Ross Consulting Club

Casebook 2011
CONSULTING INTERVIEW GUIDE

-0-

Table of Contents
I.

Introduction

II. Key Concepts

3
7

III. Frameworks

12

IV. Economics Review

17

V. Glossary

19

VI. Practice Cases

1.

Retail Bank (McKinsey Case Contest)

27

2.

ChairCo. (BCG Round 1)

37

3.

Molds R Us (Bain Round 1)

44

4.

Dr. Rossmans Magic Eye Drops (Bain Round 1)

50

5.

Baby Dinosaur (McKinsey Round 1)

57

6.

Save Mart Distribution (Accenture Round 1)

60

7.

Diesel Transportation (AT Kearney Round 1)

64

8.

Midwest Hospital (BCG Final Round)

70

9.

Caribbean Pay Phone (Bain Final Round)

77

10. Hotel Co. Spinoff (Bain Final Round)

82

11. Upscale Restaurant (McKinsey Final Round)

90

-1-

Table of Contents

12. Maries Caf

94

13. Chinatown Bus

102

14. Content Publisher and Distributor

107

15. Ross Summer Employment

116

16. Bolly Flix

121

17. Retailer Business Restaurant

131

18. Electric Auto Manufacturer

135

19. Pharmacy in Grocery Store

146

20. Lonestar Oil

151

VI. Recommended Cases from other Casebooks

156

-2-

Introduction

Ross Consulting Club Casebook Committee

The casebook committee edited and formatted cases that were written by the student body in
addition to contributing to the content sections.
Reed Hansen, RCC Casebook VP, Class of 12
Cara Howieson, RCC Casebook VP, Class of 12
Anvar Huseynov, RCC Casebook AVP, Class of 13
Joydeep Mukherjee, RCC Casebook AVP, Class of 13
Robbie Pratt, RCC Casebook AVP, Class of 13
Contact Reed Hansen ([email protected]) or Cara Howieson ([email protected]) with any
questions

-3-

Introduction
Important Information Regarding the Casebook
By accessing this casebook, you agree not to share it with anyone who is not a member of the
Ross Consulting Club. This casebook is a product of the work of Ross Consulting Club members
who wrote the cases and Casebook committee members who compiled and edited these cases.
Access to the Ross Casebook is a privilege of club membership.
Many of the cases provided to the club were provided by consulting firms who did so with the
understanding that the audience for these cases would be limited.
When the opportunity arises, the RCC will coordinate casebook exchanges with other MBA
programs. These exchanges will be facilitated by the RCC Casebook Committee.
Contact Reed Hansen ([email protected]) or Cara Howieson ([email protected]) with
any questions
Copyright 2011 by the Ross Consulting Club. Copyright act of 1976, no part of this publication
may be reproduced or distributed in any for or by any means or stored in a database or retrieval
system , without prior written permission by the publisher.

-4-

Introduction

How to Use the Casebook

The Cases have been formatted for easy use by both Interviewer and Interviewee. Follow these
guidelines for a practice case interview:
1.
2.
3.
4.
5.

The Interviewer reads the problem narrative out loud.

The Interviewee may ask initial questions then construct a framework for solving the case.
Follow the instructions given in the case, it should be clear what information should be given to
the interviewer (at times information should only be provided if the Interviewee asks).
Proceed until the case conclusion and allow the Interviewee to present recommendations.
Interviewer: take notes throughout the case and provide feedback to interviewee.

-5-

Acknowledgements
Case Contributors
In addition to the RCC Casebook team, the publication of this casebook would
not have been possible without the support of the following individuals:

Chandra Arya
Rohit Bakshi
Steuart Botchford
Tyler Cole
Matt Harms
Ameera Hiary
Chris Hicks
Jonathan Hunt-Glassman
Jonathan Huynh
Noy Jacobsberg
Alex Sedler
Adam Schanfield
Cecilia Tian
Rick Wilmot
John Zhang

-6-

Case Structure
The overall structure of the case interview takes the following form:

Understand the
Question

Develop
Framework

(~1-2 minutes)

(~1-2 minutes)

