to your interview.

How are interviews typically*

structured?
Time Total
(Minutes) 25 5-10 20-35 3-5 45

1-4 12 2-4 10-20 2-3

*Be prepared for variations in timing and structure

2008-2009 Case Book 19

Practice enough to be comfortable, confident and sharp in yonr interviews, but not so much that you
sound like a case interview machine. Enjoy this opportunity to solve a problem. You'll be doing it for at
least 2-3 years as a full-time consultant.

Remember to frame your verbal communication as follows:

The Preview (What you're going to do, and why)
The Process (What you'redoing)
The Point (What it means)

Cases are less stressful once you know

what the interviewer is really looking for
Can you break down a complex problem Into smaller pieces?
Do you logically organize Information?
them, and develop an attack plan?

Can you interpret charts, graphs, and data tables?

Do you find creative
Are your assumptions reasonable?
Do you demonstrate general business acumen?
actionable are

Can you persuade others to take actlon?

Do lUke r with

Types of Cases

Brain Teasers
Example: "Why are all manhole covers round?"
The purpose of these questions is to see if you are creative and can think "out of the box" when
you are confronted with an unusual problem.

Market Sizing
Example: "How many gas stations are there in the U.S?"
These questions test .your comfmt with numbers, your ability to identifY key drivers and to make
key assumptions, and your resourcefulness and creativity.
NOTE: Brain Teasers and Market Sizing questions are becoming increasingly rare, but you
should expect to encounter one of them in your interview process. Be ready.

2008-2009 Case Book 20

 r
f
Operations I Profitability
Example: "The client's profits are down. What is going on?"
These questions test your understanding of the profit equation (income statement) and the impact
I
of fixed, variable, and sunk costs. Your interviewer wants to see if you can use a framework to
guide your thought and offer an actionable recommendation.

Strategy I Market Entry

Example: "The client wants to export a commodity chemical to Brazil. Should they?"
These questions test your ability to identify key strategic relationships and relate them to the core
competencies of the company. These questions may also test your ability to perform industry
analysis and provide actionable recommendations for your client.

Mergers & Acquisitions

Example: "The client is a major U.S. hardware manufacturer. They want to know whether they
should buy the upstart in the industry."
M&A questions are increasingly common lately considering the rise in deal due diligence done
by.consulting firms as a result of increases in private equity investing. Show that you understand
the implications of merging two businesses.

Curve balls
You may get other cases concerning government policies, small"scale entrepreneurs and other
non"business issues. Your interviewer is testing you on your ability to analyze and apply structure
to non"business problems.

What type of case problems can I

ect? Il
Why are profits falling?
What new products should we Introduce? Primary
focus of
Should we enter a new market?
case 1
Where to locate a new facility ("site selection") interviews
Should we merger/acquire. company 'IYZ?
How many golf balls are made In the US each year?
How many cans are needed to paint the Delta fleet?
How many dogs are there In California?
Can you walk me through a past project step by step?
How would you manage your prior firm differently?
Why are manhole covers round?
Why do fashions change every year or t\vo?
What are chances of rolling double sixes 3 times in a row?

2008-2009 Case Book 21

Use a matrix like the one shown below to track what types of cases, in what types of
industries, you have done. This matrix contains the most common cases I industries but you
should expect to encounter others as well. Also, don't feel a need to "check every single
box" - the main goal is to balance industries and case types, and to become comfortable
with encountering unfamiliar cases.

Common types of business problems

and sectors covered in case interviews

Case Interview Tips

General Tips
Be enthusiastic: About the interview, the fitm and your future career as a management
consultant.
Be fun: The interviewer is silently giving you the "Pittsburgh airport" test. Would they
mind being stranded in the Pittsburgh airport with you after a delayed flight?
Be positive: Don't disparage yourself. Exude confidence, not arrogance.

Case Tips
I. Take notes: When the interviewer indicates that she's ready to give you a case, pull at your
pen, click out your lead, pivot your paper into landscape orientation and get ready to crack
the case! Especially dming the case stem, take detailed notes.
2. Listen carefully to the objective of the case and note the case facts given. Write down the
case question clearly so you can refer back to it later.
3. Think After the scenario has been set, you must dete1mine two things:
a. Have you been given all the needed infmmation to see the big picture?

2008-2009 Case Book 22

 T
h. Is all the information given relevant to the case solution? l
f
I'
Review your notes to make certain that you understand the question and the intel).ded
direction of the case. If you are unclear about any of the tdrms used, infmmation presented, ''''
or the client's objective, ask for clarification. I'
4. Frame it. Illustrate your approach to solving the case by structuring your thinking on paper
with a fiamework. Communicate to the interviewer how you intend to proceed. The
i'
'
framework serves as your guide to work through and present the answer to your case. If
possible, set fmih a hypothesis as to the final solution (i,e., "On first blush, it doesn't look
f
like this company is in a position to make the proposed acquisition.") I
5. Test your hypothesis. Begin validating your hypothesis by looking at the most significant
issues first (i.e., attractiveness of the target company, its fit with the fitm, acquisition price, t'
etc.) As you ask questions, respond to hints or attempts to steer you in another direction.
Work through each issue set forth in your framework. l
6. Recommend. Once you think you have arrived at a solution (or the interviewer asks you to
!
wrap up), take a moment to organize your thoughts. When you are ready, pitch your
recommendation to the interviewer as though she were the client. Don't waste time
summarizing the past 20 minutes of the case. Start with the answer. Issue your
i
1

recommendation, explain why (2-3 key elements of your analysis), then outliue next steps
that the company can take to put your recommendation into action.
l
!
7. Write it up: Write up your cases as soon as you get home! This way, when the MCC asks
you to submit cases for next year's case book, you'll be all set to go! (We are NOT joking!
The best way to get good oases for you and your colleagues to prypare with for next year's
f
recruiting is for everyone to write up their cases ASAP!) l
i
l
Always be ... I
t
Structuring \ .>J-'o ).._ l
- Is It MECEl -"'"' l)il' '1(<-:;f>
- Is It logically organized? J)f
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- Are_ the most Important Issues prioritized?
Communicating
!;
Am I giving a clear road map:
Wherearewe/whyarewehere7 !
Where are we going? l
- Is my
- Do my
dear and concise?
signals help or hurt me?
'''
- Ar'emywritten notes an effective communication tool? j'
Thinking "SO WHAT?" 1
- How does this relate to the main question I original problem? I
- What are the 200 order Implication over time? l
Is this practical and actionable given our client's situation? 'j
t
,.!
\

2008-2009 Case Book 23

I
 vrru
fb:.iis- CM-r
DeoN'""'-"\
1 I J.-'

Chapter 5: Case Frameworks and Tools

Case interviews do not test your ability to use frameworks. They test your ability to solve problems.
Frameworks are simply a tool that you use to enable you to convert complex, ambiguous problems into an
actionable recommendation. Study these frameworks to develop a basic understanding of how to tackle
cases. Never say: "I will use the 4Ps/3Cs/5 forces to solve this case." Start with these frameworks, then
develop your own approach to solving cases. Iu your interview, show that you understand framework
basics and how to apply them to unique business situations.

Profitability
General Questions: What are the sources of profit? Are there multiple profit streams? Multiple
revenue streams? If so, analyze each separately. Focus on sales mix and sales force incentives.
[ Profit -Total Revenues - Total Cost
'
Totaf Revenues= Price*Quantity

How much can we raise price? How can we increase quantity?

- Does the firm have market power?
- What is the demand elasticity?
- Is the product differentiated? Are there
additional goods and services that we can
charge a premium for?
- Are there substitutes?
- Sell products to new customers
- Increase market share
- Increase market growth
- 4Ps (Price, Product, Promotion, Placement)
- Sell new products to cwTent customers

I - How is our product mix priced?

'

f Total Costs =Fixed Costs + Variable Costs

Understand the firm s cost structure. What are the main cost drivers? What costs are fixed?
Variable? How have costs changed over time? What are competitors' cost structures?

Common costs include: Common cost reduction techniques:

Labor (wages & benefits) Improve utilization of equipment
Materials Outsource
SG&A Consolidate purchasing
Overhead (rent, PP&E) Relocate to lower cost areas
Depreciation Partner with distribution companies
Capital costs Strategic use of!T
R&D

2008-2009 Case Book

 '
The 3 C's: Customer, Company, Competition
This is a basic framework but is ve1y useful. It is especially applibable to business strategy and new
I
market opportunity questions.
I

I
Customer Company Competition
Individual Economics !ndusl/y analysis (5 forces)

- Who is the customer? - Costs - Size, # of competitors,

market shares
- Perceptions - Profitability '
- Loyalty - Capacity to develop - Competitors' responses
product - Current strategy f

I
- Volume
- Capacity to produce - Strategic value of product
- Switching costs product and commitment to product
- Profitability of customer
- Break-even analysis - Corporate goals
- Preference - Experience curve - Capabilities f
-
-
Purchase Behavior
Usage
- Financials - Economies of scale/scope
I
i
- Channels - Cost structure
Market -
- Organization/structure Experience cm-ve
- Size - Intangibles - Resources: financial,
- Growth Fit
channels, organization,
intangibles (brand loyalty, f
- Segmentation
- Shares
- Strategy and vision
- Strengths/weaknesses -
culture)
Relative product 0
I
-
-
Maturity
Trends
- Culture
positioning
- Substitutes l
- Resources
- Expected response to
i
Product
- Organizational Structure
competitive moves
- Price
- Brand equity
- Differentiation - Core competencies
- Life Cycle
f
- Teclmology Collaborators Context !
- Substitutes - Downstream wholesalers

-
or retailers
Upstream suppliers
- Culture
- Politics
- Social norms
I
!

I
- Regulations

2008-2009 Case Book 25

I
l
 Porter's 5 Forces -Industry Analysis
This framework is applicable to new business opportunity and finn stratep questions.

Barriers to
entry Govemment

threat

l
'
Suppliers Competitors .
Rivalry among

threat

Substitutes

Barriers to Entry increase with: Buyer Power increases with:

Economies of scale Buyer concentration, few buyers
Learning curve advantages Bargaining leverage
Absolute cost advantage of incumbents Low buyer switching costs
Proprietary low-cost product design Buyer information
Brand recognition Buyer ability to integrate backward
High switching costs for the customer Availability of substitute products
Capital requirements High price elasticity
Inaccessible distdbution channels Low product differentiation
Access to suppliers
Govt. regulation, restrictions on entty
Expected retaliation
If
1'

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I 2008-2009 Case Book 26

i
 Rivalry increases with: Supplier Power increases with:
Industry growth Lower supplier concentration
Number of competitors Differentiation of inputs
High Fixed costs + low variable costs Importance of supplier's
product/service in cost
High value added
Lower switching costs of suppliers
Intermittent overcapacity
Lower number of substitute inputs
Low product differentiation
Higher threat of forward integration
Low brand recognition
Lower importance of volume to
Low switching costs
suppliers
High baniers to exit

Threat of substitute increases with:

Relative perfmmance of substitutes.
Lower switching costs.
Higher buyer propensity to substitute.

Marketing 101
Target Market Selection and Product Positioning

You might be asked to segment or analyze a mm*et. These questions and ways ofbreaking it down
will come in handy, Calculations are usually involved when segmenting customers and a market:

Questions to ask:

e Which potential buyers should the fi1m attempt to serve? (segment the customers)
How much customization should the firm offer?
If we pursue a certain segment, how would we approach it and how would we
want potential buyers to see us?

Ways of segmenting customers:

User vs. Non-user

Light, Medium, Heavy User
Benefits Sought: Performance Oriented vs. Price-Oriented
Loyalty Status: None, Moderate, Strong, Totally Loyal

Ways to segment a market:

By Demographic: age, income, gender

By Geography: nation, region of a country, urban ''S. rural
By Lifestyle: luxury vs. value-oriented

2008-2009 Case Book. 27

 The Four P's
This is a usefulji-ameworkjor most marketing cases, especially those involving a new product launch

I
I
or expansion into a new market

Product

The physical product itself

The brand name and company reputation
Repair service/financing plans (i.e., additional add-ons)
Questions to ask when making product line decisions:
o Does the product satisfy the target customer in profitable ways?
o Does it offer opportunity for differentiation from competitors?
o What is the impact of this product to the rest of the line? Will it
complement other products, or will it be cannibalizing substitute?
o What is the impact of the new product on the brand's reputation?
Product line planning decisions:
o Increasing product line breadth: ex. A computer manufacturer starts
selling laptops, or a car company starts making SUVs (i.e., a new but
somewhat related product)
o Increasing product line length: beer maker starts making a premium-
quality kind ofbeer, Armani opens the more affordable Armani Exchange
(i.e., the same product but for a different income bracket)

Place (channels/distribution -7 .how you sell the product)

e Account concentration: if there are only a few high-worth customers, then

selling is efficient; if there are many customers, then use a retailer
What kind of sales channel one uses determines the level of control and direct
customer contact

Promotion

e 6M's (for planning communications strategy)

o Market: to whom is the communication to be addressed?
o Mission: what is the objective of the communication?
o Message: what are the specific points that need to be communicated?
o Media: which vehicles will be used to convey the message?
o Money: how much will be spent in the effort?
o Measurement: How will the impact be assessed after the campaign?
Why we use advetiizing
o Create awareness of new product
o Describe features of a product
o Suggest usage situations
o Distinguish product from competitors
o Direct buyers to point-of-purchase
o Create of enhance a brand image

2008-2009 Case Book 28

 e Sales Promotions (3-types; most effective when used to generate short-term sales)
o Consumer promotions: ex. coupons
o Trade promotions: used by manufacturer
o Retail promotions: store discounts or special displays within a store
& Public relations effmis: ex. Press releases, speeches, appearances on the Today
show; firm has less control over the message being given, but bonus is seeming
objectivity of that message
Pricing

8 The other 3 P's usually determine the customer's perception of the value of the
product, and hence the maximum price they are willing to pay
.. Make sure one firm's pricing actions do not have a negative impact on industry
profitability by setting off a round of price cuts
e Price customization (an option, depending on the situation)
o Develop an entire product line: (ex. Hardcover/softcover/audio copies of
the same book) .
o Control the availability of lower prices (ex. It is impossible to get an iPod
for lower than the price Apple sets, unlike clothes, which you can get at a
variety of prices at different retailers)
o Vary prices based on observable characteristics of the transaction: (ex.
Offer quantity discounts to big-volume buyers)

Product Placement (Distribution)

Product positioning and market Channel decision based on product
segmentation: high end, low end specifics, level of control desired and
margins desired
Differentiated good vs. conunodity
Coverage: tradeoff between geographic
Features and capabilities
coverage and cost
Reliability, quality, brand name, reputation
lnventmy levels, turnover, carrying costs
Packagil;lg, size
Transport: alternatives, efficiencies, costs
Service, warranties

I
l
I
I

l
'

I
I
2008-2009 Case Book 29
 Promotion Price
The Buying Process: Considers retail price and discounts
Consumer awareness, consumer MC=MR? Skim (price high, profit now)?
interest, trial, repurchase, loyalty Penetrate (low price, gain share)?
Sales Method: Seek volume or profits?
Pull (ads) v. Push (distr. Discounts) Perceived value, cost-plus-margin
pricing?
5 categories of promotional effotts:
How does price relaie to the market, size,
Ads: medium, reach (share of target
product life-cycle, competition?
market reached) frequency (# of times
reached) Economic incentives to channel
(commissions, margin).
Personal Selling: when direct contact
with buyer is needed Establishes barriers to entty.
Sales Promotion: Incentives to
consumer, sales force and channel
Consumer incentives: coupons,
refunds, samples, contests.
Trading force incentives: Sales contest,
point of purchase displays, spiffs ($ to
dealers), trade shows, in-store demos
.!.
Public Relations and Publicity

Generic Strategies:
Here are a few generic marketing strategies to use when asked to improve flagging sales
or to streamline product or marketing efforts

Focus on what you do best or what you do cheapest

Differentiate product lines to appeal to the widest variety of customers
e Use brand as a means to communicate strengths (without pushing too hard into
areas that the fum is not strong in)
Developing New Products
Always do consumer research and listen to the customer to see what they want (e.g., pre-
lau.nch forecasting, focus groups, polling)

2008-2009 Case Book 30

Internal-External Factors
This framework is especially applicable to new market and company strategy questions. The question
you are looking to answer is whether the firm strategy aligns internal factors with external
environmental considerations.
Internal Considerations
Core competencies of the firm
Company mission aod goals (consider its objectives for employees, the community, the
environment, technology, etc.)
Company organizational stmcture
Firm resources (labor, technology, internal systems)
Environmental Factors
Industry trends using Porter's 5 forces or your favorite market analysis structure
Constraints govt. regulations, laws, union/labor agreements, societal pressures, etc.
Competitor activities: plans for expansion, frnancial strength, etc.

Value Chain Analysis

Use the value chain to:

I. Identify components of costs
2. Identify components of profits
3. Relate activities and core competencies

Porter's typical value chain:

The Value Chain

Finn Infrastmcture
'
Human Resource Management 1
Support i
Activities Technology Development 1

Procurement !
Inbound Outbound Marketing/
Operations Sales Service
Logistics Logistics
I
Primmy Activities i'
t
'
Primary Activities
t
1'
Inbound Logistics - Receiving, storing, materials handling, inventory control, vehicle l
scheduling and returns to suppliers. r
l
I
I
2008-2009 Case Book 31
r

Operations - Transfonning inputs into final product fotm (e.g. machining, packaging,
assembly, equipment maintenance, testing, p1inting and facility operations).
Outbound Logistics - Distributing the finished product (e.g. finished goods warehousing,
material handling, delivery vehicles, order processing and scheduling).
Marketing and Sales- Induce and facilitate buyer to purchase the product (e.g. advertising,
sales force, quoting, chaooel .election, channel relations and pricing).
Service- Maintain or enhance value of product after sale (e.g. installation, repair, supply, and
product adjustment).

Support Activities
Procurement- Purchasing ofraw materials, supplies, and other consumable items and assets.
Technology Development - Know-how, procedures, and technological inputs needed in
eve1y valne chain activity.
Human Resources Management - Selection, promotion, placement, appraisal, rewards,
management development and labor/employee relations.
Firm Infrastructure - General management, plaooing, finance, accounting, legal,
government affairs, and quality management.

2008-2009 Case Book 32

Mergers & Acquisitions
This framework is particularly helpful when one has to decide whether to enter a new market by
acquisition or to merge with a competitor.

Industry Analysis
First, analyze the industry to its attractiveness (Porter's 5 Forces analysis is a helpful tool).
Address the following questions:
Market size and dynamics (capacity, distribution, market saturation, rate of market growth)
Sustainability of profits
Competitive position and likely competitive response. Cost structures
Product differentiation and standards. Substitutes.
Price dynamics.

Company Fit
Second, consider whether the business is a good fit for your fum. See if the core competency
required of the new business is similar to the ones developed by the company in its existing
businesses. Are there any potential synergies? Questions to ask:
Revenue synergies with or cannibalization with existing products.
Distribution costs and ease of access to distribution channels.
Cost of capital, given the risk of the investment
Potential economies of scale and learning curve issues, patticularly with respect to
competition
Cost synergies
Increase on complexity costs
Alternative uses of investment.

Recommendation
If no core competencies are shared and no synergies exist between the two businesses, the film
will have no competitive advantage over another firm and probably should not make the
acquisition. If synergies do exist, make sure they outweigh the increased complexity costs. Be
sure to structure this in the interview as "answer first: "

Microeconomics
Be prepared to draw supply and demand curves if necessaty. This should be no problem if you were
awake during your core microeconomics course! Here is a shmt refresher.

Market Structure
The type of market will detennine the playing field for your client. Refer to your tnicroeconmnics
textbook for more detail.

2008-2009 Case Book 33

 Perfect Competition
Without any product differentiation, a finn will be a price taker. A competitive fitm's demand
curve is horizontal and its elasticity of demand is infinite.

Monopoly
While such firms have significant control over prices, monopolies are also faced with downward
sloping demand curves implying that an increase in price will result in a lower sale volume.
Monopolistic profit maximization is governed by the relationship

MR=MC=P(l+

where Ed is the elasticity of demand. Note that if the demand is highly elastic then there is little
advantage to having monopoly power since MR = MC = Price, i.e., the same as that of a price-
taking competitive fum. Even if demand is inelastic, monopolistic fnms must be careful in their
pricing so that the market does not become too attractive, thus inducing new market entry and
competition.

Oligopoly
This occurs in highly concentrated industries with significant barriers to entry. Films have
marginal control over prices and must consider rival fnms' behavior to detennine the best policy.
Resist the urge to cut prices; your competition will likely match your price cut and you'll both
lose. Bring game theory into play.

Issues to A(ldress
E.: What is the elasticity of demand? Consider effects of price changes and substitutes.
Time: Consider the long-term and dynamic effects of pricing decisions. Demand may be
inelastic in the short run, but elastic long term (remember automobiles vs. gasoline).
Price Discrimination: Consider methods to enhance and support price discrimination
Brand Integrity: Be careful not to price too low, as doing so could compromise the reputation of
the brand
Pricing Tactics: Consider using tactics such as "loss leaders" or "traffic builders".
Double marginalization: Monopolists at multiple stages in the value chain each marks up prices,
producing higher prices to the consumer.
Transfer pricing: The solution to double marginalization for a veriically integrated company, in
which pricing decisions take into consideration

Macroeconomics
Refresh your memory abont these macroeconomic concepts. All definitions below are abridged
versions of definitions found on Investopedia.com, a Forbes Media Company.
Inflation: The rate at which the general level of plices for goods and services is rising, and,
subsequently, purchasing power is falling. As inflation rises, every dollar will buy a smaller
percentage of a good. Most countries' central banks will try to sustain an inflation rate of2-3%.

2008-2009 Case Book 34

 Stagflation: A condition of slow economic growth and relatively high unemployment -a time of
stagnation - accompanied by a rise in prices, or inflation. Stagflation occurs when the economy
1
isn't growing but prices are.
Consumer Price Index (CPI): The CPI is calculated by taking price changes for each item in the
predetermined basket of goods and averaging them; the goods are weighted according to their
importance. Changes in CPI are used to assess price changes associated with the cost of living. '
CPI is one of the most frequently used statistics for identifying periods of inflation or deflation. '
Producer Price Index (PPI): A family of indexes that measures the average change in selling
prices received by domestic producers of goods and services over time. PPis measure price
change from the perspective of the seller.
Gross Domestic Product (GDP): The monetary value of all the finished goods and services

I
produced witllln a country's borders in a specific time period (usually annually). GDP is
commonly used as an indicator of the economic health of a country, as well as to gauge a
country's standard ofliving.

I
Leading Indicators: A measmable economic factor that changes before the. economy starts to
follow a pariicular pattern or trend. Bond yields are typically a good leading indicator of the
market because traders anticipate and speculate trends in the economy.
Lagging Indicators: A measmable economic factor that changes after the economy has already
begun to follow a particular pattern or trend. Some examples are- unemployment, corporate
profits and interest rates.
Money Supply: The entire quantity of bills, coins, loans, credit and other liquid instruments in a
I
country's economy.
Fiscal Policy: Government spending policies that influence macroeconomic conditions. These
policies affect tax rates, interest rates and government spending, in an effort to control the
economy.
I
f
Monetary Policy: The actions of a central bank, currency board or other regulatory
f
If
that determine the size and rate of growth of the money supply, which in ttU"n affects interest
rates.

Finance 101
t
f
General terms:

Risk-free rate: The risk-free rate represents the interest on an investor's money that he or she
would expect from an absolutely risk-free investment over a specified period oftime. Investors
f
commonly use the interest rate on a three-month U.S. Treasury bill since tliere is virtually
no risk of default.
Present value: The cutTen! wmih of a future sum of money or stream of cash flows given
a specified rate ofretum. Future cash flows are discounted at the discount rate, and the
higher the discount rate, the lower the present value ofthe future cash flows.
Discount rate: Rate used to calculate the present value of future cash flows.

2008-2009 Case Book 35

 (Opportunity) Cost of capital or hurdle rate: Expected return that is foregone by
investing in a project rather than in comparable financial securities.
Discounted Cash Flows (DCF): Future cash flows multiplied 6y discount factors to
obtain present value.
Pro-forma: Projected

" ,_

Valuation tools:
"-
---- Payback period: in which project should recover its initial investment
... . .!
Net Present Valu NP A project's net contribution to wealth equivalent to the
. '; present value of cas ows minus initial investment. This is the most preferred form of
'
valuation by academics.
Internal rate of returns (lRR): Discount rate at which investment has zero net present
value.
Multiples: A valuation themy based on the idea that similar assets sell at similar prices.
This assumes that a ratio comparing value to some firm-specific variable (operating
margins, cash flow, etc.) is the same across similar fums. In other words, the theory is
that when firms are comparable, we can use the multiples approach to determine the
value of one firm based on the value of another.

