the qvartz case interview handbook · well as whether a career in management consulting is for you....
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The QVARTZcase interview
handbook
How should I use this handbook?
The purpose of this handbook is to serve as a source of inspiration during your interview preparation. We recommend browsing through all sections of the handbook to ensure that you are familiar with the various topics covered in it. At QVARTZ, case inter-views are a part of the recruitment process for full-time Consultants, Junior Consultants and Interns. The contents of this handbook will, however, not be explicitly tested during the recruitment process.
Is this handbook relevant for me?
If you are new to case interviews and you are pre-paring for upcoming interviews, this is the hand-book for you. If you are already a seasoned case solver or have read other literature on the topic, the handbook may be of less relevance to you. See the section “Additional resources for case preparation” for other recommended sources of information.
Should I prepare before the interview process?
Very few make it successfully through manage-ment consulting interviews without preparation, and we therefore strongly recommend that you take the time to prepare as this greatly improves your chances of securing a job offer. The vast majority of successful applicants across all management con-sulting companies have prepared by reading up on cases, practicing with friends and brushing up on their mathematical skills.
When you are invited for an interview, you can safe-ly assume that your CV is good enough. What is left to do is for you to show your personality and to demonstrate your ability to work in a group – as well as your analytical and problem-solving skills. One of our consultants who recently joined QVARTZ shares her top-3 preparation tips here:
1. Practice problem solving in a structured way, but preferably without clinging too much to specific learned-by-heart frameworks. Make sure you are familiar with the most common types of cases
2. Practice calculations without a calculator (it is usually fine to use pen and paper, however)
3. Reflect on who you are and how to best convey yourself. Consider how you want to interact with the rest of the group – both in group inter-views and under less formal circumstances
If you want to know more about our recruitment process, go to www.qvartz.com/career. Here, you can also find information about open positions and upcoming recruitment deadlines.
Introduction
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QVARTZ: Nordic heritage, global reach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The case interview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Types of case questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
How to open and close a case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Frameworks for business cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Profitability framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Industry analysis framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Mergers & acquisitions framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Product strategy framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Additional resources for case preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Quantitative preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Example cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Table of contents
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QVARTZ is a management consulting company with Nordic heritage and global reach. Our purpose is to inspire, deliver and demonstrate “next practice” leadership and organization. Our civilization con-sists of passionate and empathetic people, intro-verts and extroverts, business profiles, economists, engineers and scientists. Together, we tackle and solve complex problems and make others shine in the process.
QVARTZ was founded in 2002 with a relentless desire to create a tier-one original in manage-ment consulting with less dependence on standard methodologies and more emphasis on listening and giving advice based on the client’s specific challeng-es and opportunities as well as our specific insight and experience. Today, we follow our clients around the globe from our offices across Europe, the U.S. and Asia, constantly exploring new opportunities to strengthen our relevance.
QVARTZ: Nordic heritage, global reach
Getting your head around what management con-sulting is all about can be difficult. At QVARTZ, we aspire to deliver results and build relationships in everything we do. Through a combination of rigor-ous analyses, solid experience and deep industry insight, we help our clients improve their business – whether this requires reducing costs, maximizing investments or restructuring the organization.
As a consultant with us, you will work closely to-gether with the client and your team. Being a good management consultant is therefore not only about having the black belt in problem solving. It is equal-ly important to be able to understand your client’s business and culture, and to be able to work with and motivate different personality types in different team structures.
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The case interview
What is a case interview?
In a case interview, the interviewer will present you with a challenge faced by a company. You are asked to analyze and solve the problem through a discus-sion with the interviewer. The majority of case in-terviews are based on real client projects, and the interviewer may therefore have additional knowl-edge or information to draw upon during your dis-cussions than that which was initially presented.
Why case interviews?
Consultants tackle and solve problems. Case inter-views are an effective way of simulating the kind of problems we encounter on a daily basis. They pro-vide a fast and concrete way for us to understand how you frame and solve ambiguous business prob-lems. In addition, they also give you an opportunity to gain a better understanding of the work we do as well as whether a career in management consulting is for you.
What do we look for in the case interview?
The case interview is designed to test skills that are common to almost all consulting companies, though they may be described and weighted a little different-ly in different places. During case interviews, the in-terviewer is looking to answer at least two questions:
1. Would you thrive when solving our clients’ problems? The interviewer will assess your ability to combine skills such as logical reasoning, creativity, quantita-tive skills and business acumen as well as your abili-ty to put it all together in a structured way.
2. Would you work well with us and our clients?
Management consulting is based on teamwork. Your ability to interact with others and your communi-cation and presentation skills are therefore of great importance. The interviewer wants to learn if you are tactful and approachable, and how you handle constructive input. Additionally, he or she wants to evaluate if you present your arguments in a clear and concise manner that would be easy for a cli-ent to follow. Do not be afraid to show that you are human; a welcoming and attentive attitude goes a long way.
The group case session
The group case session is designed to give you an opportunity to show how you work with peers to challenge problems. In addition to the problem-solving approach, teamwork along with effective communication and the ability to show re-spect and empathy will be evaluated. Throughout the group case-solving process, an interviewer will listen in on the group’s communication to observe how its members interact, and continuously provide feedback.
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Types of case questions
Interview cases generally fall into two categories, (1)Estimation or market-sizing cases and (2) Business cases. At times, the interviewer may also ask you to include a market-sizing question as part of a larger business case.
1. Estimation or market-sizing cases
In estimation or market-sizing cases, you are asked to estimate a quantity that you will not likely know in advance. Examples of estimation case questions are: “How many gas stations are there in Sweden?”, “How many trains are in motion in the Singapore metro system right now?”, or “What is the value of all coal produced in the U.S.?”
Typically, there is not one correct answer. The pur-pose of these cases is to understand how you work logically through a mathematical problem, make reasonable assumptions and interpret mathemati-cal results. While you cannot prepare for the exact problems, there are a few things to think about and possible approaches you could consider.
Communicate your approach
Before you dig into the details, it is a good idea to think through your mathematical approach on a high level and then briefly communicate it to the in-terviewer. In that way, the interviewer can give you an indication of whether you are on the right track from the start or intervene and help you change di-rection before you spend time on an approach that may not work out.
Approaches
A) ExtrapolationOne approach is to extrapolate a metric from one element against an entire population. As an illustra-tive example, you could answer the question “How many gas stations are there in Sweden?” by extrap-olating your knowledge about the number of gas stations in your local region against the whole coun-try. (E.g. three gas stations per 50,000 inhabitants in a given city would bring you to 600 gas stations across Sweden, assuming a population of 10 million people).
