Wharton_Practice_Case_Interviews_Guide

Wharton Consulting Club 2004/05 Practice Case Interview Guide 1 Welcome Consulting Club Member, This manual is the result of significant contributions by your fellow class mates, who have contributed real case questions from the 2004 2nd year recruiting season to assist you in preparation for consulting case interviews. Many students are initially daunted by the prospect of preparing for case interviews which are foreign to anything they have previously experienced. In our view however, there is no need to feel overwhelmed. Preparing for case interviews is much like learning to play a new sport. Until, you actually get out and start playing it can be difficult to understand what is going on, but once you get into it, it all comes together with practice. Literally volumes have been written on the topic of case interviews and we strongly recommend that you review at least one of the many publications available. Readily available resources include the 2003 Wharton Case book, which includes a detailed introduction to the Case Interview process, David Ohrvall’s Crack the Case, or the Vault Guide to Case Interviews. Reading these texts however is very much like reading a text on how to play basketball – it might give you a basic understanding for how to play the game but until you go out and shoot a few jump shots you won’t be much of a player. It is with that in mind that we have focused this year’s guide on actual cases, including questions from real interviews together with the interviewee’s solution supplemented by comments and recommendations from the Case Book Editorial Team (who have had the time to consider preferred solutions and frameworks away from the pressure of a live case interview) Our advice: • Read at least one preliminary guide (more if you feel necessary) • Form a small group of 3-4 members with similar expectations and time commitments • Get together regularly to practice cases choosing cases of as many different types and from as many different sources as possible (all interviewers are different and you need to get used to very different styles of interview) • Give honest feedback on each others performance (you would rather find out about your errors now rather than in a rejection from a live interview) • Get used to thinking out loud and structuring your thinking clearly • Do as many cases as you need to feel comfortable with the process. For some people this will be ten for others it will be sixty. Only you can tell when you are really getting a grip on things. • Remember to use a good dose of commonsense. Case interviews are about real world situations, you will normally have a better sense for the right answer than you initially give yourself credit for. Your own experience and your first year subjects should equip you well to know what the issues are. Good luck!! Ben Simons Richard Osborne Vice President – Member Education Case Book Editor 2 CASE INDEX Case # Title Firm – Round Page 1 Optical Fibres BCG – Rd 1 3 2 Holding Company Booz Allen – Rd 1 5 3 Election Booz Allen – Rd 1 7 4 Perpetual Motion Bain – Rd 1 9 5 Nutracorp McKinsey – Rd 1 11 6 Party Goods BCG – Rd 1 13 7 Razors and Blades BCG – Rd 1 15 8 Supermarket BCG – Rd 1 16 9 Chewing Gum AT Kearney – Rd 1 18 10 Alcohol Distribution Booz Allen – Rd 1 20 11 Gas Station LEK – Rd 1 22 12 Telematics BCG – Rd 2 24 13 Manufacturing BCG – Rd 2 25 14 Cell Phones BCG – Rd 1 27 15 Explosives BCG – Rd 2 29 16 Pharmaceuticals BCG – Rd 2 31 17 Electronics Retailers BCG – Rd 2 34 18 Aero Inca McKinsey – Rd 1 37 19 Pharmaceuticals II ZS Associates – Rd 2 39 20 Hotel (Post 9/11) BCG – Rd 1 40 21 Beer Booz Allen – Rd 2 41 22 Benjamin Carpets McKinsey – Rd 2 43 23 Other Samples Booz/ LEK/ McKinsey 45 CASE 1: OPTICAL FIBRES (BCG – Round 1) Our client makes optical fibre (has volume advantages to copper wire) which is mainly used by the telecom, cable and mobile phone industries. It’s made in glass strands and rolled onto 25 km spools. Their customers (who are generally major Telecoms networks) would buy a huge quantity, bundle it up, dig a trench and put the bundle of fibres in the ground. They’ve seen a 50% decline in revenues, and have recently brought in a new CEO. The new CEO would like to know: a) Why did revenues drop 50% in one year? b) Can he expect an improvement, and if so in what timeframe? c) How does our company compare to our competitors? Additional Information Provided After Relevant Questions: • Optical fibre is similar to a commodity, so consumers do not purchase by brand and pricing is in line with competition. • There has been no significant change in supply from the company’s perspective. • There are no direct substitutes and no regulation changes during this period. • The “usage” of the optical fibres, for voice, data and