_"\

Useful formulas:

Perpetuity: The value of a constant cash flow CF per year given a discount rate of r 'is
y

Perpetuity with growth: A cash flow CF per year given that grows at a constant rate of
g given a discount rate of r is PV = ..0:
}'-o

General lessons from Finance

Price: "there's always a price too high to make an investment a bad deal, and there's
usually a price low enough to make an investment NPV positive."

l 2008-2009 Case Book 36

 Dupont formula:
Rettt?'n on Assets* leverage ratio=
Asset Growro >'P'rof!.tabthty * ie'l/'{feTage ntUo = - - * - - * .......:.==--
j , , J Sal:s2
Ns:t.
Return on Equity

Basic business risks:

e Is the business generally risky? For example, a toy business selling fad items is
risky because fads go out of public favor.
" Is the business cydlical?
e Is the business sensitive to interest rates?
e Does it face exchange rate risk?
Does it face political risks?
" Does it face logistical rsks?

Issuing debt rather than equity to finance an investment can increase the value of the fum
by reducing the tax burden. However, increasing debt can increase the risk of fmancial
distress since you must pay debt holders.
Costs of financial distress:
0 Direct
o Legal costs, advisory costs, etc
Indirect
o Scare off customers and suppliers
o Agency costs of financial distress
o Debt overhang: the inability to raise fund to undertake good investments
Pass up valuable investment projects
n Competitors may take opportunity to be aggressive

Cash is King
If a company or investor publicly uses its money to buy shares or assets, it is sending a
clear signal. This is a credible, quantifiable signal.
If a company has excess cash, it can do the following:

Grow faster
Acquire assets
Pay dividends to stockholders
Repurchase stock
Pay down debt

31
2008-2009 Case Book
 If a company needs cash:

.. Slow growth
Sell assets
Cut dividends
;:, Issue equity
Borrow money

Three basic concepts for making investment decisions: Strategic fit, valuation, and
quality of execution.

Framework Crib Sheets

The diagrams on the following pages provide visual representations of some key frameworks.
Memorizing these frameworks will not serve you well. Instead, understand the logic underlying the
framework and convert that knowledge into your own personalized approach to framing and solving
problems.

I
2008-2009 Case Book 38

(
 Profitability
Profit

MIT Sloan MCC

Sample Case Framawmks

High Level Industry Analysis

Overview

MIT Sloan MCC

Sample Case Frame>..orks

2008-2009 Case Book 39

 Growth Strategies

MIT Sloan MCC

Sample case Frameworks

Competitive Strategies
>
,.
I

CompeUtlveSlralegles

ii
'

MIT Sloan MCC

Sample case Framewofks

2008-2009 Case Book 40

 Market Entry?

Using Frameworks in Cases

These examples illustrate how you might apply these frameworks during a case interview.

1. New Market Entry Analysis

Stem

The client is considering entering a new market. Should they? If so, how?

Intuition First

What are the primmy objectives of the CEO in this market entry?

What is she expecting to get? And are her expectations realistic?

What are the requirements to do business in this new market?

Diagnosis

New market en!ty cases require candidates to investigate tlll'ee fundamental:

2008-2009 Case Book

 What are the market requirements?
,c(-
What are the capability requirements?
. j

How do we execute our entry? How to enter?

These three questions snggest a potential framework for analyzing new market entty:

.- ':_

Entry
Capab!lities
Scenarios

Analysis

A. Market dynamics
.Market size and growth

What is the size of the new segment we are planning to enter?

r What is the growth rate in this new market?

Demand

What do customers in the market want? What do they need?

What price do customers pay for comparable products now?
Are some cnstomer segments more attractive, higher-demand than others?
How elastic is demand?
Products and services
What products and services are we going to sell in that market?
Can we offer a differentiated product?

2008-2009 Case Book 42

 Competitors
Who are the current players in that market? ,
What are the market shares of these incumbents, om pt:ospective competitors?
How do we expect competitors to respond to our entry? Will they accommodate or
retaliate?
Barriers to entry
What are the barriers to entry? (See Porter's 5 Forces in this book)
Are there any tax issues, subsidies, etc?

B. Firm's capabilities
Organization and people
What are our organizational strengths?
Are employees' skills transferable to the new market?
Do we have enough people to dedicate to that market? Or will we need to recruit new
labor force for our market entry? If yes, will there be training costs?
Transferable assets
What assets do we need to start our business in the new market?
What are the transferable assets to the new market?
Tangible assets: Real estate, property, technology infrashuctme (IT, call center,
Internet backbo11e, etc.), supplier contracts, customers
Intangible assets: Know-how, people's talents/skills, patents, trade secrets,
operational methods (i.e. Dell's !ow-cost ITT manufacturing)
Processes and quality
Are the necessaty processes and quality metrics in place to conduct business in that
market?
Can we ensure the continuing quality of our products?
Systems and technologies
What are the technology requirements of the new market?
What are the systems arid technology infrastructme that we can use in this new market?
Again: Transferability is key!
Financials
What is our cash position?
Do we have strong financials/balance sheet to back up our market entty?
Back of the envelope NVP and payback calculations might be required:
Payback= Total cost I positive cash per year

43
2008-2009 Case Book
 C. Ent1y Scenarios

Start from scratch:

What is our logic to start from scratch?
Do we have enough capabilities to start from scratch?
Struiing from scratch can delay onr entry, are we OK with this delay?
What are the advantages/disadvantages of struiing from scratch?
Acquire an existing player:
What is onr acquisition logic? 'Vhy acquisition? What will we bring on the table?
Is there an acquisition candidate in this new market?
Are we financially strong to acquire an existing player in the new market?
What are the advantages/disadvantages of acquiring an existing player?
Form a JV/partnership with an existing player:

What will we gain from the JV I parinership --what value will we add?
What are the advantages/disadvantages of forming pminerships with an existing player?
Is there any player that is available to form a N /partnership in this new market? If yes,
what will be rules/clauses of the N /pruinership agreement?

2. Mergers and Acquisitio11s:

Stem

(1) A company is planning to merge with company X OR (2) A company is planning to acquire company
X OR (3) A company is planning to patiner with company X. How can you approach to this problem?

Intuition First

What is the M&A logic? Why are we doing this? What is the CEO's objectives/expectations from this
M&A? What is our financial position? What is the target company's strategic, operational, fmancial and
technical situation?

Diagnosis

Merger and acquisition cases require candidates to diagnose four fundamental areas:

1. What is the M&A logic?

2. How will the financials work?
3. How is the target company doing?
4. What are we going to do after M&A- next steps?

2008-2009 Case Book 44

I
 These four questions suggest a potential framework for analyzing M&A transactions:

M&Alogic
Financials
Due diligence
Exit strategies

A. M&A logic
Why does the client want to buy this company?
Increase sales and market share by reaching new market segments?
How are we going to increase the market share? New customers?
Gain from synergies? (be very careful throwing "synergies" around)
What are the synergies?
What value do we add to the merger?
What are the combined strategies?
Decrease average costs
DiversifY risk
Gain tax advantage
Pre-empt or acquire the competition

B. Financials
Is the economy right? Is it right time to buy?
Is the price right? Are there any comparable transactions?
Can we afford to pay the price? If this must be financed, how?
Will the merger hurt olu: margins or any of our key fmancial indicators?

C. Due diligence
Is the industry attractive?
Is the target the right player in that industry?
How secure are its markets and customers?
Will the incumbents accommodate or retaliate?
Can we legally merge with or acquire the target?

D. Exit strategies
Are we planning to keep our partnership or leave after a certain period of time?
Are we going to break the new company into pieces and sell these pieces?
Do we have a potential future buyer in mind?

. 3. Other Valuable Frameworks

Investment (ROI)

Returns
Market attractive- size, growth,
Ability to capture market share
Cost savings contributions to profitability
45
2008-2009 Case Book
 New revenue streams?
Investment

l
Capital intensity
a Source of funds, financing options
Risk
Cost of capital

New Product
Current business
a Product mix
Customer segments
Revenue -Market Attractiveness (potential demand)
Size + Growth
Competitors
Substitutes
Dist
Costs
Cost oflaunch
Cost of operations
Impact on cmTent business:
Brand
Synergy
Cannibalization
Competitive response

'
. Patent Development
I In house (risky, 100% returns)
Pa1inership (less risky, 50%)
r Licensing (no risk, low returns)

! Deloitte Value Finder

Deloitte uses this framework to understand how a company can increase shareholder value

Revenue Growth
Volume
New Customer
Retain and Grow Current Customers
Leverage Income Generating Assets
Price Realization
Operations Margin
SG&A
Customer Interaction
Cmporation\Shared Services
COGS
Development and Production
Logistic & Service

2008-2009 Case Book 46

 Income Taxes
Assets Efficiency
PP&E
Inventory
Receivables & Payables
Expectations
Management Govemance
Execution

Core frameworks and tools to draw from

Supply and demand (Inc. elasticity)

Profit tree SWOT
Cost structures: sunk, fixed, semi- a Growth-share matrix
variable, marginal, average,
STP {Segment, Target1 Position)
etc.
Market I product expansion
oBreal<even points

3-Cs (Customers, Competitors, Product I technology life cycle

Company)
Organizational (7-S's)
Value chain I supply chain
Core competencies
.,Porter's five forces'
Macroeconomics
oPorter's generic strategies

2008-2009 Case Book

41
Chapter 6: Mock Case Interviews

Playing the Interviewer

RULE #1 - Know the case you are giving, and know it very weU. Don't try to fake it by
reading the case in real time
Start with a behavioral question or two:
Every interview will incorporate some infonnal (sometimes fopnal) initial conversation about
the candidate's experience, interests, and aspirations. Your mock interview will more closely
approximate a real interview if you do the same.

Stay in the role of a consultant interviewer:

Play the role of a consultant who is evaluating the candidacy of the person acioss the table.
Being a friend to your interviewee during the interview will do him a disservice:
Don't give data away. Let the interviewee ask for data on his own. Ask guiding questions
only if the interviewee is stuck for long. If everyone who you give a particular case to is
nailing it, perhaps you're being too generous.
Pressure the interviewee to be specific when perfonning analyses, mnning calculations or
making recommendations.
Stay in character. Don't deviate from your role as veteran consultant.

Respond to questions with questions:

If the interviewee is fishing for data or direction, or if you feel that you're being too easy 6n
the candidate, try answering questions with questions of your own, such as "What do you
think?", "Are you sure?" and "Can you be more specific?"

2008-2009 Case Book 48

 Thoughtful interaction interviewers
and candidates is critical to success
If the candidate ... You should ...

Change direction and ask questions that will force them to refocus

Indicate that you have enough Info about a particular area

Encourage them to move on to other aspects of case

Divulge Information you have that may be hi:!lpful

Ask questions with Increasing specificity and focus
"Help" them along and ask questions fn other areas
Ask them for his/her reasoning
If they are wrong, this gives an opportunity to rethink
this

This demonstrates ability to draw strong conclusions and summarize their

Issues succinctly

Take notes:
Interviewers will often take notes during interviews. This can be disconcerting, especially
when the interviewer statis scribbling while you know you're babbling. You want your
classmates to be ready for this situation if it arises in a real interview.
Use the feedback foim in this book to take note of what the interviewee does well and what
didn't work. After a 30-minute case, you won't remember everything that transpired, so
refening to your notes can help you give meaningful feedback.

Give precise and meaningful feedback;

Take 5-15 minutes to reflect on the interviewee's perfo!Tllance in the behavioral questions
and case and discuss what should be done better next time.
Was the initial structure effective? Did the interviewee refer back to it during the case? Was
the interviewee structured throughout the case?
Did the interviewee nail any quantitative questions? Was there a better approach?
How did this interviewee fare in comparison to other classmates who you've given this case
too? Which aspects of this person's approach were unique (in both+ and- way)?
Was the interviewee action oriented? Did she drive the case? Was she confident?
Did the interviewee give a direct, concise recommendation? Was she "answer first?"

2008-2009 Case Book 49

 Work with a team, and play the "observer" role

Especially early in the case interview learning process, it can be beneficial to observe a mock interview
and take notes. The downside of this is you "use up" the case that is being given, but there is a very strong
upside to quietly working along with a case while you aren't personally in the hot seat!

Each team member plays critical,

complementary roles in practice interviews

Request focus on your

development goals Use attitude

Arrive on time and Work case along with Provide honest,

(paper, pen) interviewee constructive feedback
Use timeD Pay attenllon to delivery Incorporate best
attitude and relationship w/ practices into your own
interviewer
Read case 23 limes Prepare for interviev;ee -Provide
Ask about interviewee's "curveba!!s" constructive feedback
development goals Slay In character Incorporate best
Create your ncharacter" practices Into your own
approach

Have fun!

Case preparation can be a frustrating leaming experience. Almost everyone suffers through difficult
moments and goes through phases of discouragement- be honest with yourself, work diligently and stay
positive. While it's important take the process seriously, it's also impotiant to have fun along the way. As
you achieve case mastety;you will begin to have more fun with cases and this will show.

2008-2009 Case Book 50

. MCC CASE INTERVIEW PERFORMANCE EVALUATION FORM
Date I Name .1 Case I Source

c::.
PART 1- Section Notes
Listening and Clarifying the Problem:
Took detailed notes
Asked appropriate clarifying questions
Paraphrased, not regurgitated, client situation
'
Structuring Approach: --.;:;;
Broke the problem into MECE sub-Issues
Used appropriate frameworks
l -----.._J
Customized to specific problem
Organized lnfonnation logically
Prioritized key Issues

'
Gathering and Analyzing Data: __,.
Walked intetviewer through thinking
Continued to use structure and frameworks
l !'
Prioritized data requests .

. Probed critical areas

Handled ambiguity
Made reasanable assumptions

. Demonstrated general business acumen

Performed public math

.. Interpreted charts, graphs, and data tables

Found creative ways to Identify strategic insights

. Used facts to build logical arguments

Synthesized findings
'

'

!
Making a Recommendation:
.. Developed clear recommendations I I
.. Stated findings, not process, of analysis
Considered Implications to client
Discussed trade-offs/caveats/next steps
Proposed practical and actionable ideas

PART II- Behavior and Communication

Poise and Composure:
Stayed calm and professional under pressure
Displayed confidence through tone and presence
Managed time constraints and drove to an answer
Demonstrated "client-ready" presence

Communication Skills:
Articulated thoughts clearly and concisely
Avoided overused words and fillers
Used charts, tables, and graphics
Listened to the interviewer and took hints

PART Ill- Overall Performance __.

Rockstar 0 Above Average 0 Average 0 Below Average 0 .-------- .

..
 Reading the cases
Case interviews are not all organized with the same stmcture. Some cases are organized very
fmmally and will lead you from phase 1 (framing the problem) to phase 2(analyzing markets,
customers, profitability, etc), to phase 3 (math calculations), to phase 4 (your recommendation,
always "answer first"). Other cases are more of a conversation, or move between phases more
seamlessly, or employ a unique or "curveball" structure.

In this book, we have erred on the side of providing more stmcture and content to our cases, rather
than less. We believe this will allow you to understand how to effectively give the case. However,
you will know that you are getting a good intuition for giving cases, when you no longer feel
constrained by the formal stmcture of the cases in this book. Once you are comfortable giving cases,
put yourself in the head of the consultant interviewer. Don't be afiaid to customize your cases to add
your personality to your case interviews.

Name of the case (give this name to the interviewee before starting)
i Company whose interview this case is based on

All cases start with a case stem. Start the case by reading the stem to interviewee. Feel free to
use your own words ifyou wish, but be sure to include all important datafiom the case.

l't phase: This title will describe the general vurpose o(this section

Behind the scenes: Here you will find private instructions for you, the interviewer. Don't read
this aloud. Use this information to guide your approach to giving this section of the case.

Interviewer: Here is the information/questions that you will actually give to the interviewee.
Again, feel ji-ee to use yo'w: own words or just read the text verbatim.

Possible Answers: How individual interviewees answer questions varies drastically and there
is no right answer. In fact, ifyou give a case a few times, you '11 inevitably find someone

2008-2009 Case Book 52

who gives a better answer than the "possible answers" you'll find listed here. these
case write-ups are based on one person's recollection of their experience with this case.
I

Some cases will include a "Case Data" section. Don't just give away the infonnation in a Case Data
section. Provide the data in response to relevant questions or observations fiom the interviewee.

All cases end with a "Wrap-up" or "Recommendation" section. Some examples of prompts:

"Here comes the CEO, what are you going to tell her?"
"You've perfmmed a strong analysis so far. Please swnmarize your fmdings."
"Take a moment to review yonr work, then provide me with your recommendation."

2008-2009 Case Book 53

 Chapter 7: Brain Teasers and Market Sizing

1. Booz Allen Hamilton Brain Teaser

Detetmine the true economic value of a soccer player in a soccer club.

Brain Teaser

Behind the scenes: This has been designed to be a very open ended question and it can be approached in
many ways.

Possible Answers: As always, the "rightness" of a response is a factor of how logically you organize your
answer, and the extent to which the interviewer follows your analysis.

Bottom-up: Look at theplayer's characteristics and previous contribution and compare them
to those of other players in a similar position. Also the revenues from sales of merchandise
associated with that player should also be added.
Top-down. The revenue of the soccer club (for example $100 million) is split between the
different players on the team and other parties.

Interviewer: Does the sum of the economic values of all the players equal to the club's revenue? Why or
why not?

Possible answers: No, these sums would not be equal for two primary reasons.

I. A soccer club is guaranteed a cetiain level of ticket/season pass sales coming from loyal and
passionate suppmiers regardless of the team's performance.
2. The coach of the team can be very important in extracting the most out of the teams' players
and as a result should be responsible for some of the club's revenues.

Behind the scenes: A successful interviewee will perform the required analysis, and will then present a
clear answer to the stated question.

2008-2009 Case Book 54

Interviewer: Here comes the club president. What are you going to tell

Possible answers: An individual player's economic value is that players share of the franchise's total
profits, weighted by that player's value relative to other players and adjusted to account for intrinsicvalue
in the soccer club.

55
2008-2009 Case Book
,.

2. McKinsey Market Sizing

Calculate the annual revenues of Mercedes Benz in California.

Brain Teaser

Behind the scenes: This is a market sizing question in which you need to go through all of the numbers
and your thought process with your interviewer and then deliver your solution.

Interviewer: We are more interested in your logical though process rather than the actual answer that you
generate.

Possible Answers: Use a series of steps to hone in on an estimate

I. Estimate the population of California 40M

2. Estimate average cost of a Mercedes 30K
3. Estimate# of people who could afford a Mercedes(% of above) 5% 2M
4. Estimate #of the subgroup who could drive it (% of above) 25% 500K
5. Estimate market share of Mercedes in luxury car market 20% lOOK
6. Estimate average used lifetime of the average Mercedes 5yrs
7. Divide the number of people in Mercedes' market ( 6) by used lifetime (7) 20,000

This is a good question on which to perform a quick reasonableness check and/or sensitivity analysis. For
instance, "If I am grossly overestimating the % of people who can afford a Benz, and if the actual number
is 2%, that would drop the total number of cars inCA from 20K down to just under !OK cars.

Conversely, Mercedes is an asp irationa! brand, so people might buy a Benz even if they can't afford it,
resulting in 10% of the population being able to afford it. I think I could say with confidence that there
are between 10 and 40 thousand Mercedes Benz's in California."

2008-2009 Case Book 56

3. Bain Brain Teaser

You are alone on a deserted island with a completely stocked supermarket. The island is completely
empty except for the supe1market. For how long could you survive?

Brain Teaser

Behind tlte scenes: There is no single correct answer, but instead this case is testing creativity and
structure.

Interviewer: We .are more interested in your logical though process rather than the actual answer that you
generate.

Possible Answers: I would organize my provisions into 4 groups:

Necessities such as food and water

Medical supplies to keep me healthy and cure my ailments
Rescue supplies to attract rescuers because my best chance of surviving in the long run is to be
found, such as flares, fires, radio transistors, etc.
Perishables. Plant the seeds from the fiuits and vegetables for a sustainable source of food to
last beyond the expiration of the perishables. Use perishables for compost.

Behind the scenes: Make sure that the interviewee goes through the math calculation to mrive at a frnal
answer.

57
2008-2009 Case Book
Chapter 8: Cases

Integrity
You are embarking on a career where reputation and integrity are paramount.

The cases in this book are based on actual cases that your classmates received last winter and this past
fall. We base our case book on real cases because we believe doing so provides you with the most
effective preparation material. We do not base our book on real cases to give you an unfair advantage in
the event that you are given a case in an interview that you have already seen dming interview
preparation. In fact, using real cases means you may face tests of your integrity.

Consulting firms detest dishonesty. If they discover during or after an interview that you willfully
received a case with which you were familiar, you will not get the job, your reputation will be irreparably .;

damaged with that firm and other finns (yes, they talk to each other), and the MIT Sloan community will
suffer from your lack of integrity.

Conversely, consulting firms value honesty. If you hear a familiar stem, pause the interviewer and say
"I'm sorry, but this sounds familiar. I think I may have received a similar case from one of my peers
during a mock interview. Could you give me another case?" The interviewer will gladly give you
another case. They have plenty to choose from.

Do not try to get away with taking a case that you already prepared.

Eam your intemship by cracking a new case on the first shot.

2008-2009 Case Book 58

 1. Hungry Hospital (Deloitte)

Stem
Your client is Hungry Hospital. It has eight hundred beds and is located in a metropolitan area.
It supports both in-patient and out-patient care. It accepts patients regardless of their ability to
pay. Last year, it had revenues of $1.2 billion. Hungry Hospital is currently under budget
pressures, but has received bond approval to restmcture its food services division. The division
provides food for all of its patients. The hospital must decide whether to outsource or build the
capability to provide those services.

1'1 phase: opening

Behind the scenes: The answer itself is not important in this case. Do not focus on the numbers;
encourage the interviewee to not make calculations. The most important aspect is the stmcture
and thought process that is set out in order to reach the answer.
Interviewer: How would you stmcture your decision?

Possible Answers: Compare the NPV, and/or break-even analysis between the two alternatives.
Consider outside non-financial considerations like quality and any additional funding. Consider
practicalities such as space, employees, etc. Here it is also fine for the interviewee to walk you
through a structure. If you choose this option, ask the interviewee which metrics he/she wbuld
use to make the decision. The candidate's answer should include the NPV method.

znd ohase: Data Analysis

Behind the scenes: Do not give all the data. Give extra data only when specifically asked for.

Interviewer: How would you get the data necessaty to conduct your analysis?

Possible Answers: There are a number of possibilities here. The most important aspect is that a
bond measure was approved in order to support the project. That means that prior research on
much of the data has already been conducted. Other considerations include market research and
requesting quotes :fiom vendors and contractors.
Additional information could have been received by requesting information about nearby
hospitals for comparison. The interviewer could reveal that nearby hospitals all outsource their
patient meals.
Interviewer: What do you think are the costs associated with each option?

2008-2009 Case Book 59

Possible Answers:
Outsourcing: Costs per meal from a vendor; staff and management

Building own capability: Up-front costs (fixed costs); yearly variable costs like ingredients, t/
labor, insurance, utilities, and space.

3rd phase: Additional Considerations

Behind the scenes: Allow the interviewee to brainstorm and justify as many possible
considerations as possible. Challenge them when appropriate.

Interviewer: What other considerations beyond cost-benefit analysis can be considered?

Possible Answers: Considerations like quality, additional funding, public suppoti, quality
comparisons with other hospitals, and synergies with existing operations should be considered.

As in the previous phase, the interviewee could ask for additional information about nearby
hospitals. In this case, the interviewer could reveal that nearby hospitals all outsource their
patient meals.

Recommendation
Behind the scenes: There isn't any right or wrong answer in this case. Just as long as the
recommendation is confidently delivered and based on facts from the conversation, the
interviewee should be fine.
11. we<..A-'!t> pwsw..
+z:..:)"" """ 6{\'!__
UM.uvt<.. ILW C:Auuf-5

2008-2009 Case Book 60

 2. Beverage Manufacturer (McKinsey) '

Stem
Our client is one of the top three beverage manufacturers in the US. They are thinking of
launching a new non-sparkling flavored water product. The company is a vettically integrated
beverage manufacturer that makes the drinks, has five bottling plants, and owns their own
distribution channels. They have asked us to determine whether or not they should launch the
new product, how to do it, and what the marketing strategy should be.

Phase 1: Background
Interviewer: Let the interviewee ask questions from their structure, but make sure that they ask
some variation of the following questions about the beverage market, and give these answers.
What is the size of the entire water market? Answer is: 8 million gallons sold per year
Specifically, what is the breakdown in the water market, and what percentage of sales are in
sparkling versus non-sparlding? The interviewer should now provide the following graphs (the
second graph represents a further breakdown of the 10% show in the first graph: 02 and Easy
Drink are flavored water products.

onsparklin
10%

Easy Drink
t8%

02flavor
12%
Others
70%
Sparl<Jing
90%
.,'

The interviewee should now volunteer some key insights, which should include:

-- Flavored water represents a small share of the overall market

Only two competitors have large market shares -7 our client may have an oppommity
to emerge as a third large competitor in this highly segmented market
How will the drinks be packaged?: Everyone packages their water in 16oz bottles, and our client
will do the same (*this will be important for the market sizing)

61
2008-2009 Case Book
 How will the drink be priced?: $1 per bottle
Phase 2: Market Sizing
Interviewer: Ask tl1e interviewee to do a market sizing and then detennine how long it would
take to break even on this product
First, the interviewee should calculate the size of the flavored non-sparkling water market:
10% of 8 million gallons= 800,000 gallons of flavored non-sparkling water sold each year
Each bottle contains 16oz; there are 64oz in a gallon, then 4 bottles make a gallon.
800,000 gallons*4 bottles in a gallon= 3.2 million bottles sold each year in this market

Phase 3: Break even analysis

Interviewer: The next step is to figure out how long it will take to start making money on this
product. Give inf01mation on the margins:
Costs = 90 cents per bottle
Key Insight: The interviewee should see that since each bottle is sold for $1, the company makes
I 0 cents on each bottle

Interviewer: The launch will cost $400,000. How many bottles the client will have to sell in
order to break even?
Interviewee: $400,000 /10 cents per bottle= 4 million bottles need to be sold

Key insight: The interviewee should see that 4 million bottles is larger than the entire annual
market for such products, so it will take a few years to reach this amount (assuming not change
in market size).
Interviewer: So how many years will it take?