B) Segment-by-segment breakdownAn alternative approach is to isolate the estima-tion per segment. Visually, you could do your cal-culations in a table format, which makes your work well-structured and easy-to-follow. As an illustra-tive example, you could answer the question “How many diapers are sold in Singapore each year?” by segmenting Singapore’s population by logical age groups and then making sound assumptions of the average amount purchased per capita for each group.
C) Driver breakdownA third approach that works well for many estima-tion or market-sizing cases, especially the more unconventional ones, is the driver breakdown ap-proach. Here, you begin with the key metric and systematically decompose it into its corresponding drivers. Keep attempting different decompositions until you find that the subcomponents are manage-able to make your assumptions on. As an illustra-tive example, you could answer the question “How many golf balls are in the air in the U.S. at 11 a.m. on a Saturday morning?” by breaking it down into its subcomponents “number of golf balls in the air per course” times “number of courses in the Unit-ed States”, and subsequently breaking those down further.
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2. Business cases
The business case interview is by far the most com-mon type of case interview. A business case inter-view begins with the interviewer presenting you with a challenge or opportunity faced by a company and asking you to analyze and resolve the situation through a discussion with the interviewer.
Business cases are designed to simulate real-life consulting projects, and sometimes the interview-er may even roleplay one or several “characters” in-volved in the case to get as close to a real project as possible. He or she could provide you with relevant data upon request — or — after a given section of a case, ask you to analyze or investigate certain top-ics. The types of topics vary; you may for example investigate how to make a company’s distribution chain more effective, how to best enter the Brazilian soda market or how to make use of overcapacity in a car manufacturing facility.
The purpose of this type of case is to understand several of your competences: the depth of your business acumen, how you structure and prioritize issues, how you handle different types of informa-tion and your overall fit with the type of work that we do.
Strategy
• Increasing market share
• Market entry strategies
• M&A transactions
• Starting a new business
• Competitive response
• Pricing strategies
• New product strategy
Typical business cases you could be presented with
You can significantly increase your chances of be-ing successful in a business case interview by prac-ticing. The opening and closing of the case are fairly generic practicing how to open will get you off to a good start and practicing how to close will make your wrap-up more concrete and concise. The mid-dle part is more difficult and requires more natu-ral talent, yet there are a number of methods and frameworks which can help you along the way when you practice case interviews.
The following pages contain a selection of approach-es and frameworks that might inspire you in your case solving. But keep in mind always to adapt your thinking. Interviewers look for candidates with busi-ness acumen who are able to develop high-quality frameworks on their own in contrast to merely re-peating rehearsed frameworks. The key takeaway is to use frameworks as a source of inspiration, but not to force-fit a case into one just because you are familiar with it.
Organization
• Incentive systems
• Organizational design
• Roles and responsibilities
• Post-merger integration
Operations
• Cost-out
• Strategic sourcing
• Supply chain optimization
• Production capacity change
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Summarize the process and synthesize
Either the interview comes to a natural close when you feel that you have solved the problem, or the interviewer steers you in that direction because time is running out. Regardless, a good close is one of the most crucial parts of the interview. At this point, you have hopefully asked all the questions you want and performed your analysis. So where do you go from there?
• If you feel you need to, take a moment to collect your thoughts
• Try to quickly take your interviewer through the analysis and your most important findings
• Answer the question! If there is a clear question at the beginning of the interview, do not forget to answer it. If the question is whether or not to enter a specific market, your conclusion should be just that, whether to enter it or not. Not all cases are the same, but you should always focus on making your conclusion as action-oriented as possible
• Lastly, back up your conclusion with support-ing arguments. Try not to include too many, but rather spend time on the ones that you find most important to your overall conclusion
Receiving and gathering information
• Listen carefully to the question and confirm that you have fully understood the assignment or problem faced by the client. A good way to check is to paraphrase the question back to the interviewer. Take notes, especially if you are pre-sented with data
• Ask clarifying questions if necessary. Even the most obvious questions are sometimes appro-priate to ask, and asking provides you with more time to think
Process information and present your approach
• Ask for time to collect your thoughts and struc-ture your analysis. Often the interviewer leaves the room to give you some time, while at other times, the interviewer may stay in the room – in either case, do not feel stressed and take the time you need
• Present to the interviewer how you are going to approach your analysis. This is very impor- tant and often forgotten. Be a good listener; the interviewer might give you hints on where to go first or whether you should rethink your approach altogether. If this is the case, ask for another minute to collect your thoughts
How to open and close a case
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Frameworks for business casesYou will quickly find frameworks if you start looking around for materials on management consulting in-terviews. Frameworks are tools for you to use when structuring your problem solving in a case interview. Sometimes, they could also just be a checklist to avoid missing the most important steps in the pro-cess. You should keep in mind that a case question rarely turns out to fit perfectly into a predefined framework – instead you will have to adapt your ap-proach and use the framework more as the back-bone of your analysis. In the following pages, you will find four useful frameworks.
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In many cases, you will be expected to analyze the profitability of a company at a more granular level. The profitability framework helps you to systemati-cally break down the profitability drivers. Your goal is often to isolate significant historic developments (e.g. the cost of raw materials has been surging), benchmark profitability drivers with competitors (e.g. our prices are lower than our competitors’), and evaluate opportunities (e.g. is it possible for us to in-crease profits by boosting sales of product A?). The key to solving these cases is often to understand the underlying mechanics that produce any anomalies in the numbers (e.g. our prices are lower than our
Segment your analysis
Think of different ways to segment costs and revenue. During a real project, you will have time to investigate several different ways of segmenting, but in a case interview, the inter- viewer often has a preferred segmentation.
• Decompose by applying appropriate segmentation, e.g.
– Business units – Customer types – Large vs. small customers – Geographies – Product types – Sales representatives – Etc.
• Identify increases or decreases in components (e.g. has “units sold” gone up, down or stayed consistent)• Understand if trends are company-specific or an industry-wide problem
• Decompose by applying appropriate segmen-tation (e.g. by looking at revenue)
• Decomposing according to the value chain is another powerful way of analyzing costs, e.g.
1. Raw materials2. Inbound logistics3. Production costs4. Sales and distribution costs
• Do not forget overhead costs (e.g. administrative, IT and marketing costs)
PROFIT COMPONENTS
HINTS
REVENUE
(PRICE * VOLUME)
COSTS
(FIXED + VARIABLE)
Profitability framework
competitors’ because our brand is the weakest in the industry, but is it possible to improve it through investment?).
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Industry analysis framework
The industry analysis framework is designed to help you gather information on a company’s external environ-ment. At first glance, it may appear overwhelming, but many of the elements are likely already familiar to you.
• Industry growth
• Business life cycle
• Is the industry cyclical, stable or counter cyclical?
Market share
Client Competitor A Competitor B ...
Financials
Product
(differentiation, packaging, prices, etc.)