internet, has actually doubled each year. (meaning you would think you’d actually need twice as much each year) • Customers are asking for less. • No major changes in customer’s industry. Even spread across industries for product sales. • Current usage is 5 T/second, but capacity is 100 T/second. Interviewee’s Solution: Why did revenues drop 50% in one year? I determined the problem was that because it is such an effort and expense to dig the trenches to put the fibre bundles in, the customer does it as infrequently as possible which leads to overcapacity. Can he expect an improvement? If so when? I found out that they buy a year in advance of needing it. Since usage doubled yearly, I worked out that customers would reach capacity in 3.5 years, and therefore we would be impacted for 2.5 years. The CEO wants a benchmark slide with how we compare to our competitors: what would be the main items you’d want to see on that slide? I asked for Market Share (leader), Cost (lowest cost), People (no advantage), Customer Base (no advantage), Product (no real advantage), and Balance Sheet (highest) He asked if we could weather the storm or if we were in trouble. I said if we had a pretty healthy financial situation, we could weather the storm for 2.5 years but that it would be worthwhile looking for other ways to diversify since this would be a cyclic problem. 3 Zhang_A Pencil Zhang_A Pencil Zhang_A Pencil Commentary/Recommendations: The key to answering this question is understanding what is actually going on in the industry. To get to the heart of this issue you could ask: Clearly our client has lost a significant portion of their revenue. To understand why there are three key things I would want to examine. • First, what has changed about our Client – we haven’t heard of any major reason why things would be going wrong internally but some of the things that I would want to look at are: Have they lost key sales personnel with good customer relationships? Have they lost their good reputation because of some incident or accident etc? Have there been perceived quality problems? Etc • Second, I would want to look at our key Competitors – Are they offering a better product? (probably not if the industry is commoditized) Are they selling at a lower price? Are they offering better service/delivery times etc? Are there now more competitors? Are our competitors better placed geographically to meet the needs of our customers? Are their some competitors that are doing better than us? If so how do they differ from us? Are they bigger and leveraging their scale, etc? • Third, I would want to look at the needs of our Customers and whether these have changed. – If there is nothing wrong with our product (Client) and our Competitors haven’t suddenly got better then the downturn in sales must have something to do with the needs of our Customers. What is their current usage? What is their current capacity? What is their anticipated usage? What are their purchasing patterns relative to capacity? etc This structure should drive you to identify the key issue. The way the facts are presented it looks like most of the questions on Client and Competitors will yield little return and the richest part of the discussion will focus around Customer needs. This should provide the opportunity to discover all of the facts about the growth in demand and the capacity constraint currently in place. It could also lead to understanding the “lumpy” nature of these capital purchases. This discussion should also draw out enough information to answer the follow up question on how our client compares to its competitors. 4 Zhang_A Pencil CASE 2: HOLDING COMPANY (Booz Allen – Round 1) Client is a holding company or conglomerate. They are a longstanding client of ours. Their revenues are about 1.5B/year. They hold all sorts of companies, mostly around low tech manufacturing, including roughly in the “Oil and Gas” “Automotive” and “other” categories. The holding company doesn’t really have a unified portfolio, but basically places bets on companies it acquires. It is now looking at an auto parts manufacturer, and trying to get an idea of whether it should acquire it. What kind of things would you want to investigate to find out whether it was a good idea? Additional Information Provided After Relevant Questions: • Financial health is excellent – sitting on a lot of cash. Their portfolio is well diversified. They are not looking for “synergies” necessarily. • After market products – winches for cars, trucks, ATV’s (revenues of 300M for this product line). • They have 90% of the market in the US, and the market is expected to have flat growth. • Second division is drive train mechanism for switching car from 2W drive to 4W drive. It’s a small niche market, mostly luxury cars. Interviewee’s Solution: 5 What