Interviewee: Looking back at the graph, the interviewee should detennine a reasonable market
. slmre goal or estimation that this product will grab. Here are some possible thought processes:
Since the new entrant is a major company, it should come in strong with brand name power
Since the other main competitors have 12% and 18%, and our product is backed by a strong
company, perhaps this product will come in somewhere in that range. (Any estimate that is
backed by logical reasoning and reasonable assumptions is acceptable here.)
Using 15% as an estimate; the calculations should look like this:
15% of3 .2 million bottles = 480,000 bottles to sell each year about 0.5 million
4 million bottles I 0.5 MM bottles it will take 8 years to break even

2008-2009 Case Book 62

 An excellent candidate would comment that 8 years is an "eternity" in a market like beverages
(especially because new beverages emerge constantly and trends change).

Phase 4: Other marketing issues to consider

'
Interviewer: Knowing this infotmation, how should the client position the product in the market?
Interviewee: Should ask for information on how the two main competitors are positioning their
drinks. \\Then she does, show the following chart

Low-calorie 02 Flavor Easy Drink Other

healthy drink?

Oz Easy Other
Sports drink?
Flavor Drink

Other
Leisure 02 Flavor
beverage? Easy Drink

0%
Percentage of respondents

The key takeaways from this chart are:

@ our beverage will be in the "other" categoty and need to make a name for itself there
@ our client should position the drink as a sports drink or leisure beverage, since those
are the categories where "other" has the largest market share

Interviewer: Ask to brainstmm some problems with this new venture. Possible answers include:
changes in the market landscape for beverages (perhaps flavored water is a fad?) and
cannibalization (how many other similar products does this company make?)

Recommendation

This is probably a questionable investment. It will take some time to break even. However, if
interest in this kind of product remains strong, and the company can leverage its existing
strengths to get an inmtediately strong market share, this has potential for being a profitable
product.

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2008-2009 Case Book
;,--

3. Fruit Juice (Bain)

Stem
Bain is serving a private equity client thinking of purchasing a fresh fruit juice manufacturer. The
company operates on the West Coast and serves the high end health food market. Currently
servings are in 16 oz bottles. The juice is sold in high-end delis, cafes such as Starbucks, and
large upscale grocery chains such as Whole Foods. Last year they had $90 million in revenues
and they have been growing at 15% for the past 3 years. They have strong sales and marketing
teams and a strong brand name. The private equity company wants us to identify whether the
company is an attractive acquisition. What are some things you would look into?
Phase 1: Structuring the problem
Behind the scenes: First part should be broad. Allow the candidate to brainstorm.

Interviewer: How would you think about evaluating this opportunity?

Possible answers: Important issues to hit:

" Industiy dynamics: size, growth, drivers of purchases, trends, competitors' market share,
new entrants, customers
Margins: price, cost structure of the firm (compare to competitors), possible future
changes in the cost structure due to outside forces
Private Equity Fit: Is the price fair? Is there an exit strategy? How does the potential
acquisition fit with the cunent portfolio, and would there be auy synergies?
Phase 2: Digging deeper in industry dynamics
Interviewer: First let's look at the industry dynamics. The high end juice market in the US is
$lB. Our client is the third largest presence in the industry. The number 1 and 2 players have
70% of the market. The market overall is growing at I 0% annually. What are the one or two
most relevant pieces of information you'd like to have about the industry landscape?
Possible Answers:
.
Are the two top players only operating on the west coast or are they nationwide?
How have they been able to capture such a big share? Is it because they've been in the
market longer, (our target looks like a more recently established company given it only
operates on the west coast) or because their product is better?
Interviewer: (give the following infonnation requested) The two top players operate nationwide.
They have been in the market for longer than the acquisition target.

2008-2009 Case Book 64

 Key Insight: The target company has been able to be number three even though it is competing
with bigger national players. If it goes national, it has the potential to be a big player because it's
been growing faster than the industry. Our target's growth numbers suggest that its product is
comparable to that of the top players and would be successful in the new markets.

Phase 3: Private Equity Fit

Behind the scenes: Now come back to the acquisition part of the structure. Guide the
conversation to a point where the interviewee asks the following question:

Interviewee: Before I dig deeper does the client have anything in their portfolio that could
. generate synergies?

Interviewer: Yes, they own a low end soda and bottle water manufacturer makes private labels in
US and Canada. The private labels are sold at retailers like Walmart and CostCo.

Key Insights: (guide the conversation to make sure that the interviewee hits on most of these)
Synergies usually come from manufacturing, distribution charmels, marketing etc. In terms of
manufacturing, there probably aren't big synergies because the manufacturing
is not similar to sodas (different kinds of ingredients, markets, processes, quality standards).

Then one might think of trying to sell juice in these charmels because there are existing
relationships BUT I think this would hurt the company in two ways: First, the placement of a
high end product in a low end retailer it would hurt the brand image. Second, retailers like
Walmart will use their buyer power to try and push prices down.

Also, the competencies of already-owned sales and marketing teams don't line up with this
business.

Interviewer: So, what is your overall feeling about this acquisition's potential for synergie (just
make sure that there is a clear wrap-up for this section before proceeding to the next)?

Interviewee: The company itself seems promising, but in te1ms of working with other companies
in the po1tfolio, I see no obvious synergies.

Phase 4: Company Profitability

Interviewer: Okay, we know this is a growing company, but now let's look more closely at
profitability, COGS are 75 cents per bottle, manufacturing is 20% of revenue, sales and
marketing is $15M, distribution is $30M. Each bottle sells for $2.50.

Interviewee:
Revenue $90M
COGS $90M/$2.5- 36M bottles x $0.75- 27M
Manufacturing $90M X 0.2- 18M
Sales/Marketing $15M
Distribution $30M
Profit $0!

65
2008-2009 Case Book
Key Insight: They are not making a profit. We could look at some ways to improve this.

Interviewer: How would you go about doing that?

Possible Answer: I'd look at it from two perspectives, increasing revenue and decreasing costs.

Interviewer: Let's brainstorm. What are some ways to cut costs?

Interviewee: (as many of these as possible should be hit on)

Consolidate suppliers -centralize procurement

Automate the factory- increase efficiency
Change packaging to make it lighter without hurting the high end brand image -
decreases fuel spending and thus distribution costs
Reducing employees (especially higher ranking ones)
Get rid of less profitable juice flavors tlnough profitability analysis and identify the lines
that we could let go. There would also be a potential to use shelf space to sell more of the
profitable types.
Interviewer: Good. Now, what ideas do you have about increasing revenues?

Interviewee: Look at price. We are selling this at $2.5, what's the competitor's price? (make sure
the interviewee asks this; otherwise there won't be grounds upon which to reach a conclusion)
Interviewer: Also $2.5. Would you raise prices?

Possible Answer: (others are acceptable if backed up by good logic and ideas, but this is
probably the best) No, because there are more established comparable products with the same
price this is a bad idea. We would either loose market share or potentially spark a price war ,
which would hurt margins. But we could look at some increased distribution channel penetratio'n.
Given the product's high image we could go into hotels, catering companies, restaurants, etc.
Recommendation
Interviewer: So do we tell them that this is an attractive acquisition or not?

Behind the scenes: The key here is to be succinct. But overall, this is an attractive target. Though
the company is currently not making profits, there are areas to cut costs and increase revenue and
the company is growing faster than the industry.

2008-2009 Case Book 66

4. Consumer Packaged Goods (Bain)

Stem
Our client sells Consumer Packaged Goods in convenience stores. They have 500 salespeople
who personally visit the stores 2-6 times a year and are responsible for tracking and restocking
the inventory, monitoring the expiration dates of the product, and for selling to the stores. The
sales force visits 125,000 stores per year. The client wants to increase its efficiency by raising
sales force visits to stores visits by 10% and increase sales by 20%.
Phase 1: Focus on the number of store visits
Interviewer: What are some ways that we can look to increase the number of visits per year?
Possible Answers: Expand geographically and in# stores, prioritize which stores to visit more
Interviewer: The sales force works 40 hr. weeks and is at capacity with regards to number of
store visits. Given these constraints, how can we implement your suggestions? What factors
should we explore further?
Possible Answers: The interviewee should ask for a salesperson's tasks and schedule.
e 25% oftime spent stocking, monitoring expiration dates and counting inventory
e 25% oftime spent selling
25% oftime spent on administrative tasks, i.e. paperwork
o 25% oftime spent driving

Interviewer: What are some ways that we can make this process more efficient?
Possible Answers: Automate processes by reducing paperwork; scan the products instead of
manually checldng and writing on paper, work on driver's routes to make trips more efficient.
Interviewer:
By scanning products, we can reduce the stocking time by 50%.
e By adding GPS systems to the cars we can save 25% in driving times
e By going paperless and eliminating forms we can reduce administrative time by 20%
Finally, all these changes will also result in increased efficiency in selling by 20%.
What overall efficiency savings does this translate to?

2008-2009 Case Book 67 i

J
 This gives us a of5 + + 7.5 + 8 = 28.5 hours
40-28.5 = 11.5 hours which is approx. 30% increased efficiency

Key insight: These changes have potential for substantial efficiency improvements, including
saving enough time to increase the number of visits by at least I 0%.

Interviewer: What are some potential challenges associated with increasing visits?

Possible Answers: Before committing to more visits, investigate if there even is an oppmtunity
to visit a larger number of stores. Longer drive times to get to new stores may counteract
efficiency improvements. The sales force may also be resistant to changing their routines.

Phase 2: Sales improvements

Interviewer: What are some factors you would want to look at in analyzing the potential for
increasing sales?

Possible Answers:

The success rate of multiple visits - what increase do we see in sales based on number of
visits
Sales data based on store size - are we more successful in larger or smaller stores

Interviewer: This chart shows the rate of sales per visit to different store sizes.

Possible Answers: We are not getting extra value from additional visits in the small stores. We
should focus our efforts on targeting multiple visits to as many large stores as possible.

Interviewer: What are some challenges associated with focusing on only the larger stores?

2008-2009 Case Book 68

Possible Answer: Larger stores are going to service larger areas, so they will be more spread out
geographically. This will add to the drive time. They may be chains, and therefore if one refuses
to sell more of the product, perhaps all of them will, because they are dictated by a corporate
purchaser.

Recommendations
Ask the interviewee to round up the points that have been covered and present a final
recommendation. This is a more open-ended and qualitative case, so the recommendation will
depend on the points that were raised during the discussion. Good answers should be well- - j
organized and confidently delivered with logic to back up the assumptions. '

..;
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2008-2009 Case Book 69

 5. Sandwich Shop (OC&C)

Stem

Our client is considering investing in a chain of sandwich shops which owns 50 stores in the
Mid-Atlantic region Each store makes 300 sandwiches per day and charge $5/sandwich. The
sandwiches always sell out. Should the client invest in the sandwich shops?

Phase 1: Background

Behind the scenes: Because stem doesn't say very much the interviewee should investigate the
chain's business model (i.e. this should be explicit in the interviewee's structure).

The interviewee should definitely ask what the costs are.

There are only four main costs: ingredients, labor, electricity, and rent (they don't do
delive1y), which amounts to $400 per day per store.

The intetviewee should ask about ingredient costs (bonus points if he/she asks if the store makes
multiple kinds of sandwiches). Store makes an equal number oftlnee types every day:

1st kind costs $4 to make (33% of sales)

2"d kind costs $1 to make (33% of sales)
3ro kind costs $6 to make (33"% of sales)--+ key insight: loosi'ng $$on type 3!
f
The intetviewee should ask is why the company has decided to make 300 sandwiches a day (if
not, make sure to hint). The answer is that this is the number they realized would ensure a
complete sell-out every day at $5/sandwich. Key insight: The company is setting prices to
maximize output, not profit!

Phase 2: Profitabilitv of the Chain

Interviewer: Now ask the inte1viewee to detetmine profitability.

(100 * $4) + (100 * $1) + (100 * $6) = $1100 spent on ingredients every day
$1100 + $400 = $1500 total daily costs

300 sandwiches * $5 = $1500 total daily revenue, i.e. profit= OJ

Inten,iewer: Why is this, and what should they do to be more profitable?

Interviewee: The sandwich shops are focusing on the wrong metlic. By capping production at
300 in order to sell out completely, they are, in effect, setting prices to maximize sales, not profit.

Interviewer: \Vhat cmTective action would you suggest to increase profits? (let the person
brainstonn)

2008-2009 Case Book 70

 l
:'

Possible answers: Raise prices, change product mix towards lower-cost sandwiches, differentia!
prices between different sandwich types e

Phase 3: Possible price increase

Interviewer: Say, for example, the chain raised prices to $6 a sandwich. At this price, they would
sell only 225 sandwiches a day. Keeping all other factors the same, how does this affect profits?

Have the interviewee calculate the proposed profit;

Costs:

300- 225 = 75 sandwiches not sold

Given that there will still be an even three-way split, that's 25 of each sandwich type

(25*$1) + (25*$4) + (25*$6) = $275 less per day that they're spending on ingredients

$1500-$275 = $1225 daily costs

Revenue:

225*$6 = $1350 made per day

Profit;

$1350- $1225 = $125 profit per day

Key Takeaway: By raising prices, they make more money, even though they are selling fewer
sandwiches.

Phase 4: Other ideas (brainstorming)

Interviewer: What are some challenges that might face this business?
Possible answers: volatile food prices, new competitors, etc.
Interviewer: What are some other ideas the chain could do to make more money?
Possible answers: adding delivery, selling other things like drinks and ice cream, catering to
offices, etc.

Recommendations

Ask the interviewee to sunnnarize his/her findings. A good answer should statt with a fitm
answer on whether or not to purchase the chain (yes because we know how to increase
profitability). Then he or she should explain the cutTent state briefly, and go into what the chain
should do to improve profitability. A good recommendation should be concrete and therefore
include a statement about experimenting further with the new output and pricing model to find
an optimal pricing structure.

2008-2009 Case Book

71
 6. Rental Cars and Frequent Flyer Miles (BCG)
. '

Stem

Our client is a US airline with a popular frequent flyer mile program. They sell frequent flyer
miles through partnerships with credit card companies, hotels, and rental car agencies. While the
business overall has been healthy, they have noticed a sharp decline in their frequent flyer miles
revenue from the rental car segment: a 50% drop in the last two years. They have asked us to
determine the cause for this loss in revenue, and what they can do to reverse the trend.

Phase 1: Case Facts

Behind the scenes: Let the interviewee and his/her structure drive the first part of this interview,
but give the following information if he/she asks questions about the following topics ..

Hist01y ofjiequent flyer program: The frequent flyer program has been in place for over 20
years. It was created for two reasons: 1) competitive advantage, and 2) retention of customers.
This airline was among the very first to have the program, but now almost every airline has
fiequent flyer miles.

How do car rental agencies sell these miles?: An agency will advertise that customers can get X
fiequent flier miles per car rental day. When customers request the fiequent flier miles, they get
the miles and the agency pays the airline for the transaction.

More facts about revenue jiom car rental agencies (only if the interviewee asks for it):
There are 7 major car rental agencies in the countty
5 out of the 7 agencies are partners with our client
These 5 agencies comprise 97% of all rental car business in the US.
Number. of cars rented has not gone down
Days per rental have not gone down
It is fair to assume that our frequent flyer members would sttongly prefer to rent a car
that came with miles as compared to a car that did not come with miles

Key Insight: What has decreased is the number of frequent flyer miles sold per day. The next
question should be "Why?" The rental car companies wanted to lower their own cqsts per rental
transaction by paying less for frequent flyer miles. They asked the airline to lower the piice per
fiequent flyer mile, but the airline said it couldn't do that. In responses, the agencies have simply
started offering fewer miles per rental.

Phase 2: Possible solutions to problem

Interviewer: Ask the interviewee to brainstonn some options.

Possible answers: Many logical answers are good, but let him go until he hits upon this (if not,
prompt after awhile): "The airline should offer exclusive partnership(s) rather than having

2008-2009 Case Book 72

 ,
"il !

everyone as partners. Then explain the value to these rental agencies of having a lock on this l
airline's frequent flyer customers."
I
Interviewer: Interesting idea. Why don't you try figuring out the rental agencies' willingness to
pay for the miles under an exclusive pat1nership agreement. How much could our client benefit
from such an arrangement? Stmcture a math problem and provide the following assumptions:

10 MM rentals per year

" $45. car rental per day on average.
" Average rental is 3 days
Approx 10% margins on the car rentals for the rental car agencies before paying for any
frequent flier miles.
1Om rentals/year by our frequent flier members
Assume 5 partners now, cut down to 3 pat1ners .
Cunent payments from rental cars to our client are $3 per transaction
.
i
Interviewee should note the distinction between fixed and variable costs to the rental agency and
the implications on profit. Marginal profit from extra rentals generated by the program should be
calculated based on variable costs, ignoring fixed costs that will be incurred regardless. For
simplicity, assume that all costs of the fleet are variable.

A. Current profit to rental agencies from our fieguent flyer customers:

(lOMM rentals/year) I (5 companies)= 2 MM rentals per company per year

Profit per transaction is (10% x $45/day * 3 days/rental)- ($3 for frequent flier payment)=
$10.50

Total profit (based on variable cost only) to any one agency is $21MM. This can also be seen as
$27 MM in incremental profit before paying for frequent flier miles, minus $6 MM in total
frequent flier mile fees. -;
B. Potential profit to rental agencies under 3-partner model: !
Assuming same number of total rentals, each rental agency will now get (10/3) MM customers
fi'om the frequent flier program.

The potential profit before paying for fiequent flyer miles is:

(10%)*($45/day) * (3 days/rental)* (10/3 MM rentals)= $45 MM.

So total theoretical WTP for the semi-exclusive anangement, for a single rental agency, is $45 -
$21 MM = $24 MM. Incremental WTP compared to the current atTangement is the incremental
profit of$18 MM (or new WTP- cmTent WTP which is $24-6 MM). Note we can equate WTP
to price in this case because the rental agencies basically setting their own prices.

C. So total WTP comparison is:

73
2008-2009 Case Book
WTP(new) = $24 MM * 3 = $ 72 MM
WTP(old) = $6 MM * 5 = $30 MMT (assumes cmTent fee structure equals max WTP)
Key Insight: This represents up to $42 MM in additional revenue to our client, the airline. How
much of the $42 MM in value our client can capture? But even if we capture, say, half, we
should have a 67% increase in ff revenue fiom car rental agencies.

Phase 3: Other considerations to explore

Behind the scenes: Throw out a question of what else the airline could think of to increase
revenue from this business. This should be a conversational brainstorming session.
Possible Answers: There are many. Here is a sampling.

How to pick agencies to partner with

o Do an auction?
o Base it on geographical coverage?
o Survey our ff customers for preference or go with existing market shares among
our ff customers
Do customers have loyalty to patticular rental agencies, such that the total number of
rentals might shrink under an exclusive partnership agreement?
Actual fixed vs. variable cost for the rental car agencies to get a better sense of profit. By
assuming all costs are variable. we maybe underestimating the profit impact of our
program.
Do we p1;ice the new partnership based on a higher price per mile, or do we mandate that
the exclusive partners offer a minimum number of ff miles per rental day?
If it is profitable to have fewer partners in the rental car space? Could we profit fiom
similar exclusive agreements with hotels?

Recommendation
A good recommendation should sum up the facts and discoveries ofthe case. There is definitely
possibility to reverse the trend. The recommendation should also take into account the strongest
other considerations from the last section, but wrap up firmly and positively.

2008-2009 Case Book 74

 . '?l
I
i

7. Household Appliances (Siemens Management Consulting)

Stem

Our client is Bosch, a German household appliance company. They are known for their high-
quality, Getman-made washing machines. Bosch is thinking of expanding into the Chinese
market with their washing machines, specifically in Shanghai. They have hired us to find out if
they should, and if so, how they should do it.

Phase 1: Market Sizing & Background

Behind the scenes: A large pali ofthis case will be a market sizing, which should be reflected in
the interviewee's written structure. Tell him or her that this is what the first part ofthe case will
focus on. The stem didn't give much infotmation, so the interviewee should drive the
information-discovery pali of the case by asking questions.

One of the first things the interviewee should think about is the washing machine market in terms
of products. If this doesn't happen naturally, then prompt the discussion. There are three sub-
markets: residential washing machines, washing machines for laundromats (which are somewhat
similar to residential ones), and commercial washing machines (such as you'd find in a hotel
basement). Once this point has been covered, say that Bosch is not looking at the commercial
market for these products. So, .we're focusing on in-home and laundromats.

Interviewer: What are some facts and numbers we need to know in order to estimate this I!larket?
Possible answers: There are multiple way of doing a basic market sizing exercise here, but make
sure the interviewee is clear about what data is necessary, makes assumptions, and explains the
reasoning behind each assumption (the following are necessary) .

The population of Shanghai: 18 million people. (This is the one number that is fixed and
which the interviewer should give)
Number of people per household?: about 4
How do people do laundry?: Pretend that there is an even split between in-home
machines, going to the laundromats, and doing it by hand. So, there are 33%, or 6 million
people for each option. This translates into 1.5 million households in Shanghai for each
option.

Phase 2: Calculations of Market Opportunity

Behind the scene$: Prompt each step of the math problem, but let the interviewee go through the
equations herself.

Interviewer: Now that you have gone through the total market for each type of machine, let's i
I
look at each one individually. Bosch is thinking of selling these machines for $400. From this,
figure out the market opportunity in dollars.
I

2008-2009 Case Book 75

.
1
Lt
 A. In-home machines:
$400* 1.5 million households= $600 million
Key Insight: But people don't buy washing machines very often. The interviewee should
estimate somewhere between every 5 and 10 years for a new purchase. If we take 10, then: $600
million I 10 years=. $60 million to be made each year from the residential market
B. Laundromats;
Behind the scenes: Let the interviewee make assumptions about the following categories that
pertain to laundromat use as a way of estimating how much money Bosch could potentially make
from this market every year. Give the interviewee the answer to the following questions if he/she
asks:
How many times per week does a household visit?: 1 time (give this infonnation if the
interviewee asks for it)
How many washing machines are in a laundromat?: 20 machines
" How many loads does the family wash in each trip?: 3 loads
How long does one load take?: 1 hour
How many hours is the laundromat open for each day?: 10 hours

The should now go through the exercise of calculating the dollar value of each
market. If the interviewee is stuck, you can ask one or more of the following questions:

I) How many families are customers at each laundromat?

20 machines I 3 loads per family at !load per hour= about 7 families per hour
/
7 families per hour * 10 hours/day* 7 days per week= 490 families per week
round to 500 families per week per laundromat
2) How many laundromats are there in Shanghai?:
If 1.5 million households use them, and each one has a capacity of 500
households per week, then there need to be 3,000 laundromats in the city.
3) How many laundry machines are in laundromats in Shanghai?:
Since we said there are 20 machines per laundromat, 20 machines* 3,000
laundromats = 60,000 machines in laundromats in Shanghai

4) How many machines are purchased per year?:

The interviewee should take note of the fact that these machines are being run
constantly, and that therefore, the same assumption of I 0 years used in the
residential calculations won't work here, because these will wear out a lot faster.
For example, she could say that laundromats buy new machines every tluee years.
5) How much revenue can Bosch make per year in this market?:

2008-2009 Case Book 76

 .1
$400 {assume same price as households) * 20,000 machines= $8 million per yea
in the laundromat market . r
J
Behind the scenes: Make sure the interviewee tells you what he or she thinks of the numbers.
Are they logical and reasonable? How much of this market does he/she think Bosch could
capture and why? A good interviewee should also say something about Shanghai in particular.
Key points are: a) the city is growing rapidly, b) there are a lot of poor people, c) the number of
wealthy people is also growing, d) the housing situation is not the same as many Westem cities
and perhaps apartments are not properly wired for washing machines, etc.
l
Phase 3: Costs and Marketing Considerations
Behind the scenes: Now that the interviewee has figured out the market potential for the two
sub-segments, tum the attention to other considerations so that he or she can really decide if this
is a good opportUnity for this company.
Interviewer: "So what do you think of this opportunity for our Getman appliance company?
What do you think might be challenges and positives in this idea?"
Possible answers: Here are some problems that the interviewee should come up with:
Shipping: washing machines are very heavy, and shipping costs will be high. Also, the
company is in Germany, and Shanghai is halfway around the world. She should . i
remember that the brand is based on high-quality German engineering, so building a new
plant in China to circumvent the shipping costs will be not only expensive for this
potentially risky venture, but also water down the value proposition.
Sales: How would the sales force be built? She should ask if Bosch already has a sales
network and presence in China that they could tap into, or if sales departments and
relationships would have to be built from scratch.
As a last consideration, ask the interviewee how she thinks Bosch should matket the
product, if they decide to go for it? How should they appeal to both the residential
customers and laundromat owners?