Other drivers
(brands, loyalty, etc.)
INDUSTRY FACTS
COMPETETIVE LANDSCAPE
• Suppliers
– Have their costs shifted?
– Bargaining power?
• Raw materials
– Has the price changed?
– Is the economy affecting prices?
• Economies of scale
• Is there a better technology?
• Can we change our staff?
• Is outsourcing a possibility?
VALUE CHAIN ANALYSIS
OTHER FACTORS
UPSTREAM PRODUCTION
• What is the channel mix?
• Distributors
– Have their costs shifted?
– Bargaining power?
• Sales personel
– Are there large differences in competences?
– Is the right incentive system in place?
• Marketing
• New players in the market or new players entering?
• Substitute products?
• Is the market getting consolidated?
• B2B or B2C?
• Preferences
– Product
– Distribution
– Price
• Has the bargaining power shifted?
• Can we change the mode of transportation to be more effective?
• Can we manage inventory more effectively?
END USER
LOGISTICS
DISTRIBUTION, SALES AND MARKETING
CHANGE FACTORS
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Mergers & acquisitions framework
• What does the client do?
• How do the finances look?
• Potential reasons for M&A
– Increase market share or access
– Economies of scale or scope
– Learning-curve advantages
– Diversification
– Pre-empting competition
– Tax reasons
CLIENT AND PURPOSE
• Does the client expect to make an exit?
• For how long is the client going to hold the company?
• How is the client planning to sell the company?
EXIT STRATEGY
• Use a light version of the industry analysis framework
DUE DILIGENCE
• Can the client afford the company?
• Is the price fair?
• Are there any benchmark transactions?
• How will the transaction be financed?
• What is the expected return?
PRICE AND FINANCING
This framework is seemingly quite narrow in scope and perhaps not as important as the other frameworks. It is, however, common for transactions to come up in business case interviews, and it is a good idea to have thought them through in advance, especially if you have no previous experience from transaction work or studies.
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Product strategy framework
• How does the product and its features com-pare to competing alternatives?
• Is there an intended price level for the prod-uct? If no, consider
– Cost-based pricing (Applying a margin on top of costs)
– Market pricing (Based on prices of competing products)
– Value-based pricing (What are customers willing to pay?)
• Is the client’s technology protected by patents?
• Does the client sell similar or competing prod-ucts today?
• Does the client benefit from economies of scale or scope?
• Is there a risk of cannibalization?
• Does the client have the capabilities necessary to introduce the product (e.g. technical know-how, financing, operational set-up, suppliers)?
COMPETITIVE POSITION STRATEGIC FIT WITH PRODUCT
• Who are the target customers?
• Are there different customer segments (e.g. businesses vs. consumers)?
• Is there an overlap with the existing customer base?
• What are the customers’ key purchasing criteria?
• Does the client have an appropriate distri-bution set-up (e.g. retail sales, internet sales, direct sales reps or distributors)?
• What is the revenue potential?
• What are the corresponding costs?
• Are there any capital expenditure requirements to consider?
• What is the break-even volume?
• What would be the expected payback period?
FINANCESREACHING THE CUSTOMERS
This framework is similar to the industry analysis framework, but with some important differences and additional issues.
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Additional resources for case preparation
www.caseinterview.com A recent and popular case site developed by a former consultant.
The site includes a range of materials containing useful and concentrated frameworks and case tips. The materials come in the form of videos and PDFs and are typically free of charge. However, beware that the site is designed to encourage you to make large add-on purchases which are not necessary for your interview preparation.
SOURCE COMMENTS
Case Interview Secrets
Author: Victor Cheng
Same as above, in book format.
How to Get Into the Top Consulting Firms:
A Surefire Case Interview Method
Author: Tim Darling
A book written by a VP of a large American consulting firm.
The book offers a condensed overview of how to create problem-solving structures and communicate like consultants. It also provides ten well-written practice cases.
Case in Point
Author: Marc Cosentino
One of the most frequently used case preparation books.
The book contains detailed descriptions of case interviews and samples of how a case interview may play out.
The Pyramid Principle
Author: Barbara Minto
Almost all consultants have a copy of this book. This is not a typical case interview preparation book, but reading it will provide you with a solid understanding of how consultants work with structure and communication.
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Quantitative preparation
Most management consulting companies put em-phasis on a candidate’s numerical capabilities and strive to test these in one way or another as part of the recruitment process. Numerical skills are easy to improve with practice, and we strongly recommend that you set aside some time for practicing numeri-cal accuracy and speed by repeating basic arithme-tic operations.
Why are you tested quantitatively?
We need to be confident that every team member is able to structure and carry out quantitative anal-yses. Most client recommendations are based on quantitative evidence. It is crucial to be comfortable with numerical estimations and arithmetics as these are a cornerstone of a consultant’s sanity-checking procedures.
How are you tested quantitatively?
Normally, you will be tested on
• Your ability to make computations accurately and efficiently without a calculator
• Your ability to develop and communicate a numerical model
• Your ability to interpret quantitative measures and data
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Estimates & mini cases
Estimates
1. How big is the market for home delivery of newspapers in New York City?
Key: Number of households in New York City, share of households that subscribe to a newspaper (seg-mented by interests, education, age, income or other), number of subscriptions per household (seg-mented by interests, education, age, income or oth-er), frequency of delivery (magazine, journal, daily).
Delivered newspapers in New York City per day multi-plied by days in a year to detect volume, mul-tiplied again by cost per delivery to find market size.
2. What is the market size for exterior house paint in North Carolina?
3. How much tea is consumed in China every day?
4. What is the collective amount of money spent on domestic flight travels per day in Germany?
Mini cases
1. The Swedish prime minister has asked for a meeting with you, inquiring about what the government can do to improve the business climate in Sweden for life science companies in the next 25 years.
Key: You should be able to reason about core char-acteristics of the industry
• Life science firms are typically protected by pat-ents for long periods. In countries where patents are upheld for a longer time and easier to obtain, drug development is more attractive.
• Life science is a knowledge-intensive industry, and the key to success is having access to a skilled workforce. A necessity is strong educa-tion or beneficial conditions for expats to work in the host country.
• Due to long pipelines between drug discovery and market launch, life science firms will require significant start-up funds. Access to investors for smaller firms is essential.
2. Can you valuate 10,000 hectares of forest, how would you do it and on what parameters do you base your valuation?
3. The biotechnology industry is one of the most profitable industries, whereas airlines have had low returns for decades. Why do you think this is the case?
4. You are asked to do the advertising campaign for a new best-selling action movie. You have USD 100 million to spend. How, and through which channels, would you market it?