were some options for the Winch products since the market in the US seemed tapped out? We talked about markets not really existing in other geographies because it was mainly ATVs and they weren’t as common in other countries. We talked about leveraging the technology and although nothing else could be made with it, they did discover a use as a “tool” for home and shop use (to lift bricks etc). Who would the customers be here? We talked about small contractors and home use consumers (do it yourself) I asked where they shopped and it turned out that small contractors shopped mainly at wholesalers and big box shops like Home Depot. The trend was moving towards big box. These shops only renew their contracts once a year with manufacturers. How would you figure out margins for Home Depot? We talked about how margins were based on margin/square foot and that you could ask for a small space, but keep it extremely well stocked at all times and keep our packaging small. How would you bring in customers in this entirely new market? Advertising through do it yourself channels on TV, magazines, in-store demos. (this apparently didn’t work as well b/c they had to send people to 350 stores to do the demos and for a small company it was too much). He then wanted to talk about sales in the Drive Train component area: I asked about consumers, and we talked about consumers being both end consumers and auto manufacturers. I asked how often cars were redesigned and he said every 4-5 years, but the trend was going down towards every 3 years. What does this tell us? The opportunity to get in a redesign is better. What does this tell us about the future as this time continues to go down? Is this an advantage? I said no, because now you will likely have more competitive pressure from those who saw this as a barrier. Lastly, he wanted to know how I would evaluate the overall deal tactically. I talked about doing some sort of return on investment calculation to make sure the return was adequate, and that the results we needed in a particular time frame existed. Commentary/Recommendations: My concern in this case would be that the interviewee hasn’t developed a clear set of criteria for assessing the potential acquisition and used these to drive through the case in a structured fashion. There are a number of potential approaches but I would probably break it down as follows: • Before anything else I would ask for some more information on the potential target’s business. What products do they sell? What are their revenues and margins? Etc. Then I would analyze whether this makes the acquisition desirable by looking at the following: o First I would want to look at whether this is an attractive industry to be getting into generally – The automotive parts industry seems to be generally consistent with the other products in their portfolio so I would assume that they probably have the skills to manage this sort of business, is that correct? I would also want to look at the growth prospects for this industry. Is the automotive parts industry expected to grow faster or slower than other low tech industry companies they may also choose to invest in? o Second I would want to examine whether this is the right company within the automotive parts industry to buy – in particular I would want to know to what extent our client could derive value from the acquisition. Will there be any synergies with the other companies that our client owns? Will our client be able to improve profitability by driving costs out of this business? Are there opportunities to increase sales or grow the business faster than existing management is predicting? o Finally I would want to consider these potential improvements from a financial perspective. Does the client have a certain NPV or ROE target that it is looking to achieve before it invests? 6 CASE 3: ELECTION (Booz Allen – Round 1) What do you think is going to happen after the election if Kerry wins and Drug Reimportation from Canada is legalized? I’d like to know what you think the impact will be to Lipitor (Pfizer) and if it’s negative, how we can mitigate it. Additional Information Provided After Relevant Questions: • In the US, the Lipitor market is $7B. • Lipitor is manufactured in Puerto Rico. • Drug reimportation is not currently legal, so is mostly conducted via the internet. Interviewee’s Solution: What is the impact? I broke it up into a short term revenue impact and a long term impact on the pharma large margin model. I drew the value chain for the drug model: Pharmaco, PBM –Pharmacy Benefit Manager (negotiates price) Pharmacy (sells) Consumer (buys) In between you have the Doctor talking to the pharmacy and the health plan ultimately picking up the tab. We established that the healthplans will be pushing for this, and the PBMs will put pressure