Recomme11dation
This is probably not the best idea for Bosch. It's risky. The market estimations are rather high
and the overall niarket size modest given the number of poor people in Shanghai. The shipping
logistics are expensive. Establishing a brand in China may also not be easy for Bosch.

2008-2009 Case Book 77

 8. Domino's Pizza (Rain)

Stem

Back in the 1990s, Bain Capital bought Domino's Pizza, a nationwide chain. They wanted to
identify a growth strategy.

Phase 1: Industry Landscape

Behind the scenes: Let the interviewee make their structure. It should include a section on the
industry landscape. Propose starting fiom there.

Interviewer: Let me give you a background on the industty. There are four national players.

Pizza Hut: market leader; owns mainly sit-down stores but also offers some delivery

Domino's: no sit-down restaurants, no cany-outs; entire operation is built around delivery; 80%
.of the stores are franchisees and 20% are company-owned

Little Caesar's: marketing campaign is 2 pies for the price of 1; restaurants are cafeteria-style,
they offer cany-out; there is no deliveryPapa John's: new player in the market with very fast
growth; no sit-down restaurants; their entire model is cany-out because their stores are located
on high foot traffic streets so that people can pick up and go; their marketing strategy is "better
ingredients, better pizza." However, when we conducted a blind taste test, we noticed that
despite the fact people showed little taste preference between the four types of pizza, when the
brand names were put on the pizza, people went with Papa John's.

Phase 2: Identifyin!! Growth Opportunities

Interviewer: So what's the first thing you would look at to grow Domino's business?

Behind the scenes: There are a variety of good answers to this question. Let the interviewee offer
a few, hone in on the suggestion to open more stories, when they say that.

Interviewer: What are some things you'd look into to identify where to open stores?

Possible Answers: Again, there are a lot of factors to be considered. Let the interviewee
brainstmm the following list. Don't let him or her get away with simple listing the concept; make
sure they get to a couple of the details after the colon in each point.

.-- Best Practices : Look at where we have stores right now and which of them are doing
well to see in what type of places we do profitable business
- Competitors: Look at regions where there is not a high concentration of competitors, find
those places and be the first mover. (To show yon are digging a level deeper, be sure to
touch on the point that when saying competitors, they might also include other similar
fast food restaurants - like Me D.)

2008-2009 Case Book 78

 Cost structure: Look at places where labor and rent prices are affordable
Demographics: Pizza is a "youth" trend. (Age: 13-35)
Income: You actually don't want a high income level neighBorhood because then those
people would go to high end sit down restaurants and not Domino's. Income level should
be low-middle .
. '!'' Growth: population is growing, the least it should not be decreasing
Presence of Domino's: Is there a place where Domino's has no presence, then we could
move there GIVEN that we see enough demand.
Growth for pizza demand: Identify places where general demand for pizza is going up
The interviewee should wrap this up by saying something like, "Most and ideally all of these
factors should go hand-in-hand for us to open stores."

Phase 3: Store Specifics

Interviewer: Ok, so what kind of place would be good to look at opening stores?
Possible Answers: There are lot of answers that could be given. Ask for the reasoning behind the
suggestions. Here are a few examples.

University neighborhood: fits demographic oflow income and young; students tend to order to
their dorm rooms rather than carrying-out, which fits Domino's current strengths, the number of
students universities take each year usually increases, leading to a growth in the market

Other good answers include: suburban strip malls, vicinity of office parks, near suburban
schools, near sporting facilities

Phase 4: Math By Store

Interviewer: Ok, let's change gears. I told you that we are mostly a franchisee business. Let me
give you some data. Luigi, one of our franchisees, has seen that now he sells 100 pizzas per day
and charges 10 dollars per pizza. If he charges 11 dollars per pizza, he'll sell90. Should he do it?

Behind the scenes: Make sure the interviewee asks for the cost data; Don't just give it out.
Interviewee: This will depend on his profits. What are his costs per pizza? (Bonus points for
saying that you don't need to ask about fixed costs, because in the short mn they will be the same
in both cases)

Inteniewer: 6 dollars per pizza. Now, you should be able to calculate.

Interviewee: Watch him or her go through this math.
Current margin: $10-$6 = $4 profit per pizza

Cunent profit: 100 pizzas/day * $4/pizza = $400 per day ';c-

Projected margin: $11-$6 = $5 profit per pizza

2008-2009 Case Book 79

 Projected profit: 90 pizzas/day* $5 profit per $450 per day
Key Insight: Luigi should do it. He gets $50 more per day.
ose
10Uld Phase 5: Looldng at the Chain
Interviewer: Ole, now let's look at the chain as a whole, and not just a single store. Would this
benefit Domino's overall?
Interviewee: Should remember that this is mostly a franchise business. Should also ask what the
royalty stmcture is (ie., how much Dominos gets from its franchisees.)
tp
Interviewer: The franchisees pay 5% of their sales (revenues).
e
Interviewee: (should go back to math)
Curr-ent Revenue: 100 pizzas* $10/pizza $1000/day
Dominos Revenue: .05 * $1000
Projected Revenue: 90 pizzas* $1 I/pizza $990/day
Key Insight: The chain should not raise its prices, because before it for $50/day and now it will
only get $49.5. Dominos should strictly control prices among its stores.
Interviewer: What are some things Dominos can do to control prices among its stores. Let's first
start with Luigi, who we left wanting to raise prices, and then on a national level.
Possible Answers: First I would talk to Luigi and explain to him that this is actually a short te1m
increase in his profit. Meaning that demand could be inelastic in the short term but in the l0ng
tenn people will just stmt buying :fiom other pizza places and he 'II have lost his loyal customers.
I could back this up by showing blind test results; taste-wise people actually think all pizzas are
comparable except Papa John's.
On a more national level, I would change the contracts with my franchisees and add in a
statement about prices and the fact that they can't change them unless Dominos lets them.
Interviewer: Let's say Luigi's contract was for 5 years and this is only year 1. Can you think of
anything else Dominos as a headqumters could do to discourage Luigi from increasing prices?
Inter1iewee: Well, I would think that Dominos is doing the marketing and adve1iising on behalf
of the fianchisees. If that's the case, we could say something like suggested price of$10 in the
national adve1iisements so that when people would buy at Luigi's they would know the price is
over charge and complain and this would stop Luigi because there is the danger oflosing
customers for him.

Recommendation
Open more stores, don't raise prices, and control franchisee prices to max revenue.

:9 2008-2009 Case Book 80

 9. Singapore Cellular Phone Market (Bain)
Stem

Our client is considering entering the Cellular Phone Market in Singapore at the end of 2006.
There is an auction for a cellular license next month and the client has asked us to evaluate
whether this is a financially attractive deal, and if so give guidance on an appropriate bid.

Phase 1: Data Inspection

Interviewer: Please take your time and make your recommendation based on this infmmation.

Behind the scenes: Hand the attached slide to the interviewee, and leave them alone for at least
five minutes. Only answer simple questions that the interviewer may have.

Possible Answers: If the interview responds with a structure after a few minutes remind them .!
:
that they have most of the information they need and the sttucture should resemble what they I
I
would do with the information.

Phase 2: Working towards a recommendation

Interviewer: Ok, what have you come up with?

!
Behind the scenes: Push the interviewee to come up with a discounted cash flow analysis. This
may not be the first instinct ofthe interviewee, and it may take a few attempts to break the
interviewee from the framework mentality.
;
For the future cash flows make them come up with reasonable growth estimates based on the I'
market shares of the competitors compared to the length in the business. Make sure that the i
!
interviewee keeps a clear table showing the numbers. It is not important to get the math exactly
right in this case, and if you see the interviewee sttuggling, help him or her with the calculations.

Also, keep in mind that Singapore is an island, and with an estimated population of 4 million for
the case. The most important piece of the cash flow is the perpetuity at the end that represents
the terminal value. This is where almost all of the value will be.

Recommendation

Once the interviewee has figured this out, ask for a recommendation on both whether the client
should go forward with the project, and if so what the bid price would be. A simple strategy
such as bid half the present value of the cash flows (approx. $1B) is acceptable.

2008-2009 Case Book 81

r
i
1
!
I

.) .. Singapore Cellular Phone Market

Situat orr. "Currently 3 licenses, 2 M Subscribers
;=::::::;:::=:::::::;-'
' ; .
o Market Shares
8/1996 60% Global Telecom
. 2/2001 30% Telecom National
6/2004 10% EZ Com
Market.
e Market Growth

. .
' 25% i 30% ! 35% !40% .

.. Installation Fees $115M for first 200,000 customers

. $250 per additional customer
Details
$50/month revenue

50% EBITA Margin

L......--'-A:.:.u:..:c.::.:.ti::...on-'-'---') Closed Bid, reserve of $100M

2008-2009 Case Book 82

 10. Spanish Trains (McKinsey)

''
Stem

The railway company of Spain (RENFE), a former monopoly, is now opening to competition.
RENFE has been divided into two separate companies: RENFE (train operation) and ADIF
(company that manages the tracks, train stations and traffic control). A friend of yours has 90M
and has approached you for.advice on starting a new train operation company to compete against
the new RENFE. In particular, he wants to start by opening a new high speed train route between
Madrid and Barcelona. Should your fi"iend go ahead and launch the business?

Phase 1: Industry Overview i

Behind the scenes: Let the candidate to lay out his framework and stati brainstorming about the
current situation in the industry: competitors, and competitive situation. Give the following
I
I
information when asked the proper question. Let him or her focus on competition, and the
differences between this new venture and the competition.

Case Information:
Main competitors: RENFE and air travel. Evaluate p1"ice, time and convenience I
Us vs. RENFE:

" We are less expensive I

We are more efficiently rim (as a former monopoly, RENFE is very inefficient)

"
Equal travel time
We are equally convenient (same stations and tracks)

Us vs. air travel

I!

We are less expensive

"

About equal in time overall (discuss how this can be: check-in time, luggage pick-up,
delays, traffic) Either one can be faster or slower depending on some of the factors above.
We are more convenient (none of the factors cited above with air travel)
I
''
Key Insight: As a result of this high-level analysis, it is possible that we have a chance in this
market. Now let's evaluate profitability.

Phase 2: Business Overview

Interviewer: Now that we have identified the main issues in the market, it is time to see whether
we can be profitable. How would you evaluate the viability of your friend's business? What do
you think the main costs and revenue streams are?

Possible Answers: Possible fmms of revenue: tickets (main revenue driver), ads in trains, food
and dl"inks, and any others are good for the brainstonning but should be ignored for the
calculations

83
2008-2009 Case Book
'!
 Costs: Marketing, Operations and maintenance, trains, personnel, IT, etc.

Interviewer: Great. Now, before moving on let me tell you about oper,ations. You can travel by
train between Madrid and Barcelona in 4 brs. Trains run from Sam until 1Opm. Taking
into account all different factors, we can mn two round trips per day. We will need three trains,
as well as one for backup in case of breakdown, i.e. total4 trans and 4 trips per day.

Phase 3: Break even Calculations

Interviewer: What do you need to calculate expected profits? Keep in mind that the company
only has 10 years to pay back the investment.

Behind the scenes: The candidate should ask specifically for all the costs needed.

" Trains: 30M per train (tell the interviewee to think of this only at the end)
Marketing: 15M per year
Operations/Maintenance: 1OM per year
Train fares: Trains have a capacity of 500 people
o If tickets cost 40-795% occupancy
o If tickets cost 50-780% occupancy
o If tickets cost 60-760% occupancy

Interviewer: Given this data, how much do you think the tickets cost?

Interviewee: 40 -7 (.95 * 500) * 40 = 19,000 euros per trip

50 -7 (.8 * 500) * 50 = 20,000 euros per trip
60 -7 (.6 * 500) * 60 = 18,000 euros per trip
Key Insight: It is most profitable to set ptices at 50 euros.

Interviewer: Now figure out the profits per year (assuming above costs are per train)
365 days* 20,000 euros per trip* 4 trips per day= 29.2M in revenue per year
29.2M- 25M (marketing and operations)= 4.2M euros profit per year per train
Because we on average operate only 3 trains we disregard the cots in apex and maintenance for
the fourth train. Total estimated operating profit is therefore 12.6 M euros.

Key Insight: This does not look great- it would take almost 10 years to recoup the 120M Euro
investment in 4 trains.

Recommendations

Interviewer: What would you recommend your friend? What options could you consider to
make the business more profitable?

Possible Answers: He should not invest under the cunent circumstances, but may also explore
options such as leasing trains, additional revenue from onboard sales and advertising, JV with a
foreign operator with excess capacity, etc. (ask for brainstorming ideas)

2008-2009 Case Book 84

 -1''1[1.
!

11. MVNO Market Entry (BCG)

In 2003, a client asked us to evaluate whether or not they should enter the US wireless market.
Our client was an international wireless carrier that successfully operates in Asia and was
looking for international growth opportunities. They came to us to understand 1) whether or not
they should enter and 2) what key challenges they might face upon entry.

Our client intends to enter the market using an anangement known as an MVNO (Mobile Virtual
Network Operator), in which they will lease network capacity from an existing wireless network
operator in the US, refened to as an MNO (mobile network operator) or Host Operator.

Phase 1: Big Picture Analysis

Behind the Scenes: Give out infonnation as the interviewee asks for it. He or she should ask
detailed questions about the market, growth, competition (you can give the entire competition
block at one time), and marketing

Market:
Forecast for 2004: 180M wireless subscribers in the US with an annual growth rate oflO%

Competition:
e The market can be divided into tlnee main categories:
o National cmTiers
" This includes larger network operators, such as Verizon (25% market share),
AT&T/Cingular (25%), Sprint/Nextel (20%) and T-Mobile (15%)
o Regional carriers "
'
Includes smaller network operators, such as Alltel and Dobson
" Represent 10% of the market in total
o Other MVNOs
Includes Virgin Mobile, Tracfone, etc.
Represent 5% of the market in total

Value Proposition I Target Customers:

Other MVNOs have focused on targeting niche segments, snch as low-credit consumers,
teens, and etlmic groups, using no-frills prepaid services
o Virgin Mobile was able to capture 4M subscribers
e Onr client intends to leverage its existing assets and experience, specifically next-generation
handsets from Asia and a platform for mobile applications, to target high-end consumers
o These exclusive technologies are several years ahead of the competition
o They already have a successful wireless application platform they can replicate in US
o Although US wireless data is under-penetrated relative to Europe and Asia, new 3G
networks and entertaimnent services are expected to accelerate adoption

85
2008-2009 Case Book I
J
 o Between 10 and 20% of US subscribers would be willing to pay for 11 premium mobile
handset with wireless data services

Phase 2: Profitability and Breakeven Analvsis

Interviewer: How can we calculate the number of subscribers needed to cover the initial
investment and the annual fixed costs?

Interviewee: First, we would need to determine the contribution margin of each individual
subscriber

Interviewer: Here are some points that can help simplify this complex problem. First, you don't
have to discount the cash flows. Also, you can ignore the $10/month for data services (with 60%
gross margins). Finally, you can assume that you get all subscribers during first year of service
dne to pent up demand for this business. Now, knowing these facts, what data would you like me
to provide in order do this calculation?

Behind the scenes: Let the interviewee ask for as many of these as they can think of. After they
have exhausted the list, prompt questions that will let you give the rest. For example, make sure
the interviewee asks about margins, fixed costs, investment costs, administrative costs, and
customer statistics (such as tenure and minute usage).

_.-- Average customer tenure = 4 years (48 months)

" Revenue
o Price per minute= $0.06
-o Average monthly minut;;"s of use (.MOUs) = 900
Costs
o Initial investment= $25m (it will take one full year to develop and integrate
platfonns with MNO before launching)
o IAJillual fixed costs after launch= $25m
o Per customer costs
- Marketing and adveJtislng cost per customer = $100
- Sales commission per contract= $50 (for 24 month contract)
Subsidy per handset = $200
- Average handsets purchased I contract period (every 24 months)= 1 (so 2
for 48 months)
- Cost per minute= $0.04 (based on contract with mobile network operator)

Interviewer: Ok, now I think you're ready to make some calculations. We're looking for how
many subscribers we need to get us to the breakeven point.

Interviewee: (these don't necessarily have to be done in this order; just as long as the answer is
arrived at)

Customer Lifetime Value= (average monthly revenue- average monthly costs)* tenure
-acquisition costs
Revenue per month per customer= (0.06- 0.04) * 900 * 48 = $864

2008-2009 Case Book 86

 Customer acquisition/maintenance (200 + 50) * 2 + 100 $600
" Lifetime value = $864- $600 $264
Subscriber breakeven volume= Total Costs (initial investment+ annual fixed costs);
subscriber lifetime value
Total fixed costs 5 x 25 =$125m (5 comes fiom 4 years of customer tenure and 1 year 1
of development) '
Breakeven volume I $264 473K subscribers

Key Insight: The company will need to sell close to 500K subscriptions in order to break even.
Given that this is only 1%-3% of the premium market (36-18M) and Virgin Mobile was able to
achieve Ox that number, this seems reasonable. Bonus point: if you remember the additional
data services we ignored ($6/month GM), you need less than half that number. J
i
Phase 3: Critical Success Factors I Execution Challenges I
J
'
Behind the scenes: Have a conversation about the potential challenges and other issues the
company will face in this endeavor. Ask questions, and let the interviewee brainstmm. A variety I
of answers are acceptable, but make sure he or she is thinking about this specific market, and not i
just saying generic things.
II
Interviewer: What kind of branding is necessary for this service? I

Possible answers:
l
The company will need to invest heavily in marketing and advertising campaigns to
develop a new brand in the US
I
Need to reward loyal customers and encourage referrals
Will need to be powerful enough to overcome switching costs of changing caniers,
including the loss of free in-network mobile to mobile calling

Interviewer: The company has no existing relationships with customers and will likely have to
rely on a 3rd party to sell on their behalf. Evaluate some of the trade -offs between different
options

Possible answers:
Online: While an important, low cost channel, most customers will still want to
experience the new handsets and data services in person
,.... Build Your Own: Maximizes brand control and customer experience, but requires
significant capital investment, trained sales force, and prime locations in urban markets
Canier owned stores: Strong distribution capabilities, geographic footprint, and sales
skills, but incentives may not be aligned to promote your devices/services over their own
Big box retailers (e.g., Bestbuy): While they have expertise in selling electronic
equipment and data services, it may be challenging to stand out from all of the other
elechonic devices sold in their cham1el
Non-traditional (e.g., high-end department stores,jeweby stores): Although these
chmmels may help differentiate as a luxury good and target premium consumers, they
may not have the technical expertise required to sell wireless services
I
2008-2009 Case Book 87
I
Interviewer: How do you think the company should go about developing content?

Possible answers:
Must understand the entertaiment needs I preferences I habits of US consumers, which
are likely different than cmrent Asian customers
Need to develop digital content for data services that is appropriate for US:
o Localizing existing content (e.g., translate into English)
o Licensing existing/new content fiom external developers
o Developing new content in-house

Interviewer: Are there any other issues you think need to be looked at?

Possible answers:
Customer service I billing
Handset logistics I maintenance
Extra charges for roaming, directory assistance
Regulatory enviroment must remain friendly

Interviewer: What do you think are some issues to consider when partnering with an MNO?

Possible answers:
Requires the ability to differentiate MVNO services from the network owner to avoid
cannibalization
Must target customer segments where network operator is less profitable (either through
lower acquisition costs, longer tenure, or higher margin I month) 1
MVNO anangement avoids capital requirements for spectmm and network rollout, but
requires excess capacity of partner's network
" Host network operator must be willing to accept some loss of customer control and offer
competitive rates in exchange for improved network utilization
Must also be willing to ensure network quality and customer support

Recommendations

Behind the scenes: This looks like an attractive market, and the potential for profit is high. The
recommendation should also include some of the biggest issues/challenges to come out of the
brainstorming phase, but overall, this seems like a good investment.

2008-2009 Case Book 88

 , .

.I
I
i

12. Your Town, USA (McKinsey) !

Stem

Your client is the mayor of Your Town, USA. The population is 500K declining. The economy
l
is stagnant. He has asked you to help him formulate his 100 Day Plan. How can the mayor I
revitalize Your Town's economy and drive population growth? I

Phase 1: Brainstorming reasons for the problem

Behind the scenes: This section of the case should be conversational.

Interviewer: What information do you need to determine the eff01is for revitalization?
Possible Answers: The interviewee should think of the problem in "buckets" brainst01m a couple
of reasons for each. Here are some examples for each bucket.

P"""t " 1) Social: People are leaving because of cultural stagnation; Housing is not affordable;
rl Public schools aren't good Maybe there is a high crime rate
1 v u...e._ 2) Political: Taxes are high; Unfavorable laws have been passed
3) Economic: There have been layoffs; Not enough jobs, so people are leaving; Cost of
living is too high; Perhaps one of the town's major industries has become unsustainable
4) Population: The population is aging and people are dying; low bitih rate; Not enough
people to patron small businesses; labor force not meeting needs oftoday's industry
5) Environment: Natural disaster caused people to leave; pollution?

Phase 2: Math

Interviewer: The mayor is concerned about unemployment. How many new businesses would
need to open in Your Town, in the next year to make the unemployment rate move fi'Om 8% to
5%, while maintaining current 5% population growth? First, what assumptions do you need?

Behind the scenes: The following assumptions should be made by the interviewee:
I


Population of 500K is made up of all age ranges.
The population overall ranges fiom ages 0-80
I
I
Working age range is between 17-65 (can also say 20-60; this is flexible)
An average business employs 500 people

Interviewer: Based on these assumptions, how many people are working?

Possible Answers: (multiple answers possible, depending on the working age range assumption)
Option 1:
500K * (65-17)/80 = 300 K available to work
II
Unemployment= 8% = 24,000 people out of work
Number of people cutTently working in Your Town= 276K I
I
I'
2008-2009 Case Book 89
.J
..j
II Option 2: . . .
Given that people in the US usually live to about 80 years old, say there are an eqttal number of
people in the following age groups: 0-20, 20---40, 40-60, 60-80; so, 125K in each group.
The 20---40 and 40-60 groups work, which is 250K working population. Unemployment is 8%
of this 250K, which comes to 20K people unemployed. Number of people cutTently working is

I 230K (250-20).
Interviewer: (better if the interviewee comes to this on their own) How many people will need
work next year, and how many businesses need to open?
Possible answer:
In one year: (substitute in 230K for 276K if done the second way)
Growth of population is 5% 7 315K people in town next year.'
Unemployment Goal is 5% 7 315K * .05 = 15,750 out of work
Number of people hopefully working one year from now= 315K- 15,750 = 299,250
I Number of people in need of work: 299,250-276,000 =
23,250 I 500 employees per 47 businesses
I Key Insight: Many large businesses that will need to open. This is one way of revitalfzing the
I town, but we should look at others, too, if we want to stop the trend of population decrease.

Phase 3: Digging Deeper

Interviewer: What other ideas could improve the town's economy and increase the population.
Behind the scenes: This is a brainstorming section. Go through the different points covered in
the first phase and get the interviewee to come up with feasible solutions or ideas.

Possible answers: Spend more money on schools and culture to keep the younger working
population, appeal to industries that match skill sets of population, etc.

\Interviewer: It turns out that one of the problems is that a major company in the town laid off a
lot of workers. Please elaborate why a company would lay off workers, and what specifically the
town should do to remedy the jobs lost.

Possible Answers:
FVhy there were layofft: Competitor city for industty; in financial decline;
Company decided to expand in lower labor market; Substitute for main companies product made
them share- therefore layoffs

Possible solutions: Appeal to another company in the same industty or a similar one to open a
plant or office. - r 'rl 'j/J.,;t
Recommendations -ti\<..<A\w'<-5 to If\ N_w Cs>"'f""<{">
Interviewer: Ask the interviewee to sum up and present the strongest recommendations for the
mayor based on this conversation. Make sure that the calculations abont starting new businesses
features heavily in the recommendation.

2008-2009 Case Book 90

 13. CD Ripping Service (BCG)

Stem

Our client is a big box electronics retailer considering introducing a CD or DVD ripping service.
The client has asked us to advise them on whether or not to pursue this venture.

Phase 1: Case Data

Interviewee: Can I take a minute to structure my thoughts?

Interviewer: No, let's keep this informal and work through the problem together. What pieces of
information you would like to koow?

Behind the scenes: This is not a typical framework shucture case. The interviewer should drive
the discussion and assess the interviewee's ability to react and adjust as the assumptions about
the landscape change.

Possible Questions:

Do we have any revenue and cost projections for this project?

" What kinds of products does the retailer sell?
Do we have an estimate on how much this service would cost to set up?
Do we have an expected number of customers?
Why is the client interested in this project? (although this question may be asked fi{st, try
to deflect it until you can give the other data points) .

Case Data:
This retailer sells computers, CD's, DVDs, games, music systems, televisions, and other
elechonics
There would be a $100 Million up front cost of setting up this new business line.
The customers are the same customers that would normally be attracted to this retailer.
We expect to generate expected profit of$5 million per year.

Key Insight: Wow, $5 million per year profit: We stated that the client is a Big Box electronics
retailer, so this project is probably dwarfed by their overall earnings. (Prod for this insight if the
interviewee does not offer it spontaneously)

Interviewer: You are right. Aruma! eamings are over $1 billion. Now that we've talked about a
few details, why do you think they are considering this project?

