Case interview: Building products company

The following post is courtsey Tuhin and Tarun

" Tuhin interviewing Tarun29 Dec 2006

Topic: Investments / Acquisitions

The CEO of a large diversified building products company has asked to look at his division which manufactures china products, including tubs, toilets & urinals. He wants to evaluate the decision to invest $250m in a new manufacturing facility. What are the issues that need to be considered when making this decision?

Where does he have his ops?In the US. He's one of seven producers in the US. The largest has 20% mkt share. We are #3 with 15%.

Is the market equally distributed among the other four?Yeah, more or less

What are the kind of products that the client builds?The division builds tubs, toilets & urinals. Apart from that, we make anything that is used in construction.

Restate: Our client is a building products company, and wants to evaluate the decision of a $200m investment in a new manufacturing facility, which would manufacture china products.

Are the products only for commercial or residential buildings?Not specific, general

Is the construction market growing?Market, by itself, is linked to new housing. We can safely assume it is growing.

And do we have a dollar value of market?No, I don't have $$ value. Let's assume we grow at same rate as market, holding the same market share.

Maybe you want to think about other positives apart from increasing sales?Does the client also export stuff?No, primarily USA.

Apart from growing sales, he might want to shut down existing facilitiesNo, existing facilities will remain.

Do you think there'd be a cost impact?He could be considering economies of scaleYeah

How does the client fare with competitors in terms of prices?Competitor has been cutting prices. Ours have been flat. Two largest competitors are making a profit, we are only able to break even.

Are the supply sources the same for us & comp?Yes, the cheapest.

Are we catering to the same market as comp?How would you define market?E.g. Comp could be sourcing to commercial market. We're doing home segments. Maybe we're trying to subsidise home segment. Is that happening?No, we're targeting pretty much the same segments.

How much augmentation is this new facility going to make to his existing capacity?I don't know. All I know is he's asking for $200m.

What has been the reason that competitors have cut prices?Primary idea behind industry is volumes. No differentiation. Comp have managed to cut prices with scale.

I want to look at our cost structure and compare that with comp.OKSo, Yep

How's our distribution set up, as regards comp?Same. We use trucks.

How about current manufacturing facility?Anything specific you want to ask?
Do we have a stock out problem?No
With the added facility, will the client be able to sell excess stuff? Is there enough demand to justify that?True, that's a factor to be considered. Will be kept in mind when making the proposal for the $200m.

What are our operating costs? Labour, material, operating?Yes, yes. Any other costs?Overheads.Yep

How's our client's manufacturing facility?Mixed prod facility. Pretty much the industry norm - it's a moulding industry. The increased level of production would help me reduce VC.Will that be in form of material cost?No, it's currently the cheapest.Any automation in our facility?Yep, in line with industry stdAre we catering to entire US market?Yes, we try to.What are our ops cost? Do we use our own trucks?YesWill the new facility be located somewhere we don't have nay other place?It will be placed strategically.

Are our overhead costs in control?These are just allocated costs.

Is there anything apart from manufacturing you should be looking at?Is the distribution a problem?No, let's say I just hand it over to a distributor's warehouse.

How do we promote our products? How does our customer know of us?We have a good brand name, and get asked for from our distributor.

Is there any area I'm really missing here?You've covered most of the issues that are there. Question remains if I should invest 200m.

Umm.. there's nothing to be set right here. If he wants to invest 200m, what's the benefit he gets in terms of cost. If this facility gives us economy of scale... Look at location of facility, to ensure proximity to suppliers & distributors. Perhaps look at proximity to upcoming markets.If the benefits of all these amount to greater than cost, he should go ahead. That's about it.

Key Learnings

1) Completely skipped phase 2 and started to ask questions in phase 3
2) Interviewee did not realize that it was time to make recommendations inspite of covering all areas defined in the issue tree.
3) Did not apply MECE while covering cost areas (Missed out on operating costs but recovered eventually)"

Case Interview: US payfones

The following post is courtsey Tuhin and Disha.

"Tuhin interviews Disha Rustogi
++++++++++++++++++++
18 Dec 2006

Good evening, Ms Rustogi
Good evening, Mr Verma

Let's start with our case-based interview
The client is a major player in the payfone industry. His market share in the last year has gone up by 20% in the past year. But he's seen a decrease in profitability. The question is why has this happened? And what can we do about it?

Phase I
=======
Can you tell me which geography? Based in US.
Is the client active througout the US?
Pretty much.

I'd like to tell you about the workflow how the revenues of this client are generated. Please tell me if they're right.
Assuming that payfones owned & installed by the client. No, they're owned by the telecom company. I manuf these payfones, my telecom companies place orders and tell me the locations. I install them there, I also do maintenence, but maintenence contracts vary.

Restate: We're looking at a client that manufactures payfones. Its clients are telecom companies. The Market share has increased by 20% last year, but has reduced profitability, which it is looking to resolve.

