Real Case Interview.docx
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Real Case Interview.docx
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RealCaseInterview
Casesetup(factsofferedbyinterviewer):
Yourclientisamanufacturerofbicycles
Theyhavebeeninbusinessfor25years
Theymanufacturerandsellthreecategoriesofbicycles:
Racingbikes:
Highend,highperformancebikesforsophisticatedcyclists
Mainstreambikes:
Durable,butnotoverlycomplicatedbikesforeverydayriders
Children’sbikes:
Smaller,simplerversionsoftheirmainstreambikesforchildren
Profitsatyourclienthavedecreasedoverthepastfiveyears
Question:
Whatisdrivingthedeclineinoverallprofits?
Whatrecommendationsmightcorrectthesituation?
Suggestedsolutions:
Thefirstquestionistodeterminewhathascausedoverallprofitstodecrease.Toaccomplishthisthecandidatemustfirstunderstandwhathastranspiredineachofthethreeproductcategoriesoverthepastfiveyearsduringwhichprofitabilityhasslipped.Thefollowingarequestionsandanswersthatwouldbeprovidedinaninterviewscenario.
Whataretheclient’smarginsforabicycleineachofthethreesegments?
Racing:
Cost=$600/unit,Profit=$300/unit
Mainstream:
Cost=$250/unit,Profit=$75/unit
Children’s:
Cost=$200/unit,Profit=$50/unit
Whathashappenedtothemarketsizeofeachofthethreesegmentsoverthepastfiveyears?
Racing:
Hasremainedconstantat itspresentsizeof$300MM
Mainstream:
Hasincreasedat2%growthrateperyeartoitspresentsizeof$1.0B
Children’s:
Hasincreasedat3%growthrateperyeartoitspresentsizeof$400MM
Whathashappenedtoourclient’smarketshareineachofthesesegments?
Racing:
Marketsharehasdecreasedfrom60%to30%
Mainstream:
Marketsharehasincreasedfrom0%to5%
Children’s:
Marketsharehasincreasedfrom0%to3%
Whoaretheclient’smajorcompetitor’sineachmarketsegment?
Whathashappenedtotheirmarketshareineachsegmentoverthepastfiveyears?
Racing:
Thereisonemaincompetitorandahostofsmallfirms.Yourmaincompetitorhasincreasedmarketsharefrom30%to50%
Mainstream:
Thereexistmany,largecompetitors,noneofwhichholdsmorethan10%ofthemarket
Children’s:
Asinthemainstreamsegment,therearemanycompetitors,nonewithmorethan10%ofthemarket
Theaboveinformationprovidesenoughinformationtoputtogetherapictureofwhyprofitshavedecreasedoverthepastfiveyears:
Yourclient,withacommandingpositioninaflatmarketsegment(racing),expandedintonewsegments(mainstreamandchildren’s).Asthisoccurred,marketsharedecreaseddramaticallyinthemostlucrativesegment(racing),creatinganunfavorablemix.
Theextenttowhichprofitshavedecreasedcanbededucedfromsomequickmath:
profitshaveslippedfrom$60MMfiveyearsago(=60%x$300MMx33%racingmargin)to$44MMtoday(=(30%x$300MMx33%racingmargin)+(5%x$1Bx23%mainstreammargin)+(3%x$400MMx20%children’smargin)).
Thedramaticdecreaseinmarketshareintheracingsegmentisatthispointstillunexplained.Questionsthatwouldhelpformulateanexplanationinclude:
Havetherebeenanymajorchangesinproductqualityinyourclient’sracingproduct?
Orinitsmaincompetitor’sracingproduct?
No
Havetherebeenanymajorpricechangesinyourclient’sracingproduct?
Orinitsmaincompetitor’sracingproduct?
No
Havetherebeenanymajorchangesindistributionoutletsforyourclient’sracingproduct?
Orforitsmaincompetitor’sracingproduct?
Yes.Previouslyyourclientanditsmaincompetitorintheracingsegmentsoldexclusivelythroughsmall,specialtydealers.Thisremainsunchangedforthecompetition.Yourclient,however,begantosellitsracingbikesthroughmassdistributorsanddiscountstores(thedistributionoutletsformainstreamandchildren’sbikes)asitenteredthemainstreamandchildren’ssegment.
Howdothemassdistributorsanddiscountstorespricetheracingbikesrelativetothespecialtystores?
Pricesatthesestorestendtobe15to20%less.
Whatpercentofyourclient’sracingsalesoccurinmassdistributorsanddiscountstores?
Effectivelynone.Thisattempttosellthroughthesedistributorshasfailed
Howhasthedecisiontosellthroughmassdistributor’sanddiscountstoresaffectedtheimageoftheclient’sracingproduct?
Nostudieshavebeendone.
Howhasthedecisiontosellthroughmassdistributor’sanddiscountstoresaffectedyourclient’srelationshipwiththespecialtyoutlets?
Again,noformalanalysishasbeenperformed.