2008-2009 Case Book 91

 Possible Answer: They may view the service as a way to compete against online music
downloads. A way for people to still have their physical disks, but also have help loading their
digital music players. It could be a way to simply get people into the store.

Phase 2: Structuring the Problem

Behind the scenes: The purpose here is for the interviewee to put together a list of topics, and to
be able to expand on them. Make the interviewee put together the list with only about 20
seconds to think about it. This is basically the structure that you didn't allow him or her to make
before, but with much less time allowed.

Interviewer: If you were to deliver a report to the client analyzing the project, what would the
titles of the sections be?
Possible Answers: Market, Profitability (Revenue and Cost), Investment, Marketing,
Regulatory/Legal Liability

Phase 3: Market Sizing

Behind the scenes: Ask the interviewee to develop a robust equation and quantity estimates to
establish the potential market size. Small focus on math after the fmmula has been established.

Interviewer: What would an equation or model predicting the potential market size look like?
Possible Answers: (Average number.ofCDs sold)* (average price per CD)* (Number of
potential customers for service) *(%Digital player penetration)* (%non-sophisticated
users/overall users who would use service)

Interviewer: What values would you estimate for the variables?

Possible Answers: (make sure the interviewee provides logic to support these assumptions)
(20 CDs) X ($2/CD) X (lOOM) X (75%) X (75%) = $2,250 Million (2.25 Billion)

Interviewer: Would you expect to reach this sales figure in the first year of operation?
Possible Answers: No, it would likely take a few years, but be supplemented with new CD sales.

Interviewer: Good! If I OOM new CDs are sold each year, what would the yearly revenue look
like?
Possible Answers:
New CD Potential (lOOM CDs) X ($2/CD) X (1/3 penetration rate) X (75%) X (75%) = $37.5
Million

Wrap-Uo

Interviewer: Please summarize the case. (There is no one correct answer here. The imp01iant
thing is to concisely summmize key facts and insights from the conversation).

2008-2009 Case Book 92

 14. Brazilian Highway
Stem
Our client is a highly diversified US multinational company interested in investing in a new
Brazilian highway. It would be the company's first investment in Brazil. The highway is
cunently being built. Should the client proceed with this investment?
Phase 1: Background Information
Behind the scenes: Let the interviewee go through his or her stmcture and ask questions. Give
infommtion as it is asked for.
Interviewer: What information about the highway would you like to know?
Possible questions and answering case facts:
How long is this highway/where is it located?: The highway stretches between two
population centers; 750,000 inhabitants
What kind of vehicles does it allow?:It takes only passenger cars, not tmcks (this may
need to be prodded)
" Around how many of the inhabitants would use this highway (bonus point if the
candidate takes into account that this may be a poorer area of Brazil where not everyone
has cars): 1/3 of inhabitants in each city have cars
What is the expected usage of the highway? The car-owning inhabitants of this town
make on average one roundtrip voyage between the two cities per year.
How much is the company planning to invest in the highway?: $1OM
Key insight: If 250K in each town have cars and make this trip each year, that means there are
500K cars making the trip, so SOOK roundtrips and 1M one-ways.

Phase 2: Revenue Streams

Interviewer: Now that we know more about the highway, can you think of some ways that our
company can make money from this investment? How can a highway tum a profit?
Behind the scenes: Have the interviewee brainstorm a list. Don't move on until these tluee are
suggested: tolls, rest stops, and billboard advertizing. When these three have been proposed, give
the following data.
Interviewer: Great. Well, there are some details about the three revenue streams we hope to
have.

Tolls: The plan is to charge $1 for each trip along the highway. It costs $250K per year to
mn the tollbooths ' d
Rest stops: Rest stops will cost $375K to maintain each year (ignore building costs) an
will make $!.2M per year in revenue

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2008-2009 Case Book
 Billboards: We can place 100 billboards along the highway. Billboards that are occupied
all year round make $10K a year. However, we can only expect an 80% occupancy rate
for all of them. Assume there are no costs associated
I
Interviewee: Should do some calculations.

Tolls: If 1 million drives are taken, then the highway will make $1M in tolls
Rest stops: $1.2M revenue- $375K costs= $825K in profit
Billboards: 100 billboards *.$10Kper year= $1M in revenue; 80% $800K
in revenue
Profit: $1M- $250K + $825K + $800K = $2.375M

Interviewer: Great. So, how long will it take to recoup our investment?

Interviewee: $10 I $2.375 = about 4.2 years, i.e. 4 years and 3 months.

Phase 3: Risks and Challenges

Interviewer: The calculations suggest that this would be a profitable investment. What other
considerations would you take into account when assessing this opportunity?
'
Possible answers: potential political instability, crime, synergies with portfolio, good entry-way
into South America

Recommendation
Interviewee: So what would you recommend to tbe client?
Possible Answer: This looks like a good investment. The time to break even is only four years,
and the revenue streams look reliable. There are some concems, namely whether or not it fits
into tbe company's portfolio and the fact that this is the only Brazilian operation, but these !\fe
outweighed by the benefits .
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()$1"\0.

2008-2009 Case Book 94

 15. Store Label Tissue Manufacturer

Our client is a paper manufacturing company specializing in store label tissue paper. This covers
toilet paper, paper towels, napkins, and facial tissues. The client's key customers are grocety
chains, in the Western US. They would like to double in size, but this is a slow-growing market
it's been growing at 8-9% a year, but has hit a plateau. They have hired us to see how we can re:
accelerate growth and if this goal is attainable.
Phase 1: Case Data
Behind the scenes: Let the interviewee go through the structure and ask for data. Give data only
when asked for.
The finn has two plants, one near Las Vegas, and one in Idaho
The biggest customers are in the Rockies and in California
The whole market for these products is 500M cases per year (all four kinds combined).
400M cases are branded (ie., not what this company makes) and lOOM are store label
There are four types of customers for these 1OOM cases
o 40 million sold in supermarkets
o 30 million sold in mass market stores (ex., Walmart)
o 20 million sold in club stores (ex. Sam's Club, Costco)
o I 0 million sold in dollar stores
Customers (mostly chains) make their purchasing decisions regionally, not store by store.
Key insights: The firm is limited right now to the West Coast market because the plants are.
located there. There's no reason why these products wouldn't be popular in the east, especially
since the same chains exist there. This could be solved either by opening new plants in the east
or by shipping.
Phase 2: Costs
Interviewer: Let's look at the possibility of shipping to stores on the East Coast---how much it
would cost and what kinds of margins we could expect. What would you need to know in order
to calculate this?
Behind the scenes: Let the interviewee ask for these, but if time is going by and ayariable hasn't
been hit on, give the data.
Retailers pay $20 per case of product
It costs $I to ship a case from either plant to Califomia
It costs $750 to send a tmckload of product to Boston, plus 75 cents per mile (the width
of the US is 3,000 miles)
1,000 cases can fit in a tmck !
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2008-2009 Case Book
95
L
Interviewee: l-Ie or she should complete the following calculations

$0.75 * 3000 + $750 = $3000 cost to ship a case to Boston

1,000 * $20 = $20K revenue per tmckload
$20K- $3K = $17K left to cover costs after shipping to Boston

1,000 * $1 = $1,000 costs to ship a tmckload to California

$20K- $1K = $19K left to cover costs after shipping to California

Key insight: Shipping is too expensive to the East Coast to consider expanding Jl'om the cmTent
plants (lower profits on shipping to the East Coast). The client would need to open plants on the
East Coast, possibly in less expensive areas.

Phase 3: Product Mlx & Marketing

Interviewer: Now that we've looked into shipping and geography, let's talk about the product
mix. Do you think it's split evenly between the four types, and if not, what percentages of each
do you think are sold?

Possible answers: Facial tissues have stronger brands (I<Ieenex being an actual word, for
example); paper towels seem almost as strong. Probably stronger sales in napkins and toilet
paper, with weaker brand images.

Interviewer: You're right. Actually, the company sells a lot more of the napkins and toilet paper.

Key Insight: Maybe manufacturer should make more of the better selling products and decrease
production of facial tissues and paper towels.

Recommendation
Interviewer: So, what should we tell the CEO?

Possible answers: The answer should refer back to the goals stated in the stem of doubling size
and re-accelerating growth. This can happen on!y by opening new plants further east to serve
madcets there without the high shipping costs. Redistributing the product mix is also key.

2008-2009 Case Book 96

 ..;;_,
.;t)

16. French Cars (OC&C) 1

I
I
I
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Our client is Renault, one of the biggest French automobile companies. They are looking into
launching a car in the US. This would be the company's first US venture. It is a compact car that
will cost $15,000. It has already been out in France and has sold well. The client would like us to
i
do a market sizing and decide whether or not to enter the US market with this car. 'I

'
Phase 1: Market Sizing
.i
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l
Behind the scenes: Let the interviewee go through the stmcture, but then get right into the .I
market sizing. This is the main section of the case and should require a lot of brainstorming ,i
before getting on the right track.

Interviewer: How many people do you think would be interested 'in this car? What questions
would you ask in order to figure this out?

Interviewee: The best way would first be to look at the US population. How many households
are there? How many households have cars? Where do they live?

Behind the scenes: Don't move on until the interviewee has thought about where people live,
specifically the breakdown of urban, suburban, and mral dwellers as the three breakdown that
determine how one might use a car.

Interviewer: Good: What percentage of the total number of households do you think fall into
each of the t!nee categories? Why do you estimate these numbers? How many cars do you think
each family owns?

Possible answers: This table is based on an estimate of lOOM households in the country. These
numbers are fluid and depend on the assumptions the interviewee has made. However, the goal is
to get to the total number of cars for each of the three types of places to live.

Type of Area % of Households # of Households # Cars/Household Total# of Cars

Urban 30% 30M 1 30M
Suburban 50% 50M 2 lOOM
Rural 20% 20M 2 40M

Interviewer: Ole, now how many of these cars do you think are compacts? Why do you think so?
Who in each segment would use a compact car and why?

Possible answers: (this is just an example; other answers are good as long as they are backed up
by logic) Maybe 50% of the urban market is compact cars, because of parking constraints, young
people who can't afford more expensive cars, etc. 20% of the suburban market has compact cars,

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2008-2009 Case Book
I"
I'
mostly as a second car for the teenager, but the main vehicle is usually bigger. People in the
country usually have big tmcks or Jeeps
Interviewer: These sound like good assumptions. So, what do you think the total annual market
for compact cars is?
Interviewee: Take the percentages given just now and multiple them by the total number of cars
in each category. Sum these three. Then remember that people don't but cars every year. Make
an assumption about how often people by cars (for example, every 10 years). Divide the total
number by 10.
Key Insight: The interviewee should now calculate annual sales without being prompted.
Multiply the annual market by $15K. No matter what the assumptions, this should be a pretty
sizable dollar amount, making the market look attractive. Even if Renault can capture a small
part of it, this would be profitable.

Phase 2: Marketing
Inteniewer: Well, that looks promising. What other considerations do you think we should take
into account when lannching this product? How would you market it?
Behind the scenes: The marketing strategy should praise the benefits of owning a compact car.
Inteniewer: Are there any challenges you see in launching this product in the US?
,.
Possible answers: aheady a glut of compact cars in the market, desire for SUV's if oil prices ;:
ever go down, lack of sales force here since this is a French company, Americans liking dome,stic r
cars, shipping and taxes possibly bringing down profits
Recommendation
f
;.

Interviewer: The CEO is coming to hear your recommendation. What will you tell him?
Possible Answer: This is a potentially very profitable market. Even if we capture a small pmi,
there will be a profit. There are a few marketing concerns, such as building a sales force n the
us.

2008-2009 Case Book 98

 17. J[nsurance company merger (a connect)

Stem

The CEO of a major Swiss insurance company approached the CEO of our client, another major
Swiss insurance company about the possibility of merging. How would you detem1ine if this is a
good idea?

1st phase: Structure

Behind the scenes: Throughout the case, if asked you can tell the interviewee that:.

G The main business for both insurance companies is property casualty insurance. (i.e. car and
home insurance) You can ignore their other areas such as life insurance for this case
<> Both firms are consumer focused
0 They both cover the same geographic area (Switzerland Dnly)
e Together the market share of the two fitms is 23%. The rest of the market is fragmented
e Both companies sell the insurance through company-employed agents. (as opposed to
independent brokers).

Let the interviewee form a structure. After the interviewee evaluates that this is a good candidate
for a merger (because of so many similarities), ask: '

Interviewer: What are the pros and cons you would expect with the merger? Let's start with the
pros.

Behind the scenes: Spend most of the time on cost reduction.

Possible Answers: Save on overhead, such as number of actuaries, advertising, executives,

headquarters costs, and regulatory compliance. Save on number of company employed agents
needed to sell. Can use new market power to reduce cost of claims.

2nd phase: Claims reduction math

Inteniewe1: You mentioned using market power to reduce the amount paid on claims. How
much are claims and how much could be saved?

2008-2009 Case Book 99

r
f
I Beltind the scenes: You can further ask about how much the annual payments are for car
II insurance to get this started. Let the interviewee make assumptions on the numbers, but if it's
clear he or she knows nothing about insurance, give some suggestions as variables are brought
up.

Possible Answers (give information as necessmy):

Assuming the average car costs $20,000 and on average it is subject to repairs valued at 5% of
the car's value. The average car insurance payment is $1,200 per year.

Average profit would be $1,200 - $1000 = $200. Therefore, claims account for about 85% of
the company's revenue.

Interviewer: So how can you use market power to reduce this cost?

Possible Answers: You could set maximum reimbursement rates by type of accident, similar to
how HMO's have strict guidelines on what they'll pay for each type of procedure or illness, and
use their market power to pay only 90-95% of the actual costs. You could also use your market
power to make good deals with certain garages and mechanics.

Interviewer: Could our client do that?

Possible Answers: Yes, within capabilities of your actuaries to determine average costs and set
limits. Depends on competitive landscape, and regulatory issues.

Inteniewer: Each company now pays $700M in claims. If you achieved 5% savings through the
merger, how much would that be?

Possible Answers: 5% of 1.4 B is $70M. .

3rd phase: More about cost and revenue

Interviewer: Wbat would be the savings in the overhead efficiencies you mentioned? For
example, how many fewer agents would you need, and what would that depend on?

Possible Answers: That would depend on their geographic coverage, if they are working to
capacity, etc. There is a danger if you cut too many that you would lose sales. If you have exact
duplication, you could save as much as 50% (probably not realistic).

Behind the scenes: Specifically question on a few of the overhead efficiencies mentioned earlier.
The interviewee should mention the pluses and minuses of cutting them. Possible answers
include call centers, billing and mailing systems, duplication f01ms, etc.

Interviewer: Let's look at the revenue side now. How would that be affected?

Possible Answers: This is still a fragmented market, so competitive pricing remains. Property
insurance is a commodity product. Revenue should not be expected to increase (beyond
obviously the combination of the two finns revenues) from this merger alone.

2008-2009 Case Book 100

The interviewee should also notice here that if it is a commodity product, it may not be possible
to reduce the payout rate as this is effectively a price hike (although customers may not be smart
enough/ documentation may not be transparent enough that they realize this).

Recommendation

Interviewer: You're sitting next to the CEO on an airplane; it is landing and yon have to
summmize for him. What do you tell him?

Possible Answers: Go ahead with the merger. Because the two films are so similar, there are
great efficiencies to be gained in reducing overhead, plus your increased market power will
allow you to cut claims. Be careful of cutting too many sales agents or you could hmt revenue.
-1
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2008-2009 Case Book
 18. Casual Diner (Bain)

For many years, Jimmy Diners was a small successful chain of casual diners in the Boston metro
area, operating primarily out of the suburbs. Two years ago, Jimmy Diners opened up four new
locations in Boston/Cambridge near universities. The diners have been very successful, often
with long lines of people waiting for tables. Unfortunately, these new restaurants have been less
profitable than their suburban counte1parts.

1'' phase: Outline a framework

Behind the scenes: Expect the student to use a standard profitability framework. This case will
eventually become a question about what the customers are actually buying, so a standard
profitability framework could miss customer-specific issues.

Interviewer: How would you approach solving this problem?

Possible Answers: I approach the problem by breaking down the company's profits and
considering external factors. Within profits, I would first look at revenue dtivers. I would want
to compare the difference between the number of customers and the average dollars spent per
customer in urban and suburban settings. Then I would take a look at cost drivers. I would start
with variable costs (such as wait staff costs and ingredients) and then progress to fixed costs
(such as rent).

Externally, I would consider the differences between customers of the two types of stores. I
would review their preferences, their purchases, the timing of their purchases, and their behavior
at the diners.

znd phase: Data gathering

Behind the scenes: The inte1viewee should now ask more detailed questions about the case.
Here are some facts to be revealed when asked for:

The quality of the two types of diners are the same (ex. Quality.ofwait staff, food, etc.)
The urban diners are in convenient locations
The basic non-food operating costs are no different between the locations (ie., Rent,
labor, SG&A, and utilities expenses are the same per store per month).
Urban and suburban diners receive the same number of customers and each customer
buys the same number of menu items.

2008-2009 Case Book 102

 T
!
Interviewer: Let's start talking about costs. What would you like to know about costs? As we go
through them, can you create a table comparing suburban and urban store costs?
I
Behind the scenes: Eventually, the student should make assumptions and come up with a cost
table (per diner per month) that looks like this:

Suburban Urban

COGS (food) $20,000 $12,000

Rent $8,000 $8,000

Labor $18,000 $18,000

SG&A $1,000 $1,000

Utilities $1,000 $1,000

Total $48,000 $40,000

Key Insight: The fact that urban store costs are less is a little surprising given we know that
urban stores are less profitable. Thus, the revenue per urban store must be less than that of the
suburban stores. Suburban diners must be getting more revenue per consumer.

Interviewer: Exactly. Now Let's check this hypothesis by talking about revenues. What
questions would you like to ask me about revenues?

InterViewee: I would like to know how many customers go to each type of establishment, if there
are any differences in orders, and how l!luch each customer spends.

Interviewer: Both types of diners receive 4,000 customers. Both suburban and urban customers
order two items during each visit, but the price per item is $7.50 for suburban customers and
$5.00 for urban customers.

Possible Answers: Thus, the revenue per month per store for suburban diners is $60,000 and for
urban diners is $40,000. The profit per month is $12,000 and $0 for suburban and urban diners,
respectively. Thus, the fact that urban customers do not order more expensive dishes causes
urban profits to remain low.

Interviewer: Do you think that fixed costs or variable costs are contributing to low urban store
profitability?

Possible Answers: The Gross Margin% is the same in each type of diner, and they have the
same fixed cost base. Therefore, the urban diners will need to increase volume to the level of
suburban diners to make the same overall contribution to fixed costs.

2008-2009 Case Book 103

 3'd phase: Improvements
Behind the scenes: This is the time to test the creativity of the student. The interviewee should
try to stmcture his thoughts.
Interviewer: How would you improve the perfmmance of the urban diners?

Possible Answers: I would think about two things: increasing the number of customers and
getting more out of each customer.
Increase the number of customers - I know that we have been experiencing wait times for
customers. I would check to see why this is occUlTing. Can we make our kitchen, wait staff,
etc. more efficient? How long does each customer stay in the diner?
Interviewer: Each customer stays on average for 100 minutes. We would make the kitchen move
10% faster by employing new techniques.
Possible Answers: Saving I 0 minutes per customer is still not going to bring us in line with the
suburban diners. To increase the number of customers (especially when the restaurant is full), I
would change the ambience of the restaurant to make people eat faster (for example, put on
faster music to encourage everyone to eat more quickly).
But I think the key thing to do would be to get more out of each customer. Through simplifying
our menu, encouraging bundling, and raising prices, we may be able to increase revenue.
I'd like to think more specifically about the customers. If we are serving students, their eating
habits and level of disposable income are different than adults. We might want to change our
hours to stay open later, tailor the menu to eating habits of students, and consider new pricing
strategies. Simplifying our menu may eliminate low margin products and may also increase the
efficiency of the kitchen staff. With fewer items on the menu, more preparation work could be
done in advance. Also, we could bundle or unbundle goods. It is possible we could increase
quantity of items sold by bundling. However, we could also investigate raising prices by selling
French Fries separately from burgers, for example.

Recommendation
Interviewer: How would you conclude?

Possible Answers: We need to improve profitability, particularly for the urban locations. I
recommend that we adopt new techniques to improve the efficiency of kitchen staff. Driving up
the throughput of the diners will make them more profitable. However, the suburban diners need
to take additional steps as well. They should simplify the menu by eliminating low demand and
low margin products. Also, the diner should consider bundling or unbundling certain products to
increase sales.

I 2008-2009 Case Book 104

 19. Retail Medical Products (Bain)

Stem

Our client is a retail health care equipment chain that specializes in three product lines. They rent
Oxygen tanks. They rent and sell durable home medical equipment such as medical beds, wheel
chairs, and other similar products. Lastly, they sell nebulizer, which is a medicine that is used
for respiratory ailments. Over the last two years, the company has experienced a cumulative
revenue decline of $40 million. A new CEO has asked that we identify the causes of the revenue
decline and generate some possible solutions.

1'' phase: Structuring the Problem

Behind the scenes: The goal of the case is to evaluate revenue drivers .. The interviewee should
ask about profitability goals, but once it is made clear that the case should focus on revenues, the
interviewee should turn to the product lines.

Interviewer: Where would you like to begin?

Possible Answer: I would like to start by teaming more about the product lines and the trends
that each has been experiencing. In any of the product lines, we could be expedencing declines
in pricing or declines in quantity sold or both. First, I'd like to explore the Oxygen tank
business. Do we know the price of the Oxygen tanks, and has it been constant?

Interviewer: (as long as the interviewee has suggested a product line, move on, but get him or
her to do Oxygen tanks first) Price for Oxygen tanks has been constant at about $2,000 per
customer per year. Most of our customers are long term users and require the equipment for the
entire year.

Interviewee: So we must be experiencing a decline in the number of customers. Do we know

how many customers we had and what the rate of decline has been?

Interviewer: We started with I 00,000 customers, and we have seen a decline of2.5% per year.

Possible Answers: Great. So, I would like to determine how much cumulative forgone revenue
this represents to see if how much this has contributed to our overall revenue loss. [Should begin
a chart or put together a well-stmctured equation]
 Product P1icing Original# Original Rate of Year I Year 2
1 Total
of Revenues Decline Revenues Revenue Revenue Loss
Patients (Year 1
(Quantity) (P * Q) (Otiginal Revenues (Original Rev
Revenues *2.5%)s *2- Year 1
*2.5%) Rev- Year2
Rev)

Oxygen $2000 100,000 $200 2.5% $195 $190 $15MM

Tanks MM MM MM

znd phase: Second Product Evaluation

Behind the scenes: The interviewee needs to recognize that this is only a portion of the overall
decline and should keep progressing with the products.

Interviewer: So, what does this $15 MM tell you?

Possible Answers: This is roughly one third of the overall revenue decline. A similar decline
across all product lines would account for the entire revenue loss. I would like to explore the
nebulizer product line next. Some ofthe same customers who use the oxygen tanks may also use
the nebulizer since they are both sold to individuals with respiratory illnesses. (bonus points for
getting this last insight)
Following the same process, do we know the price of the nebulizer, and has that price been
constant?

Interviewer: (if interviewee asks first about home medical equipment, steer him or her in
direction of nebulizer by saying home medical price and quantity have been constant) Almost all
of our customers are on Medicare. Last year, the government completed reevaluating its pricing
structure. The result was a 25% price cut on nebulizer.

Interviewee: That is a very dramatic price decrease. I would like to explore the impact of this
move by the govermnent. Do we know the overall revenues from the nebulizer product line?

Interviewer: They are about$ I 00 MM.

Interviewee: So, if we assume the medicare price impact affects the entire customer base, then
the impact of the price cut to us was a loss in revenues of$25 MM. Together with the $15 MM
loss in oxygen tanks, we have dete1mined the causes of the $40 MM loss in revenues. Now we
can turn to possible solutions to ameliorate this revenue decline.

3rd phase: Brainstorming Ways to Boost Revenues

Behind the scenes: This is the creative part of the case where the interviewee should generate
revenue growth ideas. The conversation can go in a few directions, but make sure that the

2008-2009 Case Book 106

 following points are touched upon: trying to change govenunent pricing on Nebulizer, sales
force improvement for the Nebulizer, recovering lost oxygen tank customers.
:

Interviewer: Where would you start to remedy this problem?

Possible Answers: The majority of the revenue decline has come from Nebulizer, so I will statt
there.
To increase revenues, we could raise prices. However, the govemment controls prices in this
case. We could lobby the government and petition for price increases, but this will be a lengthy
process and unlikely to yield immediate results. Therefore, I recommend that we find ways to
increase the customer base for nebulizer sales. What is our sales process?

Interviewer: Each store has its own sales force. They work with local hospital discharge staff.
As patients leave the hospital, they are given the names of stores that sell the required equipment
and medicines.