Comments: No measure of profitability decline! By when do they want it resolved??

Phase II
========
Look at two sides - revenues & costs.
In costs - variable & fixed
In revenue - the company, competition, the environment & market, the pricing, promotion, essentially the 4Ps
How would promotion affect revenues? How would distribution affect revenues? -- to be debated later

Phase III
=========
Revenues first
---------------
Divide it into price & volume
Do we have revenue figures for last year? No, I just know my market share went up 20%
I know my price dropped by 10%
And my volume dropped by 15%

How much is my market share? 55%.
Am I market leader? Yes
Competitrs? Two major ones - they own the rest of the market, mostly.

So, this is a declining market. Is this a trend that has continued over a period of time.
Last year, two of my competitors dropped out, I gained their market share.

Do we know why competitors dropped out?
No, they didn't find it viable to continue.

Any idea why they didn't find it viable?
I don't know.. maybe their internal calculations.
Also, the competitors' market share is now mine --

Were these competitors based in a specific location?
Irrelevant

Were they selling to telecom operators at a specific price and we had to match it?
Why don't we try to find parity between volume decrease and price decrease? If we took over the installed base of the competitors, our volume should have gone up. Plus, the market prices would prevail as the payfone is not a differentiated product.

Are the other competitors faring well?
They have their market share. What do you mean by "faring well"?

My market share = total installed base

Do we have any idea of this year's market share?
We know my volume has gone down by 15%
Source of confusion: Market share is historical base of installed phone, not share of phones sold in the current year. And volume is the current year's sale.

Do I have an idea of the current year's market size? No, I don't know how big the pie is. But let's say I get the same proportion YOY.
Since price & volume are going down, therefore my profitability is falling.

Moving to costs
---------------
Have my fixed costs changed?
No, no change, I have enough capacity.

Are my labour costs higher?
Nothing out of the ordinary. Regualar pay hikes, etc, pretty much the same.

Any other labour issues? Unions?
Labour is unionised, but that's the way it's always been.
As my sales volume has gone down, but labour costs have gone up. Why should I do that just because of a one-year dip?

Material costs? Have those changed? Fuel costs went up, so material costs went up too. Same for everyone.
Is there a reason why my prices have dropped, inspite of cogs going up? Yeah, I had to stay competitive. Cost of materials has gone up for no fault of suppliers.
What is the profitability figure? No information available.

Can I frame my recommendations?
Can we answer both questions? Any questions that could be relevant to the latter question on what I can do about this?

Price cut is industrywide.

Considering I'm the largest player in the market, is it feasible I can increase the price?
Don't you think my volume would go down further? Please consider that this is a commodity product. I could lose a heavy amount of customers.
Ms Rustogi, have you used a payfone in the US? No. Have you seen one? When would you use one? When I don't have a cellphone, or in an emergency situation.
So, if I don't want to use a payfone, what would happen to demand? It would go down. The reason being alternate methods of calling.

Can I frame my recommendations?

Phase IV
========
-It is a declining market. But you're the largest player.
-Though it is a commodity market, you are a consortium of three players.
-Raise prices through price discrimination
-Either wait for others to go out of a business, or raise prices to increase revenues.
-You have issues on costs, labour is unionised.
-Material costs are highly dependent on fuel prices, and would fluctuate accordingly. Change policies so that competitors don't undercut you straightaway.

Reasons, summarised:
1. Market going down
2. Price competition
--> Gaining market share has not helped you

Depending on your cash flow, do either:
1. Bail out, probably not feasible
2. Acquire the others --> no, it is monopolistic.
3. Drive up the prices by forming a consortium.
4. Diversify, but not enough

Key Learnings
The interviewee missed out the following things:

1. Analysis of why the demand for payphones has fallen in-spite of increase in market share.
2. The structure is at an extremely high level and needs to be a bit more detailed in the branches of the decision tree.
3. Did not apply the SMART rule in problem definition (Missed out on M and T)
4. Recommended the possibility of collusion amongst the market leaders but needs to consider that it might have legal implications.
5. Out of the two questions posed, the first question was resolved but the question “What can the client to about it” was not analyzed.

Where is the Value add in a Case interview?

The following post is courtsey Manu and group. A useful set of takeaways from their mock interview.
======================================================
" We had our mock case analysis session with our ISB alumni, Mr. Ganesh Srinivasan from McKinsey & Co.

After going through our case, Ganesh gave us a few important pointers.

Key Take-Away:

1) Most people will get the problem definition and structure in place before the placement season. But, that is not where the value is.

2) It is true that everyone who has come to campus to advice us on case preparations has stressed on the structure and logical thinking. However, it is very important to keep in mind what the real purpose of the exercise is. If you take a step back and look at what one has achieved after putting a structure in place, and extracting all the information from the client/interviewer logically and exhaustively, there has been no value-add as such from the interviewer’s/client’s point of view. You have merely asked him to divulge all the information he already knows.