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Example cases
Interviewer
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The interviewer walks out of the room and returns a couple of minutes later
Candidate
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Our client, a China-based private equity fund, is considering an acquisition of a Singa-porean company that produces freshly squeezed juice. We have been invited to help the client evaluate the attractiveness of such an investment. What are the key elements for us to look at?
Just to be clear, are we talking about a retail juice chain or a wholesale juice manufacturer?
Good question, we are evaluating a manufacturer/wholesaler.
Interesting, let me think about my approach for a short while.
Sure, I’ll be back in a minute or two …
All right! On a high level, I would like to understand
1) The attractiveness of the market in terms of size and growth 2) The competitive landscape and the target company’s competitive position 3) The company’s current business portfolio and its performance
Okay, that sounds appropriate. Why don’t you start with the size and growth of the market? How would you estimate the size of the Swedish juice market?
Okay, let me take a minute to think through my approach.
The candidate thinks for about a minute and resumes the conversation
The juice case
In order to estimate the market size in terms of value, I need to look into the drivers of market value, which are (a) yearly juice consumption in liters and (b) price per liter. I’ll start with the consumption.
Okay, good. It sounds like you have a good overall approach, but I would like you to re-fine your structure a bit; what do you think is an appropriate customer segmentation to find out how much juice is consumed every year?
Hmm, we could segment the consumers into different categories both in terms of behavior and in terms of age groups.
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Interviewer
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Sounds good!
Let’s start with the behavioral parameters. Since we’re only focusing on the wholesale market, I’ll look at the consumption of pre-bottled juice. This is more or less the same as breakfast consumption, according to my experience. Let’s create three types of breakfast juice drinkers; a) everyday drinkers, b) occasional drinkers and c) non-drinkers. I assume that the weekly consumption within the three groups is: a) 7 glasses (1.5 liters), b) 2-3 glasses (0.5 liters) and c) nothing.
Great, then you mentioned that you were going to analyze age groups. How?
In addition to the behavioral aspects, I believe that age is relevant due to different life styles. I think that the share of people who belong to the different behavioral groups (a, b and c) varies with age. I would like to start off by defining the age groups: 0-20 years, 20-40 years, 40-60 years and 60-plus.
Okay, tell me why you chose those age groups?
Hmm, I get your point; I need to explain the rationale for defining different age groups which must be connected to the different lifestyles I was talking about.
That’s right!
OK, so 0-7 is the first group and I assume they do not drink juice at all. The next group is 7–20 as they typically live at home with their parents and are not buying juice themselves. Based on my experience, half of these people do not drink juice at all, in fact many of them don’t even eat breakfast. I assume 25% drink every day, and the rest drink a couple of times per week. The next group is 20-65, which is basically the working population. If I look at my friends and family, there are about 50% who do not drink juice at all. Then I think there is a slightly higher share of everyday drinkers than in the 7-20 age group. Based on my experience, I assume 30%, which leaves us with 20% drinking occasionally. Finally, in the group 65-plus, I think the share of everyday drinkers goes down a bit due to lower income, I assume 20%, and I think the non-drinkers are still about 50%, leaving us with 30% occasional drinkers.
Behavioral distribution
Occassionally Never Everyday Occassionally Never Total week Total yearly consumption
EverydayAges
0-7 550,000 0% 0% 100% 1.5 0.5 0 - -
7-20 1,100,000 25% 25% 50% 1.5 0.5 0
20-65 3,300,000 30% 20% 50% 1.5 0.5 0
65-plus 550,000 20% 30% 50% 1.5 0.5 0
550,000 28,600,000
1,815,000 94,380,000
247,500 12,870,000
2,612,500 135,850,000Total 5,500,000
Number of people
Weekly liters/behavioral type
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Interviewer
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The candidate runs the numbers based on an assumed retail price and calculates backwards to find out the wholesale price
Excellent, what do you do next?
Let’s continue with (b), price per liter. Based on my experience from the grocery store, a package of juice is about SGD 2 per liter …
Okay, but before you do the calculation, I would like to ask you – there is an element you’re missing, can you think of what it is?
Ah! Yes, since we’re talking about a wholesaler, my price includes a retailer mark-up which should not be considered in the wholesaler market.
Yes, that’s it. There’s also another consideration. What do you think that is?
We are only talking about one juice type here. Maybe we should consider different types of juices?
Yes, what would that mean?
That we get different prices for different juices; I would say that there are three basic types with different price levels; high-end, low-end and private-label.
Exactly, I’ll help you out and give you some numbers.
Okay, so given these price levels, I arrive at approximately SEK 3 billion in wholesale value. In terms of weaknesses of the estimation I would say that the consumption assumptions are the ones that I’m least comfortable with. If I had more time I would dig deeper into that.
What do you think of SGD 387 million? Is it realistic?
Well, a simple sanity check is to find out how much that would be per person per week, and it is about SGD 1.4 plus retail mark-up across the entire population. To me, that sounds reasonable, which would make SGD 387 million a realistic estimate.
Share of saleVolume in
litersRetail price
(SGD) VAT Retail mark-upPrice/liter to
Retailer*Total value
(SGD)
Brand high-end 10% 13,585,000 10 7% 20% 8 108,680,000
Brand low-end 65% 88,302,500 2 7% 20% 2 176,605,000
Private-label 25% 33,962,500 5 7% 60% 3 101,887,500
Total 100% 135,850,000 387,172,500
*The prices have been rounded off
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Okay, it sounds like you have thought this through. Assume for the rest of the case that your estimate of SGD 387 million is correct. So, what’s next?
Next, I would like to look at the market growth and if we have any information on whether it is set to grow in the years ahead.
Okay, you can assume that the market has been declining by 4% per year over the past five years and is set to continue to do so over the next five years.
Is that 4% in real decline or nominal decline?
Good question, assume it is 4% in nominal decline.
Okay, so is it fair to assume that we can expect even more than 4% real decline in the next five years?
Yes. So where do you want to go next?
Next, I would like to analyze (2) the competitive landscape and the target company’s com-petitiveness to see if it might have some kind of unique position in a particularly attractive sub-segment because overall, the market does not seem very attractive.
We will wrap up the case example at this stage. We do, however, encourage you to try and think what your approach would have been in mapping the competitive landscape, and how you would have proceeded in analyzing whether we should recommend to the private equity fund to acquire the company or not.
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The candidate takes around three minutes and then resumes the conversation
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After years of engineering work, you finally have the world’s first commercially viable spacecraft. It cost you EUR 50 million to build. From its launching pad outside Paris, it can take a load of up to 12 passengers into space, orbit earth and then return safely eight hours later. There are no safety concerns whatsoever. The spacecraft can do three trips per week and the operational costs related to each trip (salaries, fuel, maintenance) are EUR 75,000. There are no competing products, and the design is effectively protected by patent rights for the next 25 years. It will take you three years to build an additional spacecraft.