Interviewee: One way to increase sales would be to increase the sales forces of eachstore. We
want to be sure that we have excellent relationships with all hospitals, and that all hospitals are
promoting us as a source of medical supplies. With more sales staff, we could expand our
geographic reach to new hospitals. We could also develop a delivery service or mail order
service to expand the reach and convenience of our nebulizer product.
Unless there are other options for the nebulizer, I'd like to think about recovering lost customers
in Oxygen tanlcs.

Interviewer: Sure, go ahead.

Interviewee: I'd like to understand why we are losing customers. Are they choosing to use
competitors? If so, I'd like to survey thel)1 to understand their motivations for leaving. Perh;tps
we need to improve customer service or improve our product offetings. However, if patients are
recovering or dying and no longer need equipment, then our problem is that we aren't acquiring
enough new customers. In this case, we would need to look at new promotions strategies and
advettising to attract more new customers into our stores.

Interviewer: We don't know where they are going, but overall incidence of respiratory disease
is on the rise.

Interviewee: Then it sounds lilce we need to recover a larger share of the increasing market for
these tallies. We should try to attract a larger share of this market in conjunction with our efforts
to increase quantity of Nebulizers sold.

Wrap-Up

Interviewer: Can you tell me what you would recommend to the CEO?
Possible Answer: $25 MM in sales decline is attributable to the govemment price cut on
Nebulizer. In addition, we have lost $15 MM in sales dne to a loss of cnstomers renting Oxygen
tallies. We should increase the size of the sales force to cover more hostpitals and drive more
customers to our stores, to increase the quantity of both Nebulizer sales and Oxygen tank rentals.
As a next step we would want to explore the costs of such a move to understand the profit
implications.

2008-2009 Case Book 107

 20. Utility company (Bain)
I'
Stem

Our client is the sole utility provider in Washington state. It is regulated by the government,
which allows it to emn a maximum of 10% of assets as income. Our client's capacity is IM
megawatt hours (Mwh) per year.

The govemment recently mandated that our client generate I 0% of its capacity fiom renewable
sources. The company has two options: I) buy green credits from a 3'd party and 2) set up a wind
farm

What should our client do?

l't phase: Economics of each option

Behind the scenes: Let the interviewee come up with a fl"amework, which should emphasize
evaluation of costs/benefits for each option. Competition or market issues should not be relevant
since the client is a heavily regulated monopoly. Ideally, the framework should address internal
capabilities.

Example slatting fl"amework:

I Cost I Benefit

Wind

Upfrot"lt costs
I I Credits

Upfront costs
I
Land Tr:adfng
.. Cotostruction New technologies (lT}
Equipn"lent
... Trnns1nfsslon Systo.=n'l Or.goj-ng COSH:
Credits
Ongoil"lg costs .. Staff
..
Benefits
Sene-fits flexibility
.. Increase revenue potentl.,.l .., No c-apt tal costs
tovith asset base: growth
Grot:en pe.rct:ptlon it"! Risks
No reliable ma-rket
Risks Limited information on value:
,. of VJ!nd +Future suj>ple uni:J"IOWn
I disruptive tedmologles ... etc.

Suggest focusing on costs for this first part of the interview; ask the interviewee what they would
like to know about costs.

IntervieJver: What wonld yon want to know to analyze the options?

2008-2009 Case Book 108

Possible Answers:
Wind fam1

Cost of building wind fam1s ($2,000 per Mwh)

Life of wind fann (30 years)
Maintenance cost (assume $0 for simplicity)
Credits

Cost of credits ($20 I megawatt hour)

Change in credit costs over time (price has increased from $5 I Mwh two years
ago)

Interviewer:
For each option, could you figure out how much it would cost the client a year to fulfil the
government's mandate? [Note- ideally candidate will proactively volunteer to go in this
direction]

Possible Answers:
Renewable source requirement is 10% 7 either purchase green credits for 100,000 Mwh or build
a wind farm with that capacity

1) Green credit: 100,000 x $20 =$2M

2) Wind fann: 100,000 x $2,000 +30 years= $6.7M (assuming straight-line depreciation)

Interviewer: Assume the of implementing either option is absorbed entirely by the consumers
through rate hikes. If the client buys green credits, utility rate charged to the consumers will be
increased from $0.10 to $0.11.
What could we expect the rate to be if the client were to set up a wind fann?

Possible Answers: For green credit purchase, $2M in cost translates into a 10% increase in rate.
The wind farm costs $6.7M 7 the rate would be $0.133 = ($6.7MI$2M) x 10% x $0.10 + $0.10

Interviewer: Can you comment on profitability implications of each option?

Possible Answers: Under option 1, which is to purchase the green credits, we know that all costs
would be absorbed by the consumers so profitability would be unchanged. This is certainly true
for building a wind fann as well, but what's interesting is that our asset base has increased due to
the CapEx investment for the wind fann. This would lead to a bigger allowance for income
eamed (under the rule ofmaximum10% of total assets)

2"d phase: Qualitative assessment

Behind tlte scenes: This section focuses on qualitative benefit/risk profiles of each option. It
would be great if the interviewee suggests going down this path, but it's fine to ask the question

lillill
2?'! - ...,I .' .
;r<
'

directly as well. Ideally, the interview would include intemal capability factors, green factors,
and governmental view
J
Interviewer: What do you think are the most important pros and cons of each option?

Possible Answers:

Option Pros Cons

Green Credits - Limited capital commitment - Exposure to market

- Easy and quick to implement uncmtainty (400% increase in
- Easy to scrape if regulation price in the last two years
changes from $5 to $20)
0 May not be able to
pass all costs to
consumers in the
future
- Quick fix (not actually green
power source in the state)

Wind Farm - Improve company's image by - Large upfront investment

being green (taking big step) - Require additional expettise
0 To consumers and intemal capabililties to
0 To govemment develop
- Create more jobs for the state - Risk of investment becoming
by 'essentially setting up a new obsolete if gov't
business requirement
- Potentially earning more
income now that total assets
are bigger (i.e., get more for
the 10% cap on eamings on
assets)
Interviewer: What mtght the govemment not hke about bmldmg a wmd farm?

Possible Answers: Although it is green, it results in a higher rate hike (officials who are under
political pressure may not like this). On top ofthat, being able to eam more income now that
total assets are bigger, the client may push to sell more electricity, which may conflict with the
govemment' s goal of limiting energy consumption.

Wrap-Up

Behind the scenes: The ideal answer is a hybrid modeL However, it is fine to pick either option
as long as the interviewee gives compelling reasons.

Interviewer: So, what would you recommend?

2008-2009 Case Book 110

Possible Answers:

1) Hybrid model: Look into buying green credits to fulfil the requirement in the short term
and investigate the possibility of building a wind fam1
o This is superior because the company has an option of switching to the wind farm
if credit price goes up
o The company can buy time to develop intemal capability to build a wind farm

2) Wind fa!Ul
o Sustainability is increasingly becoming an important issue so risk of regulation
being reversed is very small
More environmentally friendly and will generate positive PR
Could be used to make existing operation more efficiently (i.e., add capacity
during peak hours) to mitigate effect of higher rate hike
I
I
 21. Health care Acquisition (BCG)

Stem
Your client is a hospital company in a state that has a "Certificate of Need" program, or CON for
shmt. The client wants you to evaluate the significance of the CON program on its business, and
then to dete1111ine the price to pay for an acquisition target.
1st phase: Why do states enact CON programs?
Behind the scenes: This section requires the interviewee to brainst01111 about the sigiJ.ificance of
the CON program, and to think about the misalignment of incentives of payor/provider
relationships. It is helpful to understand the current issues in healthcare, but the interviewee
should be comfortable with exploring industty dynamics in general.
Interviewer: 36 states have implemented a CON program. This program requires that hospitals
gain a special "certificate" every time they want to invest or pw-chase more than $1 million
worth of equipment, such as MRI machines or new operating rooms. States limit the number of
certificates they issue annually. Why would states enact such a program?
Interviewee: Do states pay for healthcare costs?

Interviewer: Yes. Medicaid is a program to insure low income people, and it is funded and
operated at the state level.
Interviewee: Well, let's think about the relevant parties. There are patients, providers, and
payors. Patients have little say in their treattnent, and usually leave the decision-making up to
physicians, medical staff, and hospitals in general.
Physicians are usually reimbursed based on the number of procedures and tests, as well as the
complexity of conditions. Physicians incentives are to 1 - make sure that the cover their
liabilities in tetms of providing comprehensive care, and 2- depending on the situation, order
excessive procedures and tests that result in higher reimbursement. Thus, physicians are incented
to bill excessive number of procedures.
Finally, payors like Medicaid do care about deliveting quality outcomes, but they want to limit
their costs in doing so. Thus, there is a misalignment of incentives between providers, and payors
in tetms of costs serving patients. The CON program is designed to manage this misalignment
of incentives by capping expenditures by hospitals.
Interviewer: And how do non-goverrnnent agencies, such as private insurers, fit into this
equation?
Interviewee: Private insurers have the same dilemma as the state, but they do not have an ability
to directly regulate providers. Insurers will take steps to manage reimbursement processes and
otherwise incent doctors to manage costs while still delivering quality outcomes.

2008-2009 Case Book 112

2"d phase: Exploring an Acquisition
Behind the scenes: This phase is a traditional quantitative analysis component of a case, as well
as an understanding of company valuations.

Interviewer: The client wants to expand, and because of the CON program, they can only
expand via acquisition. They have identified a small, local hospital that has 4 standcalone
operating rooms. How might they value such as acquisition?
Interviewee: [May offer different appi'oaches, but these should include a multiples-and-comps
method]. Companies are often valued based on a multiple of eamings, and the multiple usually is
based on the market values of comparable companies (comps).

Interviewer: Here is some data about the acquisition target company's mix of services.
CmTently, the target hospital only conducts low acuity procedures, which are very basic
procedures, and they only accept cash payments from customers.

Contribution Margin ($M)

Client
Acuity: Cash Medicaid HMO Target Hospital Hospital

High Acuity (Heart Transplants) 14 8 6 0 SO%

Moderate Acuity (Appendix removal) 10 5 3 0 20%

Low Acuity (Biopsies) 5 4 2 100% '30%

EBITDA / CM= 0.4 (Client Hospital)

Give additional data as 1t is asked for:

e Contribution margin is similar to gross margin, but it is shown here on a per-operating

room basis
e The hospital's patients are split 50/50 between Medicaid and HMO, and will be the same
if they acquire the company
The client will be able to utilize the operating rooms at their cuJTent mix of se1vices
(50%, 20%, 30%)
The operating rooms are at 100% utilization, and will continue to be so if acquimd
The EBITDA/CM ratio given takes into account all possible synergies
We don't have EBITDA/CM infonnation for the target hospital, but it is likely lower than
our client's ratio.
There are no additional costs for integration, etc

Possible Answers: Well, the target company's current contribution margin is simply $5M per
room. However, if the client acquires and integrates them, then their contribution margin per
room would become:
50%* ((8 + 6) I 2)+ 20% * ( (5 + 3) /2)+ 30% * ( (4 + 2) /2) =
 50%* 7 + 20% * 4 + 30% * 3 = 3.5 + 0.8 + 0.9 = 5

Thus, the contribution margin of these operating does not change under the ownership structure.
-<
However, given that our client has a larger EBITDA/CM ratio, the hospital rooms will yield a
higher EBITDA once integrated relative to its stand-alone status.

Interviewer: And how much is this in tenus ofEBITDA?

Interviewee: Well, we know that the ratio ofEBITDA I CM = 0.4, and there are also 4 operating
rooms, thus
EBITDA = CM * 0.4 * 4 rooms= 5 * 0.4 * 4 = $8M

3rd phase: <description, note that you can have more than 3 phases>
Behind the scenes: This section is geared towards interpreting charis and data. There is a lot of
leeway in terms of how the interviewee can interpret the data.

Interviewer: Here is some data about acquisitions in this space. Based on this information, what
multiple ofEBITDA would you pick?
----------,
EBITDA Multiples for Recent:
Hospital Acquisitions
70% 64%66%
60% ,,j 2005
50%
.:12006
40%
2oo7 1
30% 23%
20%
10%
0%

l_ 2.5-Sx 5.1-6.9x 7x or more

EBITDA Multiples of Publicly Traded Hospitals over last 12 months

Low High Last

Company A 6.9 7.4 6.9

Company B 10.8 11.4 11.2
Company c 8.2 9.5 9.1
Company o 5.9 8.2 6.7

1 1A
2008-2009 Case Book
 -------- - - - - - - ----
Premium Paid to Acquire
Hospitals in CON States

Possible Answer: From the first chart, we see that the EBITDA multiples have been going up
over the last three years. From the last chart, we see that the CON pro gram limits the supply of
hospital acquisition targets, and this causes buyers to pay higher prices. The middle exhibit gives
a reference to comps for publicly traded companies. However, I think that the fust and third
exhibits are most relevant for our analysis.

Based on these charts, I might pick a relatively high multiple, perhaps 7.

Interviewer: So what price should they offer?

Intel"l'iewee: The price would be the EBITDA times the multiple, or

$8M * 7 =$56M
Interviewer: Is there anything else that the client should consider in acquiring the target?

Possible Answers:

o Integration risks (mix of acuities, mix ofpayors, physicians)

0 Find maximum piice to pay for acquisition (BATNA)

Wrap-Up

Interviewer: So what would you tell the client?

Interviewee: [Provides a concise and well-structured answer! ... ]
 22. Tire Manufacturer (BCG)

The client is a tire and rubber manufacturer based in the Midwest. Their sales are primarily in the
US, with some sales in Europe, and minimal sales in Asia. All of their manufacturing is currently
done in the US. They are now looking at an opportunity to create a joint venture with a company
in China to manufacture the tires. Should they go fmth with the effort?

1st phase: Structuring the Problem

Behind ihe scenes: First part should be creating a relevant structure, but the main element will
be a cost analysis.

Interviewer: How would you think about evaluating this opportunity?

Interviewee: Before I dig in further, can you tell me more about how this JV is supposed to
work?

Interviewer: The client currently produces tires using a "two-step" process and old equipment.
Basically, the tires are partially constructed in one machine, then transferred and finished in a
second machine. TheN partner in China also produces tires in the same "two-step" manner.
However, there is also a "one-step" process available to the market, which relies on only a single
machine, but requires new equipment.

Possible Answers:

Issues considered in the candidate's framework I stmcture should include:

e Economics: Costs and major elements of costs; Revenue implications if this adds
capacity.
e JV Risks: Quality concems, geopolitical issues, supply chain issues, inventory, IP theft
o Market Expansion: Sales into Asia, new product capabilities
0 Other: Manufacturing flexibility, manufacturing expertise, seasonal manufacturing issues
diversification of suppliers/manufacturing, avoiding unions

Facts to reveal upon request- intent is to steer away from Revenue and focus on Costs.

e Revenue: if they do the N, then they will take capacity off-line in the US, and thus
quantity and revenue will remain constant.
e Sales to Asia: as part of the contract, they cmmot increase sales in Asia for 10 years

znd phase: Cost Saving

Behind the scenes: This is a quantitative analysis of costs .

2008-2009 Case Book 116

Interviewer: [Interviewee should already have focused on cost, otherwise focus them
proactively] OK, let's focus on costs. What are the major components of cost?

Possible Answers: [Answer should be well-structured, not just a laundry list]. Labor costs,
Materials, Utilities, CapEx!Retooling, Partnership , Costs, Training costs,Layoff Costs (in the
US),Transportation Costs, Salvage value of any unnecessary manufacturing equipment sold in
the US (revenue)

Interviewer: Let the interviewee ask for of the costs:

Category Cunent Production JV Production

Materials $24/tire $23/tire

Labor $1 0/tire "twice as much time per tire, but the hourly
rate is one-tenth ofthe US" [candidate
should calculate this is $2/tire ]

Shipping $2 /tire to distribute from $2/tire to disttibute fiom port, plus $4 to

plant ship fiom Asia

Fee to JV Partner n/a $!/tire (client agreed to compensate N

partner $1 per tire)

Total: $36/tire $32/tire

Quantity 50M/year 12M/year

Interviewer: What is the total savings?

Answer: Because the client would take 12M off-line in the US, the relevant quantity to use is
12M.
Savings per tire= $36 - $32 = $4/tire
Total savings = $4/tire * 12M tires/year = $48M per year

Key Insight: Client can save a lot of money in the JV, approximately 11% of cost per tire
($4/$36) and approximately 2.6% of current annual manufactming I distribution costs
($48M/($36*50M)).

3'd phase: Additional Quantitative Analvsis and Insights

Behind the scenes: The interviewee needs to take a step back and evaluate the one-step option.
The interviewer should gauge time; if the interviewee is fast, they can run through this analysis.
If not, the interviewee should simply acknowledge the options and move to conclusion.

-- c"."
fJJ Interviewer: Is there anything else the client should consider?
Possible Answers: Brainstorm through some of the elements of the original structure (sales into
Asia, risks, increased capabilities). How does the JV compare to upgrading to the existing plant
to a one-step process?

Interviewer: (show this table)

Categmy Current Production One-Step Production

'
Materials $24/tire $23/tire

Labor $10/tire $5/tire

Shipping $2 /tire to distribute $2/tire to disttibute

Total: $36/tire $30/tire

Fixed Costs n/a (no salvage value or capex) 8M in equipment, 10-year lifespan

Capacity n/a

Intervrewer: What optiOn IS better?

Interviewee:
1,200 tires/day

There are multiple ways of solving this, but the easiest is to fmd the total cost per tire.
Total tires/year for machine= 1,200 tires/day* 350 days/year= 420,000 tires/year

Fixed Costs/year= $8M I 10 years = $800,000 per year [making the simplifying assumption that
we can allocate upfront costs in a straight-line across the 10 year life span]
Fixed Costs/tire= $800,000 per year I 420,000 tires per year= $1.9 per tire
Total Cost/Tire for One-Step= $30 + $1.9 = $31.9 per tire
Total Cost/Tire for JV = $32 per tire

Insight: The one-step process is cheaper than current production and only slightly cheaper than
the JV with two-step process (essentially the same if we consider the noise in our assumptions
and estimates)

Recommendation

Interviewer: What would you tell the CEO of the tire company?

Possible Answers: Client should adopt either JV or one-step, or both if possible. Interviewee can
make his or her own justification.

11 g
 23. Gasoline Consumption at Fast Food :Qrive Thrus
(L.E.K.)

Stem

This is meant to be a quantitative case completed in 25 minutes. Please help me estimate the .
number of gallons of gasoline used daily in the U.S. by cars idling at fast food drive-thrus.

l't phase: Market Sizing Framework

Behind the scenes: There are a number of different ways this market can be sized; there is no
one right answer. Make sure the interviewee makes realistic assumptions for whichever
approach they take. Fast food stores include McDonalds, Taco Bell, etc., but not Dunkin
Donuts, Starbucks.

Interviewer: How would you get to this answer?

Possible Answers: Expect a straight-forward market sizing framework. At a high level this
should be something like:

[#fast food stores w/drive-thrus] * [car idle time per drive-tluu] * [gasoline used per idle time]
The number of fast food stores with drive tluus can be estimated with assumptions includinp:

U.S. population (300 million is ok to use)

# of stores/per population
e # of stores with and without drive thrus
#hours drive thrus open/day
# of cars/hour (distinguishing busy vs. slow times)
Average wait time at drive tluu/car (distinguishing busy vs. slow times)
Average gasoline consumption rate/vehicle

2"d phase: Estimating# of Fast Food Drive Thrus

Interviewer: How do we get to the# of fast food restaurants in the U.S.?

Behind the scenes: The interviewee will be driving the case based on the market sizing
framework. Each assumption should be backed by a brief reason, and if not provided, the
interviewer should challenge the interviewee to state and, if needed, sanity check their
assumptions. The interviewee should come up with a number on the rough order of 100,000. If
it's not in the ballpark of 100,000, then say that there is one fast food restaurant for every 3,000
people in the U.S. The interviewee can then calculate:
 1 restaurant = X restaurants in U.S. 100,000 fast food restaurants in U.S.

3,000 people 300m people in U.S.

The interviewee should then make an assumption about the percentage of fast food restaurants
with drive-thrus. 50% is a good estimate (make sure reasons are provided). Therefore there are
50,000 fast food restaurants with drive tlnus in U.S.

3rd phase: Idling Time

Behind the scenes: Interviewee should realize that total# of customers is not relevant- what's
relevant is the total# of vehicles coming to the drive thms. The interviewee should also realize
that demand will vary based on time of day.

Sup-stmcture here would therefore be:

[Idling time per hour] = [ Cars per hour ] * [Idling Time Per Car]
Total idling time is sum peak and off-peak idling time over 24 hour period

Interviewer: How would you estimate the number of customers serviced by the drive thm per.
day?

Possible Answers: Assume the d1ive tluus are:

"'
0
Open 24 hours/day
Peak times: !lam- 1pm and 5-8 pm (NOTE: Any other similar timeframes are
acceptable, but then following numbers should be adjusted accordingly)

Interviewer: We !mow that during peak times customers wait 5 minutes, and dming non-peak
times customers wait 2 minutes at the drive thru.

Possible Answers: Interviewee can assume that the 2 minute wait during non-peak represents
total throughput time for orde1ing, waiting for food, and paying. But while one car is ordering,
another is picking up and paying. So estimate 1 car per minute at peak. Then we have maximum
throughput of 60 cars per hour at peak time.

[Sanity check- 1 car per minute and 5 minute wait means about 5 cars in the queue at any given
time during peak. This seems like a reasonable averageJ

Interviewee should also recognize that at non-peak, the cars are not coming back-to-back but
coming through occasionally. E.g. "Every 5-10 minutes sounds about right, let's call it 10 cars
per hour dming off-peak"

Peak times: 1 car/min tluoughput. So [60 cars/hour]* [5 minutes idling per car]* [5 hour

of peak traffic]= 1,500 idling minutes total during peak time per drive-tluu
Off-peak times: Assume 10 cars/hour* 2minutes idling per car* 19 hours of non-peak
traffic= 380 idling minutes total during non-peak time per d1ive-thru

2008-2009 Case Book 120

 TOTAL# of idling minutes= 1,500 + 380 = 1,880 minutes per drive thru

4tll phase: Gasoline Usage

Behind the scenes: Interviewee should continue to drive the case f01ward and suggest that they
now look into gasoline consumption per vehicle.

Interviewer: We can assume that the average vehicle consumes l gallon of gas for every l hour
of idle time.

Possible Answers: We already calculated 1,880 minutes per drive thtu per day. So conve1t to
hours then gallons:

Per drive-thru: 1,880 minutes /60 mins/hour = 31.3 homs = 31.3 gallons
Total number of galloons = 50,000 drive-thrus * 3 I .3 gallons per drive-thtu =
1.57 Million gallons of gasoline

Key Insight: Interviewee should realize that this is an over estimation because not all drive thrus
are open 24 homs, the percentage of fast food restaurants with drive thrus rriay be lower, etc.
Nonetheless, the impact of the gasoline consumption used in drive thnis is a surprisingly large

number.
r
-c
.

i'
24. Golf Club Producer (McKinsey)
I
Stem
Our client is the CEO of a family owned business called GCP, which produces golf clubs in the
United States. They used to produce clubs that were easy to use, so most of their customers are
beginner players. They recently received a patent for a new club that would enhance the
performance of amateurs and professionals alike. Product innovation is paramount in this
industry and they want help capitalizing on this development with a strong product launch.

Interviewer: (If the interviewee asks for time to come up with a sttucture, ask them to wait until
they hear the specific questions first.)

1' 1 phase: Analyzing the market

Behind the scenes: Start by showing the chart. Give the candidate 20 seconds, then wait for
insights. If interviewee doesn't answer questions 1 and 2 by then, push for it.

Interviewer: There are two main ways to produce clubs: liquid and solid production. GCP
currently use liquid production only, but some competitors use solid production. The chart
below represents the number of golf club sets sold in each year. We have historical data from

2007 and 2008, and estimates for 2009 and the next two years. What do you see?

,, ."" y.f'
7000 - , - - - - - - - - - - - - - - - - r -

<J Solid [for professionals)

[for amateurs)

1'l other Liquid

2000 aTop 10 Liquid

1000

0
2007 2008 2009 2010 2011

1) What do you think of this market?

2) Does being one of the top producers matter? Why do you think so?

2008-2009 Case Book 122

 Possible Answers:
1) The market has been growing rapidly: more than 100% in two years; it is definitely attractive.

2) The top 10 liquid producers have a huge market share, so being top is clearly important. Some
possible reasons are:

a) It's easier to invest in product innovation

b)There are economies of scale in production, distribution and advertising

2"ct phase: Should we build a new plant or expand ours?

Behind the scenes: You can give all information at once, rather than waiting for questions. The
intent is to give all information quickly and let the candidate work with it.

Interviewer: We estimate demand for our new club to be 60,000 sets over the next few years.
Given the infonnation below, do you think we should build a new, additional plant or expand the
cunent plant? (All machines are equally durable.)

Building a new, additional plant:

Initial one-time investment of $2M.

Two types of machines are available:

Machine line I: 2000 sets I month, costs $12.5M

Machine line II: 1250 sets /month, costs $8M

Restriction: Can only have total of 3 lines operating there.