LISTEN
Summarize the
problem statement
to make sure you
understand the
situation and
objectives
Ask 1-2 clarifying
questions around
the topic and/or
metrics to be used
for the analysis
The questions
posed should
necessitate a short
response you don

Ask for a moment to

plan your structure
Develop 3-4 areas to
analyze along with a
few tailored sub-topics
Structure the
framework in a logical
fashion it should
open with the most
important topic and
provide the
interviewer with a
roadmap of where you
plan to take the case
Engage the
interviewer by turning
the framework
towards them

Analyze
(~20 minutes)
Refer back to the
framework as you
move through each
of the main areas
Use one sheet of
paper per topic
think of the case as
a PowerPoint deck
Tie back each piece
of analysis to the
main
objective/problem
statement
Walk through the
calculations
/analysis
Drive insights
whenever possible!

Form
Recommendation
(~1-2 minutes)
State your
recommendation as
a direct response to
the
problem/objective
it should not come
as a surprise to the
interviewer
Incorporate key
metrics/findings as a
part of your
recommendation
Include risks and
next steps

-7-

Porters Five Forces

Porters Five Forces Analysis

Threat of New Entrants

Bargaining Power of
Suppliers

Internal
Rivalry

Bargaining Power of
Customers

Threat of Substitutes

-8-

Porters Five Forces

Concept

Key Drivers

Internal Rivalry

Concentration and balance

Industry growth
Product differences
Exit barriers
Overcapacity

Threat of New Entry

(Barriers to Entry)

Economies of scale
Capital requirements
Access to distribution channels
Competitor response
Brand identity
Proprietary product differences

Threat of Substitutes

Switching costs
Relative pricing
Availability of and consumer propensity to substitute products

Bargaining Power of
Suppliers

Supplier concentration
Switching costs
Threat of forward integration
Product differentiation

Bargaining Power of
Customers

Buyer concentration
Buyer volume
Buyer switching costs
Ability to backward integrate
Substitute products
-9-

Key Marketing Concepts

4Ps

Considerations

Product

Features and capabilities

Quality and reputation
Service and warranties
Packaging and size
Positioning and market segmentation
Differentiated versus commodity

Promotion

Pull versus push

Consumer awareness
Loyalty
Advertising medium
Public relations
Buying process
Trial/Repurchase

Price

Perceived value
Willingness to pay
Retail/Discounts
Economic incentives
Skimming
Strategy relation to market size, product lifecycle, and competition

Place (Distribution)

Channels
Coverage
Inventory levels, turnover, carrying costs
Transportation alternatives, efficiencies, costs
- 10 -

Key Marketing Concepts

3Cs

Considerations

Company

Strengths/Weaknesses/Opportunities/Threats
Strategy and vision
Available resources/Capacity
Experience/Learning Curve
Financial
Culture/Organizational structure

Competition

Industry
Size/Number/Market share
Economies of Scale/Scope
Capabilities/Experience
Resources financial, distribution

Customer

Perceptions
Loyalty
Switching costs
Purchase behavior
Segmentation
Market characteristics/trends

To make this a 5Cs analysis, one would also evaluate costs and channels. Data for
these two dimensions is covered elsewhere in the casebook.
- 11 -

General Frameworks
Topic

Key Drivers

Revenue

Volume
Internal Price, Customer Service, Distribution/Inventory/Capacity
External Competition, Substitutes/Complements, Market
Forces/Demand
Price Competition, Elasticity, Differentiation, Segments
Product Mix Attributes (e.g. niche, patent), Quality, % of Revenue, Variety
Alternative Revenue Streams
Number of Stores

Costs

Fixed Costs Manufacturing, Labor, Marketing, Overhead, IT, SG&A, PP&E

Variable Costs Inputs, Distribution, Marketing, Maintenance, Packaging,
Inventory
Balance Sheet Items
Benchmark Opportunity Cost/Cost Accounting/Capacity Utilization
External Union strikes, Technology, Currency Fluctuations, Tariffs, De/Regulation