My question to you is: how would you take the product to the market in the next three years before you could have another spacecraft?
So we’re talking about a commercial spacecraft here? Our goal is to push this thing to the market, right? Okay, let me make sure that I caught all the details in the data.
• In terms of costs, we have invested EUR 50 million, and each round trip costs us approximately EUR 75,000
• We can do three trips per week, so basically 150 trips per year, and each trip can carry 12 passengers
• Our technology is completely protected for the next 25 years
Did I get all that right?
Yes, that’s right. What I want you to start with is deciding on a couple of areas that you would like to investigate further.
Okay, give me a minute and I’ll collect my thoughts a bit.
All right -— there are a couple of areas that I would like to explore, which fall into three main categories
1) What’s the market for commercial space trips? 2) What are the finances behind the operation? 3) How do we market the space trip?
My primary concern with area (1), the market, is that I want to understand the product and situation a bit better. My hypothesis is that the demand is rather high in relation to our supply …
Well, the demand would depend on the price, right?
The space case
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The candidate takes about half a minute to think before he proceeds
Yes, of course you’re right. I would like to explore the dynamics of the market by understanding: (1.1) Who are our potential customers? What are the segments? What are their considerations when buying a ticket?
(1.2) How big is our market? What I would like to figure out is whether we can fill our capacity or not.
(1.3) What is the competition like? I.e. are there any substitutes?
For (2), finances, I would like to do a break-even analysis to understand whether it’s a prof-itable idea, and if yes, how much room do we have left for marketing?
For (3), marketing, I don’t have a clear idea yet. But we’ll dig deeper into that later.
Good. I would like to hear your thoughts on topic (1.3), competition, what do you think?
Well, I don’t know of any other space trips, and I guess it is safe to assume that no one else will develop such a concept in a three-year period?
You are right, and in addition, I did mention that there are no competing products, remember?
You are right, I forgot to note that down.
No problem, so what about substitutes?
Good question, the closest thing I can think of is different types of leisure trips, which aren’t really comparable to this, if you ask me. My hypothesis is that there are no real sub-stitutes. I mean, what compares to travelling to space?
I agree. Let’s assume there are no substitute products either, so effectively there is no competition of any kind for the remainder of the case.
Okay, then I would like to continue with the first branch of the analysis: (1.1), customers, who are they in this situation?
Well, what do you think?
This is a bit tricky because I would assume that the vast majority of the human population would be interested in travelling to space – but, as we concluded, this depends on the tick-et price. For example, I would definitely go for EUR 100, but maybe not for EUR 1 million in my current situation. The key takeaway here is that: the higher the price, the fewer the people who would be interested in a ticket.
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The candidate writes down his calculations on a piece of paper
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Yes, of course. Can you look at the customer group and price issue from another angle perhaps? Let’s assume we are looking at the market for the next three years.
Ah, yes, we could look at how many tickets we could possibly sell per year and divide this by the number of inhabitants in the world. I think this can give us a clue as to how much we can charge for the tickets.
Okay, let’s explore that.
We have around 150 trips per year, with 12 passengers each, which adds up to 1,800 seats per year to fill. Considering a world population of 7 billion people, this corresponds to less than one person in a million. Given that, I think it is safe to assume that we could charge a lot for these tickets. I mean, one person in a million is quite a small group of people.
That sounds reasonable, with that in mind, I would like you to go into issue (2), the finances, and run some numbers on the break-even price for the first three years.
All right, we have two cost components that I noted down during the introduction of the case: the initial investment costs and the round-trip costs. I’m not completely sure of whether we should consider the initial investment as a sunk cost or use it in the break-even analysis. My suggestion is that we should include it.
Great! Do that.
Okay. I will translate both costs into costs per seat, so given that and assuming there are no additional costs, the investment costs of EUR 50 million will be EUR 16.7 million per year, and a little less than EUR 10,000 per seat, let’s assume EUR 9,500. The round-trip cost of EUR 75,000 becomes EUR 6,250 per seat since we have 12 seats. So, in total we have a cost per seat of around EUR 16,000, which would be our price if want to break even after three years.
Okay, what does that tell you? That we should charge at least EUR 16,000 per ticket?
It completely depends on the circumstances. If the useful life of the spacecraft is three Years, we would have to charge significantly more to make a good profit, but if the useful life is longer, it could be a viable option to charge the 16 thousand.
Good thinking, unfortunately we don’t have any information on the useful life right now so let’s leave it at that. But what about EUR 16,000, how do think that ticket price sounds?
Well, since we’re looking at the “one-in-a-million-most-willing-to-pay person” as our cus-tomer group, I think that it’s safe to assume that we can charge at least that. EUR 16,000 is a lot, but I’m confident we could sell the tickets at least at that price. As I mentioned before, however, I think we should make a large marketing campaign to build some mo-mentum around the demand so we might want to add a bit of a margin on top of that EUR 16,000 if we are to break even including that in three years.
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That is true. We should probably try to make a splash before the launch, but at the same time, a big attraction like this might almost sell itself, don’t you think?
Well, yes, you might be right, but we should still ensure that the word gets out there so we don’t risk not filling the seats during the first weeks before the word spreads.
Okay, so what are your ideas on marketing?
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We will wrap up the case example at this stage of the case. We do, however, encourage you to consider what your approach would be for a marketing campaign for the first commercial space trip.
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Our client, the Swedish window manufacturer “Vertical Windows”, is considering en-tering the German market. The company has an annual revenue of EUR 600 million and is currently the market leader in Sweden and one of the top 3 in Denmark and Norway – 90% of its sales are within the Nordic region. Vertical Windows also has sales and pro-duction facilities in the UK.
What aspects do we need to look into in order to evaluate whether entering the German market is an attractive opportunity for Vertical Windows?
Ok, let me think about how to approach this issue for a moment.
No problem. I’ll grab a coffee and be back in a couple of minutes.
The interviewer returns to the room after a short break.
To assess how attractive it would be to enter the German market, I would start by looking at:
1) The size of the German market 2) Market growth – to better understand the dynamics 3) Current profitability in the industry, if information is available 4) Vertical Windows’ product offering versus current market demandd
Good, it sounds like an approach that can provide useful insight to get us started. How would you estimate the size of the German market for windows?
First, I would start by estimating the number of households in Germany to get an idea of the total number of windows sold. I know that the population in Germany is roughly 80 million. Assuming that each household counts, on average, two people, this would give us a total of 40 million households.
The assumptions you have made so far are fairly accurate, but maybe we should slow down a little bit and try to structure our approach a bit more, so that we don’t miss out on any important details? For example, would private households represent the only potential market for a company selling windows?
Yes, of course. In addition to the residential market, we also have to consider the non-residential market. Maybe I should set up an issue tree to make the analysis more structured?