Expanding the cunent plant:

Initial one-time investment of $2M

Two types of machines are available:

Machine line I: 1250 sets I month, costs $8M

Machine line II: 7500 sets/ year, costs $5.5M

Obs: All machines last for exactly the same time.

f:llll:. Possible Answer: Ok, let's compare the total costs in each case. The one-time investment is the
same in either case so we can ignore it when comparing):

2008-2009 Case Book 123

 For building a new plant:
There are two possible alternatives, two type I machines or tluee type I machines), we conclude
that it would be optimal to have two type 1 and one type 2 machine, for a total cost of2*12.5+8
=$33M and total production of2000*12*2+1250*12 = 63K

For Expanding the existing plant:

It's useful to notice that 1250 I month= 15,000 per year, thus type I is much less expensive than
type II. With 4 type I machines, we produce exactly 4* 1250*12 = 60K sets, for a cost of 4*8 =
$32M.
Conclusion: Costs are roughly the same (the extra million for a new plant could be offset by
future capacity needs), so we need to include fu1iher considerations to decide what to do.

3rd phase: Other issues in deciding which project to pursue

Behind the scenes: This is a brainstorm session. Keep asking "what else" to get the most of the
candidate. If candidate mns out of ideas, you can help by saying "what about ... how do you
think that impacts the decision?", but that clearly hurts candidate overall performance in the case.

Interviewer: Given that the calculated costs are roughly the same, what other issues would you
want to analyze? What are the pros & cons of each of them? Which would you choose?

Possible Answers:

Management/Administrative: Lower labor and G&A costs if you only have one
plant
Product quality: easier to have a standard if you only have one plant
Distribution: might be cheaper if you can distribute from two different locations
Event risks: insurance would be cheaper with 2 plants (diversifying event risk)
Capacity for future: new plant has higher capacity (3k club sets per year more)
Time to implement
Impact of implementation on current production capacity for other club lines
Etc ...

4'h phase: Possible problems:

Behind the scenes: This is, again, a brainstorm session. If candidate is stuck, ask something like

,.
I

"have you ever remodeled your house? What were your main concems?".

InterpieJver: The CEO decided to expand, and there are two main issues regarding the expansion
project that don't allow him to sleep at night. Assuming our market estimates are l 00% right,
what do you think these issues are?
I
I
2008-2009 Case Book 124
 Possible Answer:
Timing: We said product innovation is impmiant and the nrarket is quickly
expanding, so it's important to launch the product on time.
Costs: It's important to guarantee that construction costs won't raise after he
decides to go for the expansion project.

Interviewer [After candidate answers the above]: how could the CEO protect himself against it?)

Possible Answer: The CEO could protect himself by buying an insurance policy.

s'h phase: Insurance Price

Behind the scenes: There is more than one way to come up with a price, so guide the
interviewee to calculate it through the data we provide.

If interviewee asks whether he/she could simplifY the calculations, the answer is no. If candidate
miss the last point and scry instead that the answer is 660,000, ask him whether he is sure about
that before ending the interview.

Interviewer: do you think the insurance price will be? What information do you need in
order to calculate that?

(after the answer): What would the price be if you assume the following:

GCP has contracts to sell60,000 sets for $500 each.

If GCP can't produce more than 90% of the 60 thousand in the next eight months,
they lose 10% of the contracts. This happens with probability 20%.
If GCP produce 90% or more in the next eight months, they don't lose anything.
The insurer operates with 10% margin

Possible Answers:
From the insurer perspective: with probability 80% they have zero loss, and with probability
20% they have a loss of 10%*$60,000*500 =$3M.

Therefore, the expected expense is 20%*$3M = $600,000

Since they operate with 10% margin, this expense should represent 90% of their price.

Therefore, the price charged is $600,000 I 0.90 = $666,667.

'\'\'rap-Up

Behind the scenes: There is no need to do a wrap-up in this case, but it doesn't hurt if the
candidate proactively comes up with a conclusion/summary.
 25. Loyalty card scheme for Canadian supermarJiet
(McKinsey)

Stem
Our client is a major supermarket chain in Canada. They are one of three major players in this
sector and the rest of the market is split amongst smaller, regional fitms. In January 2000, they
introduced a loyalty card scheme (run by a third patty provider), but have not been able to make
this scheme successful. The CEO has called us in to review their program and suggest ways to .
improve it.

1'1 phase: Overall approach for review

Behind the scenes: If the candidate asks futther questions, you should explain that the card
works in the following way: For every $1 spent in store, the customer receives 1 point. These
points can be redeemed for discounts at the store. 100 points can be redeemed for a 1% saving on
every $100 spent.

Interviewer: What areas should we investigate to determine the perfotmance of this scheme?

Possible Answers:

What are the goals of the scheme? Profitability? Business intelligence?
Benchmark the potential profitability ofloyalty card schemes (look at competitors'
schemes or grocery stores in other regions)
Compare the profitability of this scheme- is there a gap? If so, why? What drives value
for a loyalty card scheme? What improvements could be made?
o Consider alternatives- are there other pricing/promotion/customer loyalty schemes that
can match or surpass the loyalty card scheme?

Profitability of a loyalty card scheme will be detetmined by

Total customers * % customers with card *extra profits generated by scheme (per
customer)
For a given customer, extra profits generated by scheme depend on the increase in the
frequency of their visits and the spend per visit

2"d phase: Cost structure

f.
Behind the scenes: the candidate should keep in mind that the program is mn by a third party
provider

Interviewer: What are the costs associated with mtming a loyalty card program?

2008-2009 Case Book 126

 Possible Answers:
Discounts (largest cost)
Software upgrades to registers
Promotion of scheme
Customer support
Printing cards, maintaining data etc - this will likely be bome by the third party provider
and paid for on some kind of rate (e.g. per customer)

3rd phase: Loyalty card vs non-loyalty card transactions

Behind the scenes: The interviewee should bear in mind that the value they are calculating is on
a per transaction, not a per customer, basis. Pause after question (a) below to allow them to talk
before asking (b). Before doing the calculation in (b), the candidate should request the total
number of transactions. The total number of transactions is 10 million.

Interviewer: We received this data from the client. (a) How would you interpret it? (b) Can you
calculate the average revenue per transaction for loyalty card holders and for customers who do
not hold a loyalty card?

'100%
. .-
.,
-'<' -

.,- '._

40%

2'0%
0%
%:tran:;,actlons
t1taLwentH $360 MM
Possible Answets:

(a) A lot of transaCtions involve customers who do not have a loyalty card. This suggests that
there may be a lot of customers do not know about the scheme (there is potential to grow
it). However, this data tells us nothing about the number of customers with the card,
simply the number of transactions.

If we look at the relative percentages it looks like loyalty card holders spend more per
 transaction. However, this could imply one of two things: Customers who shop a lot at
this chain are more likely to get the card and make the most of the discounts OR the card
encourages customers to spend more each visit. There is insufficient data to determine
causality.

(b) Spend per transaction= (Total$ spend * % $ spend)/ (Total# transactions * % #

transactions)
i.e. for Loyalty customer transactions, spend= ($300 MM * 40%)/ (lOMM * 1/3)

= $36/transaction

For non-loyalty customer transactions, spend= (($300 MM * 60%)/ (lOMM * 2/3)

= $ 27/transaction

What might explain this? This could be because the non-loyalty customers are not regular
customers- they may be buying things like newspapers, milk, and other small purchases.
Loyalty card customers are more likely to be doing a regular trip and may purchase more
items in stores where they have discount schemes.

41h phase: Are customers really loyal?

Behind the scenes: Show the interviewee a bar chati:

"C
(!)

OJ
:;;
>-
<lJ 30
so
40

.....
c
Ill
>- 20
<lJ
f
...,0 10
Vl
::l
u 0
0 1 2 3
#supermarket loyalty cards in wallet

Interviewer: We interviewed customers in-store and asked them how many supermarket loyalty
cards they had in their wallet. We found out that the disttibution was bimodal. What does this
inf01mation tell you?

Possible Answers: Most customers either have no loyalty cards, or have cards for three
supermarkets (probably our client and the other two majors). This suggests that 'loyalty' cards
do not in fact encourage loyalty to a particular chain. There is a portion of customers who do not

2008-2009 Case Book 128

 care/ aren't infmmed about the scheme. The rest will carry a card for each supetmarket and use
the appropriate card wherever they go.

Key take-away: Loyalty cards will probably not determine where' someone shops, but can affect
what products, and how much, they buy at your store. The program should reflect this e.g. by
offering bonus points on high- margin products.

Wrap-Up
Behind the scenes: There are several ways that this data could be interpreted, so accept any
reasonable answer that is well structured.

Interviewer: What would you recommend to the CEO?

Possible Answers:
There is potential to grow the scheme, so nm promotion campaigns to enroll more card
members
Give additional loyalty "points" for high-margin products.
Restructure loyalty card fmmula to give dollar-amount discounts on particular (high-
margin) items to steer customers towards those items .

2008-2009 Case Book 129

f''
i

26. Greeting Card Company (OC&C)

Stem
Our client is the third largest greeting card company in the US. Revenue has been increasing 1-
2% per year, but profits have been declining at about 5% per year over the past 2-3 years. The
new CEO wants to know why.

l't phase: Costs and Revenue

Behind the scenes: StJucture could include fixed and variable costs, revenue, product mix,
distribution channels

Interviewer: After going through the stmcture, start by looking at costs and revenue.

In response to questions as you two go through the stmcture:

0 There is no real differentiation between greeting card products. Stores will not recognize
differentiated products.
0 Cards are distributed through card shops, mass retailers, and miscellaneous other shops; these
stores choose only one source for their greeting cards
..

Our client has a 25% share. Number 1 and 2 competitors have 35% and 3Q% .
0 The market is growing 3-4% per year, and market shares are stable .
e Fixed costs are up 1% per year in line with wage rate and inflationary increases
@ V miable costs are flat
0 Quantity sold is increasing
e The price per card is basically the same across all card types
" The price printed on the cards (suggested retail price) is increased 5% per year
@
Typically sell to retailers for a discount off the suggested retail price
e Product mix has not changed

Insight: The only explanation is that the discounts given to stores must be increasing.

znd phase: Distribution Channels

IntervieHier: Make sure the interviewee now focuses on the distribution channels. In response to
questions, reveal this:

2008-2009 Case Book 130

 1 '

SALES

Card Shops,
Mise, 10% 10%

Retailers,
80%

Discounts vary across distribution channel:

o card shops
o mass retailers -7 5%
o miscellaneous other shops-50%

Competitors are believed to have the same discount stmctnre
Discounts are stable in card shops and miscellaneous catagories
Discounts have been increasing to retailers and the retailers as a channel have been
increasing relative to the card shops and miscellaneous shops
Unlike the other two catagories, retailers negotiate exclusive deals.
a Most, but not all, of the card stores are independent shops. Some are owned by the client.

Key Insight: Giving discounts to the ietailers is driving down profits.

3rd Phase: Brainstorming Trend-Stoppers

Interviewer: Are there any ways you can think of to increase profits? You can also think beyond
this discount problem.
Possible Answers:

Seek a merger. Industry consolidation will allow a larger firm more market power
Vertically integrate to cut costs.
Expand to complementary products. For example, teddy bears and balloons. Must be
products that take advantage of the existing distribution network

4'h Phase: Recommendation

A good recommendation will summarize the discount problems as the key factor behind
fB declining profits, and then go on to suggest some of the best ideas to increase profits.

1., 1
r
I.
!
27. Kiki's Coffee (OC&C)
I
Stem
Our client, a private equity firm, is considering purchasing Kiki's Coffee. Kiki's started off with
a few stores in the West Coast where it did quite well. As the demand for coffee shops rose over
the past decade, it decided to expand throughout the country. Our client wants to know whether ,
or not it should purchase Kiki 's.

Phase 1: Growth and Revenue Data

Behind the scenes: For this case, the interviewer should use the world as it is today when
answering any qualifying questions about the market and competition (e.g., Starbucks is the
market leader and paved the way for this large market, and although the market is still growing it
is probably getting somewhat saturated over time). The interviewee's written framework should
include a market section, company section and a financials section.

The interviewee should ask some clarifying questions about the market/company. When it
comes up, say that the company is positioned on the higher end, and focuses on quality coffee

beans but not all the extras (CDs, etc.) that Starbucks sells .

The interviewee should eventually ask for revenue and growth data. Show these chmis.

Interviewer: (Showing the two charts on the following page.) What do these two charts indicate?

2008-2009 Case Book 132

 Stores Nationwide
120 ,-------------------------------------

100 +--------------------------/-------:;;<l>----
80 +-------------------------,.z-----------

60 /
40
47
20 +-------------------------------------

0
2004 2005 2006 2007

Revenues {in millions)

l!l Revenues (in millions}

2004 2005 2006 2007

2008-2009 Case Book 133

r
!
!

Key Insight: Kiki's has been growing its store base steadily, but while total revenues have
grown, revenues/store are decreasing.

Behind the scenes: If the interviewee does not begin calculate on his/her own, the interviewer
should ask the interviewee to estimate revenue per store for each year.

Year Revenue Stores Revenue/Store

2004 $110m 30 $3.7m

2005 $140m 45 $3.1m

2006 $175m 75 $2.3m

2007 $200m 100 $2m

--c-

Key Insight: Revenue/store is falling rapidly to almost half of what it was in 2004.

Interviewer: What other financial infotmation should we review?

Possible Answer: Although revenue/store is decreasing, our costs may be decreasing as well as

we build scale, which could increase profits. I'd like to look at our costs and margins next.

Phase 2: Cost and Margin Analysis

Interviewer: What do you think Kiki' s main costs are?

Behind the scenes: Several answers are applicable, but the interviewee should include the cost
of ingredients (coffee beans), property rental and labor.

Show the interviewee the next page of chmts.

2008-2009 Case Book 134

 Be a
('
).:JSII
re
$250
CAGR
045
$200
).04
035 $150
).03
025 " $100

).02
.s $50
015
'"
:J
so
).01 ">'"

J ""'"
.005 2004 2005 2006 2007
0
!ll Cost of Soles 13D&A !.;2 Rent and Lober !.! Operoting Profit
2004 2005 2006 2007

labor/store Rent/store
0.35

0.3

0.25

0.2

E!l L<Jbor/storc 0.15 l:l Rent/store

0.1

0.05

0
2004 2005 2006 2007 2004 2005 2006 2007

2008-2009 Case Book 135

 Possible Answers: While operating profit is increasing, cost of sales is increasing even more
quickly. This means I<.iki 's profit margins are decreasing. This is due to the sizeable decrease in
revenue/store.

It appears our beans/store costs are decreasing, which could be due either to the chain selling less
coffee per store or because it has accumulated purchasing power as it has expanded. Rental cost
per store is also decreasing, which might be a function oflower real estate costs in the areas of
expansion.

Key Insight: The substantial revenue/store decrease is eradicating the benefit of decreasing costs.'
Overall, margins are shrinking.

Phase 3: Top-line Braintorm and Recommendation

Interviewer: What are some ways Kiki's might be able to increase revenue?

Possible Answers: (Several answers are appropriate, but should include some of the following):

a New product introduction: expand into areas outside of coffee, such as muffins and fruit.
Product mix: review current drink offerings to make sure they align with local tastes.
o Plicing: determine whether we can raise plices, and by how much
o Improved sales: train staff to more effectively upsell customers

e
0
Loyalty program: ensure customers come back more frequently .
Local partnerships: sell other goods fi'om retailers in these new markets.

The interviewee should note that all of these decisions should be weighed against I<.iki' s brand
image and customer preferences.

Phase 4: Recommendation
Interviewer: Should our private equity client purchase Kiki' s coffee?

Recommendation: Kild's is an attractive acquisition target. It has steadily increased revenues

and successfully entered new markets in a growing market. While profit margins have been
decreasing, there is opportunity to reverse this trend with several strategies such as introducing
new products.

136
 28. Rolls Royce (Bain)

Stem

The year is 1990 and your client is the CEO of Rolls Royce ("RR"). He is wonied about his
business, as he has seen a shmp decline in the demand for luxury cars (there was a global
slowdown/recession in the early 1990s). RR was selling 3500 cars per year and is now selling at
a run rate of 1100 cars per year. As you can imagine, RR faces high fixed costs as it attempts to
keep plants running (due to the expense involved with shutting down plants and laying off
unionized workers). This has resulted in an increase in inventmy- now 1000 cars are in finished
goods.

RR is running at an operating loss of about $1M per week and is cash flow negative .. They are
owned by a small conglomerate of unrelated businesses (RR is involved in many industries). We
were asked to develop a turnaround strategy. Keep in mind that (1) the economy is deteriorating,
(2) we don't have the time or money to fully develop new products, and (3) Mercedes and BMW
are spending more money than we are on R&D and sales and marketing.

1st phase: Framework & Growth

Behind the scenes: There are no right or wrong answers here. It should be an
organized/structured brainstorming session. The following is an example. Let the interviewee hit
on as many of these as possible, and any others that he or she comes up with. The key is that the
interviewee should be structured in brainstorming approach and use good business sense in
prioritizing.

Interviewer: How would you go about thinking of a turnaround strategy?

Possible Answers: When I think about a turn-around strategy, I want to think about ways to
a)1g_reduce costs. Let's focus first on increasing revenues.

When I think about increasing revenues, I think about 2 buckets: optimizing.the.c.oreJ2.uf>iness,

and el[pandiJlg the. business markets and/or new products. ---
---- - . . ----------
Under optimizing the revenues of the core business, you have price (you can make arguments for
.raisi_ng..pri.c.es -the RR customers are unlikely to be price sensitive- or lower prices -
competition is increasing), as well as quantityl'bunQling (you could (I) increase
promotion/marketing spend, or (2) bundle extended wananties and/or repairs with the cars), and
PEOd\J.ctmJx: (try to push/promote the most profitable).

Under expanding the business, you have entering new markets or developing new products.
\Ve've already discussed that we don't have the time or resources to develop new products, s()
let's focus on new markets.
- Here we can focus on new customer segments, new geographies, or
new di_stribution channels.
--- - --- -

137
-;-:

2"d phase: Cost cutting

.I i
'
i Behind the scenes: Same as previous section ... structured brainstorming, then prioritizing.
Interviewee should use a clear st1ucture like value chain for thinking through costs and
prioritizing where to cut.

Interviewer: And what are the major cost components of this business, and how could we find
ways to make cuts?

Possible Answers: When I think about the value chain for RR, you have tbe commodity inputs
(ie., parts), PP&E expense, labor costs (particularly involving unions), sales and marketing,
overhead, and distribution. Of those, the top two areas to cut would be labor and distribution
costs, followed by sales and.warketiug. Marketing could be more focused onjustili:ewealthiest
customers, g;;-,;uthe downturn.

Jnterviewu: How/where could we cut the number ofemployees without killing the business?

Possible Answers: Reduce the number of cars produced (and cut line staff), reduce support/OR
staff, cut sales reps ...

3rd phase: Inventory

Interviewer: If we cut car production, what are the factors that would affect the optimal level of
finished inventory?

Possible Answers: [Candidate should get these and perhaps more]: The overall level of demand,
the variability of demand, the number of car models (including degree of customization), the lead
time necessary to produce another batch of vehicles ...

Wrap-Up
Behind the scenes: Simply make sure that the recommendation is clear and concise; incorporates
the highlights from the case discussion above; and gives crisp rationale for why the paliicular
actions are being recommended .

138
 29. Credit Card Refen:a!s (OC&C)

Stem
Our client is a private equity firm that is investing in an online infonnation business. The
business has articles for consumers on various financial products, including credit cards. Some of
their income comes from recommending credit cards. The consumer visits their site, compares
the cards, and if they click a link to apply for a card, they get directed to the card's webpage. If
the consumer completes the application and is approved for the card, then the company receives
a referral fee. Can the company achieve annual growth rates of 15%, negotiating higher referral
fees?

1'1 phase: mme background info

Behind the scenes:

Online credit card applications have been growing per year for the past 4 years, and
are expected to grow at 15% per year into the future
Management thinks the fee could be significantly increased from its cunent $45 per
application rate

2"d phase: Credit Card Company Revenue

Behind the scenes: Let them introduce their stmcture. Then ask:

Interviewer: How much does the credit card company make per customer?

Behind the scenes:

In response to questions, or as needed:

a The credit card companies are banks and make their money fiom late fees and interest. This
is different from the credit card network, which makes their money from merchant fees.
a Interest accounts for 60% of revenue. Fees are the rest.
o Operating margins are 20%

Possible Answer:

Assuming an average customer canies a balance of$1000, and an APR (annual percentage
rate) of 15%, the company pulls in $150 per customer per year in interest
o 150 = 60% * x total revenue is $250 per customer per year, and revenue fiom fees is
$150 per customer per year.
I) o Operating income per customer are therefore are $50 per year

139
r
I. Insight: $45 is already a lot out of $50. But these are sticky customers and if it creates a steady
revenue stream for the credit card company then it is worth it. Let's see how this compares to
the credit card company's other options for getting customers.

3rd phase: Competition

Interviewer: The top online competitor is believed to charge the same referral fee as us. For
direct mail, the cost per new customer is $120. For converting customers who already use other
services from the bank, the cost per new customer is $60. What else do we need to look at?

Possible Answer: We are a cheap way for credit card companies to acquire new customers. But
we also need to see if there is a difference in lifetime revenue between the different acquisition
channels. For example, perhaps a consumer who signs up via the internet is more likely to switch
companies than a direct mail customer, and therefore is worth less to the credit card company. Or
perhaps they have different average balances or likelihood to incur fees.

4th phase: Wrapup

l11terviewer: Please wrap up and make a recommendation.

Possible recommendation:

@ Recommend buy the company.

Strong possibility for growth and it's likely that fees can be raised.

140
 30. Fancy Truck (McKinsey)

Our client is the CEO of Fancy Truck, a producer of trucks that sells mostly to logistics services
companies. Fancy Truck's main current product is a truck called Evolution. Now they came up
with a new engine, and they want to start selling another type of truck, called Revolution, that
will use this engine. The only difference between Revolution and Evolution is the engine and
Fancy Truck's plan is to have both Evolution and Revolution in the market. The CEO hired us to
help him find out a pricing strategy for Revolution.

1'1 phase: Brainstorm on customer needs

Behind the scenes: T1y to get as many good customer needs as possible, so keep asking what
else until you have a good list. The candidate should use a clear structure e.g. Driver Needs,
Purchaser Needs, Maintenance Needs (user change).

Interviewer: .{

What do you think customers main considerations are when compaling the two models? When

deciding which one to buy?

Possf)le Answers: 1 /
Plice,yuel efficiency, Durability, Maintainance costs, ...
j?1J wW 1

znd phase: Pricing- qualitative analysis

Behind the scenes: Let the candidate mention different pricing strategies. If they say "let's see
competitors' price", tell candidate nobody has a similar model and askfor other methods.

Interviewer: How would you come up with a price for the new truck?
Expected Answers:

Analyze competitors price: In this case nobody has a similar model, so N/A.

Cost-based (cost+ mark-up):

Value-based (customers value): Paramount to understand how much value we are

bringing to the customer

3rd p h ase: P ncmg-

' 1 a f'1ve ana lys!.
quan t't

141
 Behind the scenes: Don't give all information upfront. Hoid the information about price offitel
until the candidate asks for it. Candidate may assume zero cost of capital, but can't do math
simplifications. '

Interviewer: Our current truck, Evolution, sells for $100,000. Here is a quick comparison
between the Evolution and the Revolution trucks:

Evolution Revolution
/
Fuel efficiency: lOkm!L Can do 25% more kilomters with same fuel.
/
Usefullife: 4yrs 4yrs
./
On average, our clients drive 250 thousand km per year.

Salvage value: Same for both.

Price ofjitel: $1.50 I L

How much do you think we could sell Revolution for?

Possible Answers:

In four years, the expected fuel costs for customers are:

Evolution:

Revolution:
4*(250Kkm/ lOkm/L) * $1.50/L=4*37.5K

4*(250K km I (10*1.25km/L)) * $1.50/L = 4*30K

So the difference is 4*(37.5- 30)K = $30K

Therefore, assuming eve1ything else is the same, we could charge up to $130

thousand for the new Revolution l!uck.

41h phase: Market survey:

Behind the scenes: Let the candidate ask for the costs, don't give them upfront. If candidate
forgets, remind him that Evolution sells for $1 OOK.

Interviewer: In order to get a better sense of the market, Fancy Truck did a survey and came up
with the following results as an estimate for demand in the next years:

U Revolution was sold at a price of: $lOOK $115K $130K

% customers buying Revolution: 90% 80% 40%

% customers buying Evolution: 10% 20% 60%

142
 T
Assuming the survey is representative, which of these three ptices would you choose for I
Revolution?
J

Behind the scenes: Here interviewer should stop for a while and wait to see what candidate
I
does. Candidate could try to analyze, but he/se must ask about costs because the goal is to
maximize profits, not revenues:
I
Interviewer: Fixed costs are the same for both Revolution and Evolution, but because Revolution
has a more complex engine, it costs Fancy Truck $10 thousand more to produce each
Revolution.
Possible Answers:
We wouldn't sell for $lOOK. Since there is a $10K extra costs associated with
producing Revolution, at $1 OOK it's better to only sell Evolution.
@115K, extra profits from selling Revolution would be 80*(15-1 0) = $400K per
hundred tmcks sold
@130K, extra profits from selling Revolution would be 40*(30-10) = $800K per
hundred ttucks sold
Therefore, it is better to sell it for $130K.
Observation: It's not necessary to know the market size in order to conclude that $130K is the
better choice.

