Saturday, January 06, 2007

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?

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.

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