I think that’s a good idea!
Vertical Windows
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I use the four elements initially mentioned as the base of my issue tree, and I will continue down the “market size” branch first. I would like to complete the analysis of residential property before moving on to non-residential.
That’s fine.
So, if we have 40 million households, these can be split into flats and houses. Is it fair to say that the split could be 50/50 between family houses and apartments?
Sounds fair, so let’s go with that.
Great, obviously houses would have more windows than apartments, so this has an in-fluence on our total number of windows. I would say houses have, on average, twice the number of windows compared to those of apartments. Perhaps 10 windows per house and 5 windows per apartment are reasonable estimates?
I agree that those numbers sound reasonable.
Then that would give us a total residential market size of: (20 million apartments x 5 win-dows) + (20 million houses x 10 windows) = 300 million windows in the residential market. I think the residential market is larger than the non-residential market by a decent margin. Perhaps 2/3 of all windows are residential and 1/3 is non-residential?
Sounds reasonable. Anything else we need to consider here? Would this be the total market size – and what does this number actually imply?
Given that we have estimated the residential market to 300 million windows, the total market would amount to about 450 million windows. However, windows are normally not changed every year, so annual sales would not be 450 million windows. I do not know too much about windows, but is it fair to say they are changed, on average, every 20 years?
Don’t worry! This is not a test of your knowledge of the lifetime of windows, but I would say your number is a bit low and that a better estimate would be 30 years. What else do you need in order to get an idea of the total annual sales?
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Thanks! So, this would give me a number of 15 million windows sold in Germany every year. To estimate annual sales, I would need the average price of a window. Does EUR 400 sound like a fair guess?
EUR 400 per window sounds like a good estimate.
Great! Then that would give us total annual sales of 15 million windows times EUR 400, which makes the annual sales worth EUR 6 billion.
Does that number make sense to you?
Vertical Windows currently has revenues of 600 million from sales in the three Nordic countries. Altogether, the Nordic countries are about one quarter of Germany in popula-tion size; following the same reasoning as before, this means that the total Nordic market should be about 1.5 billion. With a market share of 40%, Vertical Windows could be making 600 million in sales. So, given this, I would say the estimate is within the ballpark.
That was a good approach to check your estimate. Let’s use 6 billion as the market size for Germany. What should we look at next?
Next, I would like to look at growth: How has the market developed historically, and are there available predictions for the upcoming years?
The market has been, and is predicted to remain, stable.
Ok, then I think it’s safe to say that there will be no change in market size. Next, I would like to look into the profitability of the industry – do we have any data on this?
Yes, we do. Looking at the largest players in Germany, they are currently operating at a lower profitability than that of the Nordic countries.
Ok, I would need to continue my investigation into whether Germany would be a good fit for our client’s company.
I think that’s a good idea. How would you do that?
First, I think it would be interesting to look at the competitive landscape to see if the mar-ket is fragmented or consolidated. Second, I would ideally like to see if the company has any kind of competitive advantage it can benefit from.
We actually have some data on the competitive landscape.
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The interviewer hands over the following diagram to the candidate.
It looks like the German market is much more fragmented than the Nordic markets, which indicates that there are no large players dominating the market, but rather a lot of smaller players. This might actually be good for our client, since there is no player that can easily start a price war to keep our client out of the market.
Given that the current competitive landscape looks fairly good, I think we should look into our client’s product portfolio to see if there are any pockets in the market that look obvi-ous for it to take advantage of.
Let’s do that!
Interviewer provides data.
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The European Vertical Windows market split by market share
The European Vertical Windows market split by market material
European Vertical Windows material100% – total market size
Wood/Aluminium
100%
Aluminium
Wood
PVC
Sweden
40%
47%
6%
7%
Denmark
50%
4%
4%
42%
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3% 3%
4%
90%
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17%
5%
41%
37%
37%
10%
53%
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Sweden Denmark Norway Germany
European Vertical Windows market100% – total market size
Market share of top-3players in the market
10%
100%100%100%100%
45%
55%
60%
40%
80%
20%
90%
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My first observation is that Vertical Windows currently does not offer windows in the seg-ment that is the largest in Germany, PVC. This is an immediate concern, as it reduces the addressable market by 41%, unless Vertical Windows would be able to broaden its portfo-lio to also include PVC windows.
I agree that it reduces the addressable potential of the German market, but do you per-ceive it to be a reason not to enter the market?
No, I would not dismiss the German market based on this information, since Vertical Win-dows’ strongholds are “wood” and “aluminum”, which still account for 54% of the German market. Furthermore, Vertical Windows has a somewhat similar situation in Denmark and Sweden, where wood/aluminum represents roughly 50% of the market, but constitutes only 10% of Vertical Windows’ total sales.
I think you’re right that we shouldn’t dismiss the German market simply because Verti-cal Windows cannot address the entire market. To help you in the continuation of your analysis, we have also been provided with some data on the price levels of the different window types. Does this new data cause you any further reflection regarding the attrac-tiveness of the market?
Well, Vertical Windows sells mainly the slightly more expensive windows, which indicates that its value proposition is that of a premium brand rather than an economy brand. As a premium brand, you will typically have greater margins and be less dependent on high volumes, making the fact that Vertical Windows currently can address only 54% of the German market less troubling. In fact, this convinces me that the German market does have an attractive pocket that Vertical Windows should address by trying to enter the market as a premium brand.
Exactly. So how would you sum up the analysis at this point?
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PVC Aluminium Wood Wood/Aluminium
Price level by window type
Price levels by materialIndexed
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Based on the provided information and the conducted analysis, I would say that entering the German market is a potential next step for Vertical Windows. This conclusion is based on the attractiveness of the market in terms of its size and competitive situation. Further-more, Vertical Windows’ main segments constitute 54% of the German market, which rep-resents a significant pocket to tap into.
Vertical Windows actually reached the same conclusion that you did in your analysis. They have started to develop a market-entry strategy for Germany, and they have also started talking to a German window manufacturer, which they think may represent an interesting acquisition target
We will wrap up the case example here. However, we do encourage you to reflect on which approach would be useful in order to analyze the potential acquisition as a means for supporting Vertical Windows’ market entry.
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An American newspaper company has approached us to assist them in improving their profitability. They are currently operating at a break-even level of USD 200 million per year and would like to reach a 10% margin by the end of next year. You have been as-signed to determine whether there are any cost savings to be made.
OK! So, if I’ve understood this correctly, I am to evaluate the cost structure of an American newspaper company to potentially improve its profitability from its current break-even level to a 10% profit margin within a year?
Sounds like you caught it all!