on the Pharmacos as the gatekeeper to the contracts with health plans. What will be the financial effect? I asked what the pricing was currently. It is sold for $70 per month, and we were looking at $30 per month for the same drug in Canada. That meant the $7B would be $4B less. Big effect! What can Pfizer to do mitigate? I asked if there were drugs that they sold in the US but not in Canada – there are. This is an option – they can bump margins on those products. They can lower costs (they should already be doing this but b/c their margins are so big, it’s not a priority). They can also limit the amount of cheaper drug output to match the Canadian market size (ie. since Canada’s pop is 10% of US, they can release less and limit the market for the “reimported” drugs) I also suggested pushing for longer contracts with the PBMs so that we could extend past patent life of Lipitor and keep margins, but he asked if the PBMs would have to allow that. They would also know when they were coming off patent, so would likely not sign those types of contracts. 7 Commentary/Recommendations: Booz and some of the industry specialist consulting firms will often ask case questions that are industry specific and require you to demonstrate your industry knowledge. A Bain, BCG or McKinsey is extremely unlikely to ever expect you to have this level of knowledge about a particular market before the start of a case but they can still be used as reasonable practice cases. I would approach this case the same way as for any other case involving a regulatory change and you can construct a series of questions that would get you to the right answer even if you know absolutely nothing about pharmaceuticals before you start: I would approach this case the same way as for any other case involving a regulatory change and you can construct a series of questions that would get you to the right answer even if you know absolutely nothing about pharmaceuticals before you start: • First I would want to clarify what the change means – it appears that it means that drugs sold into Canada from Peurto Rico can be re-imported into the US – Is there anything else? • First I would want to clarify what the change means – it appears that it means that drugs sold into Canada from Peurto Rico can be re-imported into the US – Is there anything else? • Second, I would want to understand why anyone would want to re-import drugs from Canada – it appears that drugs are available in Canada more cheaply than in the US creating market pressure to re-import them into the US – why is this the case? Why wouldn’t they simply be bought cheaply from Peurto Rico direct? • Second, I would want to understand why anyone would want to re-import drugs from Canada – it appears that drugs are available in Canada more cheaply than in the US creating market pressure to re-import them into the US – why is this the case? Why wouldn’t they simply be bought cheaply from Peurto Rico direct? • Next I would want to look at the extent of re-importation that is likely to occur – how much of the drug is currently sold in the US? In Canada? At what price is the drug sold in the US? In Canada? Are there any costs associated with re-importation? Are there any limits on the amount that could be readily re-imported (e.g. the total available supply) • Next I would want to look at the extent of re-importation that is likely to occur – how much of the drug is currently sold in the US? In Canada? At what price is the drug sold in the US? In Canada? Are there any costs associated with re-importation? Are there any limits on the amount that could be readily re-imported (e.g. the total available supply) • Finally I would want to consider the flow on consequences – will the drug companies put the prices up in Canada? Will they reduce the price in the US? Can they restrict supply to Canada? • Finally I would want to consider the flow on consequences – will the drug companies put the prices up in Canada? Will they reduce the price in the US? Can they restrict supply to Canada? 8 8 CASE 4: PERPETUAL MOTION (Bain – Round 1) NEW PRODUCT/MARKET ENTRY I was flying back from my client the other night, and working away on my laptop. Beside me was seated a mad scientist, who engaged me in conversation, and was excited to find out I was a consultant. It seems that he has created a perpetual motion machine. It requires no energy, and keeps on going. He wants to know how to make money with it. Additional Information Provided After Relevant Questions: • No additional information provided Interviewee’s Solution: • We started with a general framework on the things I would cover. She pushed me into the category of what it might be used for and we stuck on cars. She asked me what the size of the opportunity could be. I did a quick market sizing, based on the