Althoughsomeanalysisand/orsurveyshouldbeperformedtoanswermoreconclusivelythelasttwoquestions,apossiblestorycanbeputtogether.Therehasbeennoappreciablechangeineitherqualityorprice(oranyothertangiblefactor)ofyourclient’sracingproductrelativetoitscompetition.Itisnottheproductthatistheproblem,butratheritsimage.Asyourclientcameoutwithlowerend,mainstreamandchildren’sproductsandbegantopushtheirracingsegmentthroughmassdistributorsanddiscountoutlets,theirreputationwascompromised.Additionally,thepresenceoftheracingproductsinthediscountoutletshasputyourhistoricracingdistributor(thespecialtyshops)inaprecariousposition.Thespecialtyshopsmustnowlowerpricetocompete,therebycuttingtheirownprofits.Instead,theyarelikelytopushthecompetition’sproduct.Remember,yourclienthasnodirectsalesforceattheretailoutlets.Thespecialtyshopsessentiallyserveasyourclient’ssalesforce.
Theaboveanalysisoffersanexplanationofwhathasaffectedthetopsideoftheprofitabilityproblem.Stilltobeexaminedisthecost,orbottomside,oftheprofitabilityissue.Questionstouncovercostissueswouldinclude:
Howdoestheclientaccountforitscosts?
Theclienthasasinglemanufacturingandassemblyplant.Theyhaveseparatelinesinthisfacilitytoproduceracing,mainstreamandchildren’sproducts.Theydividetheircostsintothefollowingcategories:
labor,materialandoverhead.Overallcostshavebeenincreasingatafairlyheftyrateof10%peryear.
Whatisthecurrentbreakdownofcostsalongthesecategoriesforeachproductsegment?
Racing:
Labor=30%,Material=40%,Overhead=30%
Mainstream:
Labor=25%,Material=40%,Overhead=35%
Children’s:
Labor=25%,Material=40%,Overhead=35%
Howhasthismixofexpenseschangedoverthepastfiveyears?
Inallsegments,laborisanincreasingpercentageofthecosts.
Doesthebasicapproachtomanufacturing(i.e.themixoflaborandtechnology)reflectthatofitscompetition?
Yourclienttellsyouthatthereisacontinuingmovementtoautomateandutilizetechnologytoimproveefficiencythroughouttheindustry,butitishis/heropinionthattheirapproach,maintainingthe“humantouch”,iswhatdifferentiatesthemfromthecompetition.(Unfortunately,he’sright!
!
)
Istheworkforceunionized?
Yes
Whatistheaverageageoftheworkforce?
52andclimbing.Thereisverylittleturnoverintheworkforce.
Whatisthepresentthroughputrating?
Howhasitchangedoverthepastfiveyears?
Presentlytheplantisproducingatabout80%ofcapacity.Thishasbeendecreasingsteadilyoverthelastseveralyears.
Whatisthetypicalreasonforequipmentshutdown?
Emergencyrepair
Describethepreventivemaintenanceprogramineffectattheclient’sfacility?
Preventivemaintenanceisperformedinformallybasedontheknowledgeofseniortechnicians.
Howoftenhasequipmentbeenreplaced?
Isthisconsistentwiththeoriginalequipmentmanufacturer’srecommendations?
TheclientfeelsthatmostOEMrecommendationsareveryconservative.TheyhavefollowedaphilosophyofmaximizingthelifeoftheirequipmentandhavegenerallydoubledOEMrecommendations.
Theaboveinformationissufficienttoaddsomeunderstandingtothecostsideoftheequation.Yourclienthasanagingworkforceandplantthatisbehindthetimesintermsoftechnologyandinnovation.Thishascontributedtoexcessivebreakdowns,decreasedthroughput,increasedlaborrates(wagesincreasewithseniority)andgreaterlaborhours(overtimetofixbrokenmachines).
Inproposingrecommendationstoimprovetheclient’ssituation,thereisnosinglecorrectapproach.Thereareanumberofapproachesthatmightbeexploredandrecommended.Thefollowingaresomepossibilities:
Abandonthemainstreamandchildren’ssegmenttorecoverleadershipintheracingsegment
Issuestoconsiderinthisapproach:
Howmuchoftheracingsegmentis“recoverable”?
Whataretheexpectedgrowthratesofeachsegment?
Howbadlydamagedistherelationshipwiththespecialtyoutlets?
Aretherealternativeoutletstothespecialtyshopssuchasinternetsales?
Howwillthismoveaffectoverallutilizationoftheoperatingfacilities?
Maintainthemainstreamandchildren’ssegment,butsellunderadifferentname
Issuestoconsiderinthisapproach:
Istheredemandamongthemassanddiscountdistributorsforbicyclesundertheirname?
Whatadditionaladvertisingandpromotionscostsmightbeincurred?
Whataretheexpectedgrowthratesofeachsegment?
Whatisdrivingthebuyinghabitsofthemainstreamandchildren’smarket?
Reducecoststhroughautomationandinnovation
Issuestobeconsidered:
Whattechnologicalimprovementsaretobemade?
Whataretherequiredinvestments?
Whataretheexpectedreturnsonthoseinvestments?
Howwilltheseinvestmentsaffectthroughput?
Towhichlinesaretheseinvestmentsappropriate?
Arethemainstreamandchildren’ssegmentspotentially“over-engineered”?
Wha
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