Great! I just have one more question before I begin to sketch an approach. I’m not an expert on the news industry, but I’ve heard some newspapers outsource the production of the actual newspapers and manage only the marketing and content creation, whereas others do all the work internally. What kind of newspaper company is this one?
That’s a great question! You’re right, some firms outsource production, but this partic-ular firm prints its own newspapers and take care of all other parts of the business too!
Alright, if you allow me to take a moment to collect my thoughts on how to approach this issue…
Sure!
*Moment goes by*
Ok, I thought it would be a good idea to look at what costs are currently the biggest for the newspaper by breaking its USD 200 million cost base into its different components and then assess which costs can potentially be reduced and how. To do so, I’d like to un-derstand the value chain for the newspaper company and what costs each step contains.
That sounds like a good approach!
I imagine the value chain of a newspaper company could be divided into a five-step pro-cess; purchasing, content creation, production, selling and distribution.
Could you elaborate?
Sure! I assume the process of making a newspaper would start with purchasing the materi-als necessary to produce the newspaper. As I’ve understood it, larger companies typically have purchasing units that take care of acquiring the materials necessary to produce the goods they sell. To fill the newspaper with newsworthy articles, I suspect the firm would also need to have journalists, editors, proofreaders and copywriters. This would constitute its content creation. Once the content has been written and the necessary materials ac-quired, the newspaper would have to be printed. Then comes the task of selling the news-papers. I’m not sure, but I imagine that newspaper companies sell their newspapers both
The newspaper case
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through direct sales and through convenience stores? Either way, I suspect the newspaper is sold before it’s delivered. Perhaps you could tell me?
You’re absolutely right! The bulk of sales for this newspaper is through subscriptions that are delivered directly to the end customer, but a sizeable portion is also sold through convenience stores and newsstands. Go on!
Ok! So, once the newspaper has been sold, it will have to be delivered to either the customer or to a convenience store. I imagine the whole process something like this:
*Shows chart*
*Inspects the chart*
It looks like you’ve laid out the value chain in an orderly fashion, how about assigning how big a share of the costs each component constitutes?
No problem! I think that production would have to be the most cost-intensive part of the value chain. I know that the machinery is very expensive, and it requires a lot of paper and energy to produce a year’s worth of newspapers, so let’s say 30% of the USD 200 million are spent on production.
Actually, it’s closer to 40%, but I like how you are reasoning, go on!
Ok, so we adjust the production costs to 40%.
The next item would probably be distribution. Since the bulk of our client’s sales are to the end customers, I suspect they would need more cars with smaller loads of paper than if most of the newspapers were sold to convenience stores. That means they would need a lot of trucks and drivers, and I suspect the gas for the cars costs a lot too. Let’s say 30% of the USD 200 million.
That’s about right, so let’s stick with that!
Next, we have purchasing, selling and content creation. I actually have no idea how much journalists, editors or purchasers are paid or how many of each are necessary, but I suspect
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Purchasers Journalists DriversSales peoplePaper
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their salaries are roughly equal, because the qualifications they require to do their jobs properly are about the same, and I guess that the newspaper company roughly needs the same amount of people for each of the three parts of the value chain. Against that reason-ing, I’d like to assign them each 10% of the USD 200 million.
Good reasoning!
That means we have the following cost structure:
Against this backdrop, I would like to look into potential cost savings in production, since this represents the greatest portion of the total costs, so efficiency improvements would have a bigger impact on the total costs than would be the case for other parts of the value chain.
All right!
We said earlier that the four main costs associated with production were: paper, energy, machinery and production workers. Since our client wants to improve the bottom line immediately, I think they should focus on reducing the cost of either paper or labor since the machinery depreciation and energy costs are tied to the machines they already have in place. Besides, I don’t think production labor is very expensive, since I suspect the print-ing process must be highly automated. Do we have any information on how much each of these components cost us?
Actually, yes! We know from the purchasing office that last year, 60% of the total pro-duction costs of USD 80 million went to raw materials such as paper and ink.
So that means our client spent USD 48 million on paper last year?
Exactly.
That sounds interesting. Since paper represents almost 25% of the total costs, I would like to investigate whether it would be possible to reduce that number. Could I have another minute to think of how we could go through with that?
Of course!
* Sketches an approach *
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20,000,000 20,000,000 60,000,00020,000,000 80,000,000
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All right, the way I see it, to reduce the paper costs, our client must either reduce the price they pay for the same quantity of paper, or they could purchase less paper. I have come up with a few proposals for each option
* Shows sketch to interviewer *
Price Quantity
Look for other suppliers Decrease size of newspaper
Bulk buying Shift to online
Secure longer supplier contracts in return for lower prices
Buy lower quality of paper
This looks interesting! Which of these options do you think they should pursue?
I think the easiest change to look into would be to decrease the size of the newspaper and to buy lower-quality paper. Since paper is a commodity good, I don’t think they’ll be able to find much cheaper suppliers elsewhere. If they buy bulk, they still have to store the pa-per, and that might cost more than it saves. Writing longer supplier contracts may sound appealing, but if customer preferences shift toward online news consumption further, our client may be left with excess paper. Shifting the business online is a good response to reduce paper costs, but that shift will likely take longer than until the end of the year, so that’s something they should look into for the medium to long term. This leaves them with two remaining options.
Great thinking! The news company has, however, already looked into the paper quality of its newspapers, and they don’t think it would be a good decision to buy any cheaper quality than they do today. They do however like the idea of changing the size of the newspaper. Today, the newspaper is 40cm x 55cm, but management believes that 30cm x 40cm is a more fitting size.
Alright, with these measures, they would decrease the newspaper from its current size of 2200 cm2 to 1200 cm2. Assuming they use the same thickness and number of pages as previously, this represents a 45% decrease in area and volume. If they sell the same number of newspapers as the previous year, with the same prices for paper, the volume reduction would save them 45% of USD 48 million, or USD 21.6 million. That alone would be enough to reach the 10% profitability goal as long as sales stay flat!
Great! Why don’t you wrap up our findings and make a recommendation?
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Absolutely! I recommend that management go through with its proposal to shrink the size of its newspaper, since it would save them annual costs of UDS 21.6 million. This alone would help them reach their profitability goal of 10%. Before launching the new sizes, I would, however, recommend that management look into how their customers would ap-preciate the new size. Because there is now less space for news, perhaps customers aren’t prepared to pay as much as they have done before, or perhaps the loss effect on removed space for advertisement sales for the newspaper company would outweigh the cost ben-efits of shrinking the newspaper.
Perfect! Do you have any additional advice to the newspaper company going forward?
Sure, I would also look into shifting the newspaper company’s business strategy to focus more on online news consumption in the long run, which essentially would remove the expensive production stage of the value chain. Another area that could potentially be improved would be distribution, which also accounts for a significant portion of the total costs.