51h phase: Final brainstorm

Interviewer: Why do you think some people would still buy the old model even if the price wa,q
the same?
Possible Answers:

Logistics companies don't want to change all their new fleet before they test the new
truck and confirm what the producer says about fuel efficiency.
Customers may fear that it would not be easy to find mechanics to fix the new engine
when it broke.
There are no old revolution engines available, so repair/replacement by third parties
could be harder.

Observation: The fact that the 250Km figure is an average is not a valid reason given that the
price is the same. Regardless of the annual usage, it would always be better to have the engine
that is more fuel efficient.

Wrap-Up
Interviewer: The CEO is coming and you need to tell him what your conclusions are.

143
I 31. Sample from. McKinsey

Case - Candidate Preparation Materials

This document is intended to help prepare you for the case portion of a McKinsey& Company
interview. While interviewers at McKinsey have a good deal offlexibility in creating the cases
they use in an interview, we believe that the following case is a good example of the h;pe of case
many of our interviewers use.
The example below is set up to teach you how to approach a typical case. TI1e italicized sections
are descriptions or instructions to help you navigate through this document. The words in plain
bold font are the descriptions and questions an interviewer may give to you during the
interview. The sections in regular (non-bold) font are possible answers.

Example Case: Great Burger

Context
The interviewer will typically start the case br; giving a brief overview of the context, ending
with a question that is the problem definition. At the end of the description you will hav? an
opportunity to ask any questions you might have to clarify the information that has been
provided to you.
Our client is Great Burger (GB), a fast food chain that competes head-to-head
with McDonald's, Wendy's, Burger King, KFC etc.
GB is the fourth largest fast food chain worldwide, measured by the number of
stores in operation. As most of its competitors do, GB offers food and "combos"
for the three largest meal occasions: breakfast, lunch and dinner.
Even though GB owns some of its stores, it operates under the franchising
business model with 85% of its stores owned by franchisees (individuals own &
manage stores, pay franchise fee to GB, but major business decisions e.g., menu,
look of store controlled by GB).
As part of its growth strategy GB has analyzed some potential acquisition targets
including Heavenly Donuts (HD),a growing doughnut producer with both a US
and international store presence.

144
 HD operates under the franchising business model too, though a little bit
differently than GB. While GB franchises restaurants', HD franchises areas or
regions in which the franchisee is required to open a certain number of stores.
GB' s CEO has hired McKinsey to advise him on whether they should
acquire HD or not.
Questions
In most McKinsey & Company cases the interviewer will guide you through the case with a
series of questions that .will allow you to display a full range of problem solving skills. Below is a
series of questions and potential answers that will give you an idea of what a typical case
discussion might be like.

Ouestion 1. What areas would you want to explore to determine whether GB

should acquire HD?

A good answer would include the following:

There are a number of things I would want to look at here:

- I would want to consider what the value of Heavenly Donuts would be to

Great Burger.
- I would also want to look at the strategic fit of the companies. Do they
complement each other? Can they achieve further benefits (or synergies)
from combining their operations?

A venJ good answer might also include the following:

- I would want to look at the cultural similarities/ differences, to see if the

management/ employees of the companies would fit in well together
- I would like to have a sense of how well positioned GB is to execute a
merger with another company. Have they done this before, for example.

You may choose to dive deeper into some of these issues, of your interviewer
may ask you to do this, for example:

To understand the value of HD to GB, I would want to look at a number

of things
- Growth in market for doughnuts
- HD' s past and projected future sales growth (break down into growth in
number of stores, and growth in same store sales)
- Competition - are there any other major national chains that are doing better
than HD in tem1s of growth/profit. What does this imply for future
growth?

145
,_ Profitability/ profit margin
- Investment required to fund growth (capital investment
., to open new stores,
working capital)

Ouestion 2. The team started thinking about potential synergies that could be
achieved by acquiring HD
Here are some key facts on GB and HD.
Stores GB HD
Total 5,000 1,020
-
North America 3,500 1,000
- Europe 1,000 20
- Asia 400 0
- Other 100 0
Annual growth in stores 10% 15%

Financials GB HD
Total store sales $5,500m $700m
Parent company revenues $1,900m $200m
0 Key expenses(% sales)
Cost of sales* 51% 40%
- Restaurant operating costs 24% 26%
Restaurant property & equipment costs 4.6% 8.5%

- Corporate general & administrative costs 8% 15%

0 Profit as % of sales 6.3% 4.9%

o Sales/ store $Urn , $0.7m

Industry average $0.9m $0.8m

*Variable costs, mostly food costs

What potential synergies can you think of between GB and HD? For
your information, a synergy is an area where additional benefits can be
captured over and above the sum of the two companies (such as cost
savings or additional revenue).

146
 A good answer would include the following: 1
There appear to be opportunities in cost savings and in revenue gains.

In cost savings:
- There may be an opportunity to save on General & Administrative Expenses
through combining management locations j functions
- There may be decreased Cost of Sales (per unit) because the companies are
purchasing greater volumes together

In revenues:
- Additional sales can be achieved through selling Donuts in GB stores
- Also GB have a greater global presence which HD could leverage in order to
grow outside the US

A ven; good answer might also include the following:

- GB appear to manage their property and equipment costs better, which

means that they may be able to transfer this skill to HD
- Since GB has greater Sales per Store, they may have better skills in finding
good locations for stores, and could transfer this skill to HD
- Since GB is bigger, it probably has more investment capital available to help
HD grow at a more rapid rate.

Question 3. The team thinks that, with synergies, it should be possible to

double HD's US market share in the next 5 years, and that GB' s access to capital
will allow it to expand number HD of stores by 2.5 times. What sales per store
will HD require in 5 years in order for GB to achieve these goals? You should
assume:
Doughnut consumption per head in the US is $10/year today, and is projected
to grow to $20/year in 5 years
For ease of calculation, assume US population is 300m
Use any data from the earlier table that you need

A good answer is as follows:

HD will require a sales per store of $1.2m
- Today's market share is $700mj$3b = This is available from the earlier
table, and yoit are encouraged to make sensible, mund estimates in a calculation.
- Expected US market in 5 years = $20 *300m = $6b
- If HD double today's market share, the will have a market share of 50%, so
their sales will be 50% x $6b $3b
[) - They are also expect to have 2,500 stores 2.5 x 1,000)

147
 So sales per store= $3b / 2,500 = $1.2m
A very good observation to make is that this seems like a realistic growth
target, because we are requiring stores sales to less than' double, while we
already know that per head consumption of donuts is likely to double.

Ouestion 4. One of the synergies that the team thinks might have a
big potential is the idea of increasing the businesses' overall
profitability by selling doughnuts in GB stores. How would you
assess the impact of this move on overall profitability?
A good anS'Wer is as follows:
I would try to work out the incremental impact this move would have
on profits. To do this I would:
- Calculate the incremental revenues we would get from selling donuts in
GB stores (how many, at what price, etc)
- Calculate the additional incremental costs that would be incurred from
doing so (for example, additional staff, additional training, additional
marketing, additional distribution and purchasing costs)
- I would also look at the additional store investment we would have to
make (for example, extra space, new equipment, etc)

A good answer would also include:

We should also investigate if the additional donut sales would mean lower
sales of traditional GB products. For example, breakfast products might be
affected as many people have donuts for breakfast. In case you are unfamiljar
with the term, this concept is known as "cannibalization".

Ouestion 5.
What would be the incremental profit per store if we think we are going to sell
50,000 doughnuts per store at a price of $2 per doughnut at a 60% margin with a
cannibalization rate of 10% of GB's sales? Note that the cannibalization rate is
the percentage of Gl8 pmducts which we think will not be sold because they
have been replaced by donut sales. Here is some additional information which
will help you:

Current units of GB sold per store 300,000

Sales price per unit $3 per unit
Margin 50%

A good answer is as follows:

There will be $15,000 incremental profit per store:

148
 - Donut sales will bring in an additional $60,000 in
60% margin)
($2 price x 50,000 x

- However, we will lose $45,000 in the original profit from GB sales (10%
cannibalization rate x 300,000 products x $3 price x 50% margin)

Question 6. You run into the CEO of GB in the hall. He asks you to
summarize McKinsey's perspective so far on whether GB should
acquire HD. Pretend I am the CEO" What would you say?
A good answer would include the following:

Early findings lead us to believe acquiring HD would create significant value for
GB, and thatGB should acquire HD
- US Growth targets seem achievable given the expected growth in Donut
consumption in the US
- There are other opportunities to capture growth from international
expansion of HD
- We also believe there are other potential revenue and cost synergies that
the team still needs to quantify

A very good answer might also include the following:

- We believe can HD add$15k in additional profit per GB store simply by
selling donuts in GB stores. This represents a -25% increase in store profit
from this move alone.
- We will also provide you with recommendations on the price you should
pay for HD, as well as any things you need to think about when
considering integrating the two companies.

149
 '

'
'

'l '
32. Big Pharma vs. Biotech

Stem
your client is a major pharmaceutical company. You were approached by the director of
licensing to evaluate a potential investment opportunity for the company. A biotech firm has
been developing a new oncology treatment that is expected to reach market in 2 years. The
licensing director has asked you whether or not the drug is a good investment opportunity for the
pharmaceutical company, and if it is, then whether the company should license the drug from the
biotech fitm or acquire the drug outright.

Behind the Scenes: This is a difficult and long case (45 minutes to 1 hour). Parts of the case
can be shortened or skipped ifnecessary, but all parts are worth working through ifyou have
time. The case is particularly valuable because it assesses the interviewee's ability to I)
logically think through an industry the interviewee likely knows little about (the pharmaceutical
industry}; and 2) analyze the high-level strategic considerations involved in a negotiation
I process. This case is especially difficult because it is not about the numbers; the real value lies
I in being able to take on multiple perspectives in order to assess relative bargaining power and
I
I important personal factors that would come to play in a negotiation.

1''Phase: Evaluating the Dmg as an Investment Opportunity

!
Behind the Scenes: This should be similar to a market entry/M&A analysis. The precise
numbers are not important; howev6f, broad assumptions should be supported with sound
reasoning. Let this be a conversation and do not provide data until asked, although encourage
the appropriate questions if the interviewee is getting off track or taking too long.

Interviewer: How would you go about evaluating the drug's potential value?
Case Data:
Drug and Market Data:

Note: oncology= cancer (the clinical term for cancer treatment)

The drug is a chemotherapy treatment for 3'd stage colon cancer.
There are 1 million patients in the U.S. cunently diagnosed with colon cancer. 1/3 of
diagnosed patients are in the 3 rd stage. .
3'd stage colon cancer is a terminal condition (i.e., there is no cure and patients will
eventually die).
The net growth in the patient population is 4% per year (i.e., the number of new
diagnoses less the number of patients that die each year increases the total population of
diagnosed patients by 4% per year).
The drug is a palliative heatment, not a cure. Clinical trials show that the drug will be
better than competitive treatments currently available in two ways:

150
 o The drug will extend the life of patients to an average life expectancy with
treatment= 1 year (this is longer than with competitive options).
o The drug will have fewer painful side effects than existing chemotherapy drugs.
The marketing department intends to set the price of the drug at $10,000 per dose, in line
with existing competitive treatments.
o Note: 1 dose= a full course of treatment (i.e., only 1 dose per patient, with no
repeat treatments).
The drug is cunently entering Phase III clinical trials (the final phase before FDA
approval).
There are 12 more years left on the patent (Note: dmg patents typically last 16 years).
There is a high likelihood that the dmg will be approved by the FDA
Costs to produce the drug once it reaches market can be assumed to be in line with an
average drug. There is nothing overly complicated, special or expensive about producing
this drug;

Interviewer: Given what you know, what do you thin.lc is the maximum potential revenue that
could be expected from sales of the drug?

Possible Answer:

The cunent maximum potential market size can be calculated as follows:

o 1 million total colon cancer patients x 1/3 in 3rd stage= 333,000 potential patients
who would be eligible for treatment cunently.
o Assuming the average life expectancy with treatment= 1 year, and that 1 dose= I
full course of treatment, we can assume a maximum potential sales volume of
333,000 doses per year, given the current eligible patient population.
o At $10,000 per dose, the total potential sales this year= $3.33 billion.
However, this assumes that all diagnosed patients will be treated, which is unreasonable
if you consider the following:
o Not all patients are covered by insurance.
" (Note: it is reasonable to assume that the drug will be covered by
insurance because it is better than altemative treatments, but priced the
same.)
o Not all patients will choose treatment even if they could afford it, given that
chemotherapy is highly unpleasant and is not a cure.
Also, it is unreasonable to expect that this drug would achieve 100% market share as
some doctors and/or patients may be unwilling to switch treatments.
On the other hand, the total eligible patient population is growing at 4% per year, and the
dmg will take 2 years to reach market, and a few more years after that to reach peak
sales.
Taking into account all of the above considerations, a reasonable final assessment of the
maximum annual revenue would be $2 to $3 billion.
o (NOTE: the interviewee can make simplifying assumptions about the above
adjustments, but this number should be thought through.)
$2 to $3 billion in aruma! sales is a lot of money- that sounds like it could be a
blockbuster!

15 I
 Phase: Understanding the Market
Behind the Scenes: This section is intended to get the interviewee to think through the forces
involved in a market they likely know little about. This is not at all about the numbers. The
interviewee should be able to logically derive the impmiant variable factors and risks in the
pharmaceutical market. If you are pressed for time you can skip this section.

Interviewer: Great. Now without worrying about the specific numbers, can you draw a graph
that shows what you expect the trajectory of revenues to be over time for the drug (draw a graph
with time on the x-axis and revenues on they-axis)?

Possible Answer:

Sales
j
I

Year2 YearS Year 12

The drug will reach market in Year 2, but it will then take a few years to build up market share.
However, given that the drug is better than the competitive options, we can assume that the drug
will reach peak sales around year 5. After the peak, that sales would probably plateau or maybe
decrease slightly as new drugs might potentially enter the market. Finally, sales would probably
drop off entirely (or at least to a negligible level) as the patent expires and generics reach the
market.

(NOTE: pretty much any variation of the above can be justified, but the key issues that should be
reflected are 1) we should expect that it will take a few years to build up market share, 2) sales
will eventually reach a peak or at least level off (or given the growth in the market, one could
argue that sales will grow along with the patient population), and 3) sales will drop considerably
when the patent expires).

Interviewer: (Talk through the assumptions made in drawing the revenue graph. If the
interviewee does not explicitly discuss marketing, ask the following question). What do you
think will be the single most significant factor that would affect how quickly the drug will be
adopted and reach peak sales (i.e., how steep the slope of the graph will be in the early years)?

152
 Possible Answer: Marketing expenditures. There's a lot of marketing in the pharmaceutical
industry: a large sales team would have to go to oncology conferences, advertise in medical
journals and meet individually with doctors to inform them about the fuug

Interviewer: On the same graph, can you draw what you expect the marketing expenditures to
look like over time? Again, you can ignore the precise values, but try to capture the relative size
of marketing expense vs. revenues over time for the drug.

Possible Answer:

Sales

Year2 Year 5 Year 12

Marketing to start very high a year or two before the drug reaches market. Once the drug enters
the market I'd expect marketing to increase slightly, and then eventually drop off as the dmg
reaches its peak market share. I would expect at least some maintenance marketing to continue
over the life of the dmg until the patent expires.

(NOTE: Typical dmg marketing expenditures start 1-2 years before a drug is launched, and then
eejual200% of Year 1 sales, 100% of Year 2 sales, 50% of Year 3 sales and then decrease over
time.)

3rd Phase: Strategic Analysis of the Drug as an Investment Opportunity

Interviewer: So what do you think? Do you think the drug is a valuable investment opportunity
that the client should pursue?

Possible Answer: Yes, the drug could likely be a blockbuster. Assuming costs are in line with
typical dmgs, then this drug could be significantly profitable. However, that all depends on the
price our client would have to pay to license or acquire the dmg. Also, I'd want to know a bit
more about our client to make sure it makes strategic sense to pursue the dmg.

Interviewer: Well I agree, it definitely sounds like the drug will be valuable. Now the question
is whether or not the drug will be valuable for your client. How would you go about evaluating
whether or not your client should pursue the drug?

153
 Behind the Seems: This section should address the high-level strategic considerations that
should be used in evaluating any major investment opportunity. In pmiicular, three major
questions should be addressed:

1. Feasibility- Is the investment even feasible? Does the film have the resources (money,
time, capabilities) to make the investment even if it wanted to? If not, then there is no
need to bother with any more analysis.
2. Strategic Sense- Does the investment make strategic sense for the firm? Does it fit with
their cunent business model? Does it compliment their cunent product line, or will it
cannibalize sales? There should be a compelling reason why the firm wants to make the
investment beyond simply monetary considerations. '
3. Price - Can the fnm get a good price for the investment? Remember, there is always a
price too high that will make a project have a negative NPV, and there is usually a price
low enough to give the project a positive NPV.
Let this be a conversation, but provide some guidance about the strategic issues you want to
discuss. In particular, steer the interviewee away from focusing on the numbers.

Case Data:
! Company (Client) Data.
I

I
I
\
I
Massive phmmaceutical company (think of Pfizer, Wyeth, GlaxoSmithK.line, etc.) .
NOTE: All Big Pharma companies typically have tons of cash and little, if any, debt.
Company cunently does not have any oncology (cancer) treatments.
Company has the resources (production capacity, sales expertise, R&D staff and lab
space, etc.) to take on the new dmg.

Target (Biotech Firm) Data:

Small biotech finn, founded 10 years ago by the current CEO straight out of medical
school.
Can be assumed that the cunent dmg under development is the only dmg in the pipeline.

Possible Answer: Well given that our client is a massive pharmaceutical company, it seems
reasonable to assume that the investment would be feasible (i.e., they have enough resources-
cash, capacity, expertise, etc.- to take on the dmg).

Also, from a strategic perspective, I think this dmg could be a great opportunity for the client to
enter the oncology market, and without any current treatments in their pipeline, they wouldn't
have to wony abotrt possibly cannibalizing the sales of one of their own existing products. Of
course, I'm assuming again that our sales team could develop the expertise and contacts
necessary to market the drug, and that we have the production capacity to successfully launch the
drug in the market.

154
 So it's feasible and makes strategic sense for our client to pursue the drug- now the only
question is can they get a good price for it?

4th Phase: Analyzing the Negotiation for Acquisition vs. Licensing

Interviewer: How do you think the price that your client will be pay will be determined?

Possible Answer: Well I imagine that both our client and the biotech finn would arrive at a
valuation for the drug, and then the final.price would be decided based on a negotiation.

Interviewer: Assuming that the price will be arrived at via negotiation, what factors will
dete1mine whether or not your client will get a good price, and in particular, are there any factors
that might make an acquisition or a licensing atTangement a more attractive option for your
client?

Behind the Scenes: The key here is to perform a risk-benefit analysis fiom the perspective of
each pmty in the negotiation. Again, let this be a conversation, and try to get the interviewee to
analyze the problem from both perspectives involved in the negotiation.

Possible Answer: The following table summarizes some thoughts about the relative value of the
drug to either our client or the biotech fnm.

Client: Big Pliarma Target: Biotech

(-) Less inf01mation about the clinical
effectiveness of the drug, or problems or costs
associated with development. This would lead
to a lower valuation (or at least less accurate).
(+)Possibly more information about the drug's
commercial potential, given the large amount
of experience, established sales force,
connections within the medical industry, etc.
Although, limited experience with oncology
treatment could temper this.
(+) Given above market expertise, the dmg
would likely be more valuable if the client
brings the dmg to market (they could do a
better job selling it, and make it more
profitable then could the biotech alone).
(+) The cost of capital for the client is likely
much lower than for the biotech finn (mature
business; very little, if any, debt; a portfolio of
drugs; etc.). Given the financial timeline of the
dmg with heavy upfront costs on R&D, CapEx
investments in production, and marketing
[; expenditures, followed later by positive cash
flows, the lower discount rate would make the
(+) More information about the drug, its
effectiveness, development processes, costs,
etc. This would lead to a higher valuation (
at least more accurate).
(-)Less infonnation about drug's commercial
potential, given limited experience bringing
drugs to market_
(-) The dmg would be less valuable if the
biotech finn tries to bring it to market alone.
They don't have the market expe1tise, and may
not have the production capacity or necessary
scale.
(-) The cost of capital is likely higher, making
the NPV valuation of the dmg lower than for
the Big Phanna client (see reasons to the left).

!55
 drug more valuable for our client than the
biotech firm.
(+)While the dmg could be valuable to the (-)The biotech finn is entirely dependent on
client, they have an entire portfolio of dmgs to the success or failure of this drug. They would
fall back on and don't need this particular dmg likely be more desperate to get a payout.
Based on the above, it seems clear that the drug would likely be more valuable to our client than
it would be to the biotech firm alone. Therefore, I think our client could likely get a good price
for the dmg in a negotiation, assuming other competitors are not also bidding for the drug. Of
course, if there is other competition for the dmg, then the biotech firm would have much more
bargaining power and could extract more of the value from the dmg. But either way, the biotech
finn would likely prefer to at least partner with another established phannaceutical company to
bring the drug to market, because more value would be created that way than if the biotech went
to market alone.

Now I'd like to consider the question of licensing versus acquiring the dmg outright. Do you
. have any more infonnation about the structure of a typical licensing agreement or what exactly
an acquisition would entail?

Interviewer: Sure. There is really no "typical" licensing agreement. Most licensing

arrangements usually involve a series of milestone payments when the dmg reaches certain
phases of development (i.e., completes a clinical trial, or receives FDA approval); as well as a
split of revenues once the drug is launched in the market (a revenue split is more common than a
profit split because profits depend more on accounting conventions, and are therefore easier to
manipulate). You can assume that a license for this dmg would primarily involve a revenue
split, and you can ignore milestone payments.

Alternatively, in an acquisition the acquirer would typically acquire all the rights to the drug as
well as the R&D staff and resources currently employed in developing the drug. In thiscase,
because the biotech firm is only developing this single drug, you can assume that the entire
company would be acquired in a traditional M&A context.

So, given that, what do you think makes more sense: to license the drug, or acquire the target
outright?

Possible Answer: The following table summarizes some thoughts about the relative value of
licensing the dmg versus acquiring the target from both the perspective of our client and the
biotech firm.

Client: Big l.'harma Tar"et: Biotech

Risk Factors: Risk Factors:
The client likely has a much higher risk The biotech fitm (and more importantly its

...
tolerance than does the biotech finn. The
client is larger, more mature, has tons of cash,
A and a portfolio of dmgs. The success or failure
of this single dmg would likely neither make
nor break the fitm.
investors) likely have a much lower risk
tolerance than does the big phmma company.
The fitm is entirely reliant on the success or
failure of this single drug, and does not have a
portfolio of other drugs to fall back on.

!56

Financing Factors:
From a financing perspective, the client has the
resources to make the investment, but they also
likely have other investment opportunities. The
client does not need this drug to be successful,
but it would like to have it, depending on the
price.
Personal/Emotional Factors:
The client is the licensing director for a major
phatmaceutical company. His daily job is to
license or acquire drugs as inves(!llents for the
client company. He would obviously like to
get a good deal on a promising drug, but he
likely has little emotional attachment to the
drug itself.
Recommendation
Interviewer: The licensing director would like ;m update on your recommendation. What should
he do?
From the perspective or risk, selling the drug
rather thanlicensing it would be less 1isky for
the biotech firm; hence, the biotech may be
willing to give a better price in an acquisition
than in a licensing deal.
Financing Factors:
The biotech firm probably has significant VC
financing, and large amounts of debt. The
VC's may be more interested in a quick
guaranteed cash payout, rather than a
prolonged development with an unsure payoff.
Furthermore, a guaranteed cash payout
guarantees debt service will be possible.
In this case, given the biotech firm's potential
financial constraints, the biotech film again
may be willing to give a better price for an
acquisition then for a licensing arrangement.
Personal/Emotional Factors:
The CEO of the biotech film founded the frrrn
straight out of medical school. This is likely
the CEO's pet project. He likely feels very
attached to the project. He may be an example
of"founder's syndrome," and would therefore
be reluctant to give up control of his company
by selling it outright, and may therefore give a
better deal for a licensing arrangement.
On the other hand, perhaps this is the CEO's
ticket to riches and he's looking forward to an
early retirement, or to building another startup.
In this case, perhaps the CEO would be more
willing to sell then license the drug.
These factors are unclear, but should definitely
be taken into consideration. Perhaps if the
CEO was a 65-year-old industry veteran the
story would be different.
157
1

Possible Answer: Pursue an acquisition of the dmg. The dmg is a very promising treatment that
is better than the competitive options cunently available. With reasonable assumptions about
market share and growth forecasts, you can expect that this dmg could be a blockbuster with $2
to $3 billion in peak annual sales. Furthermore, the dmg represents a good strategic opportunitY
for the company to enter the oncology market. I also think that your company has strategic .
advantages relative to the biotech f= that would allow you to get a good price to make the dfug
a profitable investment opportunity. I recommend that you pursue an outright acquisition of the
dmg rather than a licensing deal as I think it's likely that you would get a better deal with an
acquisition. Finally, I recommend you act quickly to acquire the dmg. The longer you wait, the
more likely it will be that your competitors would bid on the dmg, shifting much more
bargaining power back to the biotech finn.

158