3) The most value-add is actually in the solution itself. Show your creativity here. It is very important to pace your analysis such that you give enough time to get to this stage. A major portion of the points allocated in assessing a candidate is based on creativity of solutions.

4) By around 20-25 minutes into the case interview, one should have already extracted all the information from the client/interviewer and identified the problem. This should’ve been accomplished keeping in mind the structure and logical flow of questions. The next 10 minutes should be spent in coming up with a number of creative solutions (as exhaustively as possible), and going over the pros and cons of each of those solutions. This further exhibits to the client/interviewer your structured thinking even in coming up with solutions.

5) Spend the last 5 minutes of the interview, synthesizing these solutions and eliminating the most risky/improbable ones. Then summarize the problem and restating the short-listed solutions.

"

Mock Case Interview with alumni

Many alums working in consulting firms, volunteer to help the current students prepare for the case interviews. The consulting club of class of 2007 had organized mock interviews via videocon with alumni in various firms. One such experience is posted below for the benefit of all:

“The other day we had a session for an hour with Jatin Pant( McKinsey), and discussed three cases, each for 15 minutes, and had 5 minutes of feedback after that, given by Jatin and the other observers.
The following is a case discussion and analysis. Inputs from Jatin have been incorporated within the case itself.

Case: Unannounced strike by servers forced Sarovar Dining Hall to close for a month. However, Sarovar Café remained open catering to ISB students and staff during the month. The management expected huge profits due to the heavy traffic frequenting the café. At the end of the month, the P&L statements showed losses. What is the cause of this loss?

The First stage: Problem definition.
Before the problem is defined with the customary, “As I understand…” one should ask a few questions to bring out the fact that the problem has been understood. Like, the magnitude of losses (in this case it was around 10%), the expected profits (+10%).

After this the problem can be stated like this: A month long strike of the Dining Hall made students flock to the Café for their meals. The management had expected the profits to be around 10%, however, the end-of-month P&L showed losses (negative profits of 10%). The reasons for this 20% setback in profits need to be analyzed.

Jatin had mentioned that one needed to have a framework to understand the real problem. Even before the solution space is defined, the real problem needs to defined.

The Second Stage: Solution Space
The interviewee had decided to analyze the case by looking at three levers 1. Traffic at the café 2. Menu served 3. Timings of the Café 4. Raw material
Another way to define the space is to talk of Internal and External factors. Internal factors are those related to the operations of the Café, while External factors pertain to competition, substitute products and so on. In this case, as it was known to the interviewee that it Sarovar was a monopoly, the external factors were not discussed.
The other way is to talk about Revenues and Cost, and then proceed further.

The third stage: Analysis
Traffic: 418 students frequented the Café, twice a day
Menu Items:
Price?: The standard prices were maintained during strike
Standard food v/s Variety?: In fact, students having been used to variety of the dining hall demanded customized orders. Hence, a significant number of orders were customized for them.
That led to asking about the price of these products – they were not charged a premium for customized food.
3. Timings?: Sarovar operated as they had always been operating, however, there was an extension of ½ hr in the morning to cater to the crowd.
4. Overtime wages? Yes, the Chef and 3 waiters who had come early had to be paid extra. Did the traffic justify their early arrival? – No, not many people came to the café around that time.
5. Infrastructure? – Furniture was leased (at a premium because of the short notice period of strike) to seat the crowd of students.
6. Raw materials? Our supplier remained the same. But the heavy customization orders forced us to obtain items which we hadn’t bought before, and we were charged a premium for the short notice that we gave them.

One needs to bring to a conclusion each of the findings, especially the fact that large number of customizations lead to high costs, and in the absence of capturing the same in the P&L, it is lost.
The profits have been eroded due to: premium paid for renting furniture, overtime expenses, and premium for raw materials.

Jatin mentioned having the second framework, which is essentially a checklist to ensure that the major ideas that can cause the loss for a Café/restaurant is captured.

The Fourth Stage: Synthesis
The case needs to be concluded with the main reasons for a loss and if possible, giving a solution for each of the problem identified.
For example – pricing for customization, staggered timings to control the traffic and remove the furniture/ get it from Sarovar Dining Hall, reduce the staff (cut the overtime) and other creative suggestions.

Jatin’s main feedback centered around developing two critical frameworks:
To pin down the real problem from the case presented to you
A checklist framework which captures the main reasons why such a thing usually happens.

He emphasized on being confident, listening and taking hints, clarifying in case of doubt, and being involved with the case.
He signed off with Good Luck!”


Posted by: Enakshi Chatterjee
Group members: Rishik Ghosh, Rutvik Pawgi, Ashish Kumar Patidar, Siddhartha Pakrashi