Great job! Thanks!
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A Chinese private equity fund is considering the acquisition of an American wood pel-lets manufacturer. The company is currently owned by an industrial conglomerate.
Wood pellets are used as heating fuel. They are manufactured by compressing sawdust into pellets. Pellets are extremely dense and can be produced with a low moisture con-tent, which allows them to be burned with a very high combustion efficiency.
In this case, only the heating of buildings with wood pellets is in scope
The first question our client asked was to assess whether there will be a future demand for wood pellets. What do you think would be a good structure to analyze future de-mand for wood pellets?
Let me take a minute to structure my thoughts.
Of course, take the time you need.
A minute passes and the candidate resumes the conversation …
In order to assess the future demand for wood pellets, I would like to divide the issue into two main parts:
1) Who are the main users of wood pellets? 2) What is the substitute for using wood pellets?
Interesting, let’s start by looking at the first one. Who are the primary users of wood pellets?
Since pellets are used for heating, owners of any kind of building in need of heating are potential customers. There are different set-ups for heating a building. In my view, multi-family houses and commercial buildings in cities are primarily connected to central heating systems, and would therefore not be direct users of pellets. The primary customers of pellets would be A) family houses and B) commercial buildings in rural areas.
You mention central heating systems, what kind of fuel do they use?
I see your point. Central heaters can probably also run on pellets.
Good! So, you have now identified three main types of customers. What would the alter-native for wood pellets be in each category?
I believe that there is a different dynamic to each segment. There are central heating sys-tems running on garbage, wood – well, anything that burns basically. They buy fuel in great quantities and probably shift it depending on the price.
The investment case
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For houses, demand is more static. They can use electricity, oil or geothermal for heating, but they do not shift fuel. Shifting fuel would be connected to an investment in a new boiler. So, the installed base would perhaps be slightly more stable over the investment horizon.
Yes, there is a different dynamic in play for each segment. Could you describe in an over-all way how you would investigate future development in each segment?
One could look at the historical development and growth rates, and of course get hold of an industry expert to provide additional market insight.
That sounds like a good approach. Let’s say that after looking at historical data and conducting expert interviews, we found that the demand from houses is declining, com-mercial is increasing and central heating is flat-lining.
So there will be a demand for wood pellets over the investment horizon, but no spectac-ular growth.
That sounds like a good hypothesis.
I will provide you with some additional information about the target company, so you can evaluate the attractiveness of the potential investment.
• The target company is a pioneer in the industry and was established some 25 years ago
• According to the management team, the company has a very strong brand and excellent customer relations which enable a price premium — albeit modest — compared to its competitors
• The company’s business model is to operate ten factories in forest areas where it sources sawdust from local sawmills (50-100 km from the production sites)
Would you say that the pellets company is an attractive target for the private equity fund?
Hmm, the attractiveness of the investment is determined by the private equity fund’s abil-ity to increase the value of the firm and ensure that it becomes an attractive target when selling again. Buy low and sell high, right?
That’s right. And how would they try to increase the value of the company?
There should be a case for how to increase the company’s profits, either by increasing revenues or lowering the cost base – or both.
Ok, if we start by looking on the revenue side, what could be done there?
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Well, the company already has a strong brand and good relations with its customers. But wood pellets are a really basic product, a commodity – I mean, I would not pay extra for a branded bag of charcoal for the barbeque. I wonder if the company’s price premium is sustainable over time …
What options could the company pursue to increase revenues?
Well, the market is not really growing, so to increase revenues, they either need to gain market shares or raise product prices.
Is raising prices a possible strategy? What do you believe is the most important criterion for the customer when shopping for wood pellets?
Assuming that the quality is equal across suppliers, the most important thing would be the price.
That’s right, so how would you go about determining the target company’s market position?
Since wood pellets are a commodity, the price is determined by the market, and the suppli-ers’ competitiveness is about being the most cost-efficient. The way forward would be to make a cost comparison across the value chain for the target company and its competitors.
Do we know who the other suppliers of wood pellets are in the market?
Good question, there are three main categories of competitors in the market: A) medium-sized suppliers with a similar set-up as the target company, B) large forest companies and C) international importers.
Do the largest forest companies operate their own sawmills, and can they thus produce the pellets out of sawdust from their own wood production?
Yes, they use their own sawdust for the production.
If you were to make a structured comparison of the different competitors’ value chain, how would you approach this?
Give me a minute to gather my thoughts.
A minute passes …
We have three types of competitors and a value chain for producing and distributing pel-lets consisting of four main steps: A) acquiring raw material B) transportation to produc-tion, C) production and D) distribution. By evaluating each step per competitor, we can identify advantages and potential disadvantages to base our assessment on.
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We concluded that the large forest companies have a minor advantage compared to the target company with regards to raw materials. Also, the large forest companies have an advantage when it comes to transportation by having the production of pellets in imme-diate connection to the sawmills.
Good. As you mentioned, the forest companies have back-integrated their operations and co-located the pellet production with the sawmill. How could you assess the advan-tage of having the production next to the sawmill?
Well, that depends on how much sawdust you need to produce one unit of pellets?
The density of sawdust is six times less than in pellets, which is the whole idea of the product.
So, in order to produce one truckload of pellets, they would need to transport six loads of sawdust between the sawmill and the production site. That’s a pretty big disadvantage for the target company.
If we look at production, are there any significant economies of scale when producing wood pellets?
Production costs are almost equal across competitors. There is no economy of scale that’s relevant in this case.
Looking at the final step of the value chain, distribution, importers would have a disadvan-tage, as they need to ship the pellets in by boat. Shipping costs are still low, so perhaps it’s just a minor disadvantage.
So, summing up the cost advantages and disadvantages and plugging them into a matrix organized according to value chain and competitors, we see that the target company holds a poor competitive position compared to its competitors.
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A) Raw materials B) Transportation C) Production D) Distribution
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Raw materials
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Transportation
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Production
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Distribution
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A) Equal to target company
B) Forest companies
C) Importers
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Do you have any information on recent market developments such as sales or market share per competitor?
The forest companies and the importers have only been on the market for a couple of years, but have quickly gained significant market shares from the traditional players (like our target company). This proves that we’re facing a price game, and that customer rela-tions are not a sustainable competitive advantage, but rather a reflection of the manage-ment team’s wishful thinking.
That further supports my suspicion.
The large forest companies have integrated the pellets production directly with their saw-mills; hence, they have a structural advantage that the target company can’t mitigate.
Interesting, so what recommendation would you give to the investment committee?
The structural disadvantage compared to competitors will make it hard for the target com-pany to compete on price. We already see signs of this disadvantage in the current market, with the company’s decreasing market share.
In my view, the wood pellets company would not be a good investment for the private equity fund.
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