Competition

Rivals (structure)
New Entrants
Substitutes
Reaction
Position

- 12 -

General Frameworks
Topic

Key Drivers

Customers

Market Size
Segments
Needs
Purchase Drivers
Price Elasticity
Retention/Loyalty

Processes

Manufacturing
Marketing
Sales
Distribution
Customer Service
IT
R&D
Forecasting

Company

Core Competencies
Cost of Capital
Brand
Organization / Incentives
Controls
Financial Capability
Management Capability

- 13 -

General Frameworks
Topic

Key Drivers

Macro

Legislation
Unions
Technology
Economy Oil, Interest Rates, Unemployment
International Issues Politics, Regulations, Taxes, Tariffs
Environment
Socio-Cultural
Demographics

Supply Chain

Suppliers
Distributions

Industry

Barriers to Entry/Exit
Lifecycle
Consolidation
Government Policy
Capital Costs
Access to Technology, Distribution, etc.

- 14 -

Key Formula Review

Topic

Formula

Time Value of Money

Rule of 72

Littles Law
Inventory

Profitability
Breakeven
Margin
Markup
- 15 -

Key Formula Review

Topic

Formula

Return on Assets (ROA)

Return on Equity (ROE)

DuPont Analysis
Working Capital

Income Statement

Sales
COGS
= Gross Profit
SG&A
= EBITDA
Depreciation/Amortization
= Operating Profit
Interest Expense
= EBIT
Tax Expense
= Net Income
- 16 -

Economics Review
Concept

Definition

Adverse Selection

Situation in which an individuals demand for insurance is aligned to their risk

of loss (i.e. people with the highest expected value will buy insurance) and
the insurer cannot account for this correlation in the price.
Restrict choice
Equalize information
Signaling

Consumer Surplus

Economic gain achieved when consumers purchase a product for a price less
than their willingness to pay.
Consumer Surplus = Willingness to Pay - Price

Economies of Scale

The average cost per unit for a business entity is reduced by increasing the
scale of production.

Economies of Scope

The average cost for a business entity is reduced by producing two or more
products.

Elasticity

Insurance

Form of risk management used to hedge against the risk of a loss in which
the cost is equal to expected loss.

Law of Diminishing
Returns

At some point in the production process, the addition of one more unit of
output , while holding everything else constant, will eventually lead to a
decrease in per unit returns.

Marginal Cost

Cost of one more unit of output.

If E>1, decrease price to increase revenue

If E<1, decreased price leads to lower revenue

- 17 -

Economics Review
Concept

Definition

Monopoly

Entity is the only supplier of a particular good.

Lack of competition produce less and charge more
Barriers may include government regulation, networks, patents, etc.
Revenue is the midpoint of the demand curve

Moral Hazard

The unobservable actions and risks that humans may take once a contract is signed
since they dont bear consequences. It is a special case of information asymmetry
that affects the cost of transaction.

Oligopoly

Market is dominated by a small number of sellers.

Dominant strategy is always better
Sequential games commitments help

Perfect Competition

Price Discrimination

Situation in which identical goods are sold at different prices from the same provider.
Ist degree Different price for different willingness to pay
2nd degree Different price for different quantities
3rd degree Different price for different segments (attributes)

Risk Averse

Individuals who prefer certainty over the uncertain for the same expected value (EV).

Risk Neutral

Individuals who are indifferent on risk taking if the EV is the same.

Risk Seeking

Individuals who prefer risk even if the EV for a certain event and the risk is the same.

Firms take price MR = P

Maximum profit = MR = MC
P<AVC shut down

- 18 -

Glossary
Term

Definition

Arbitrage

The purchase of securities on one market for immediate resale on another market in
order to profit from a price discrepancy.

Break-Even

Total amount of revenue needed to offset the sum of a firm's costs. Implies that the
firm's profit will be $0.

CAGR

Compound Annual Growth Rate: (Ending value/beginning value)^(1/# of years)-1.

Most likely to show up in a case with graphs and exhibits.

Capacity

The maximum level of output of goods and/or services that a given system can
potentially produce over a set period of time.

Competitive
Advantage

When a firm is able to deliver benefits equal to competitors but at a lower cost OR
able to deliver greater benefits than competitors.

Contribution
Margin

C=P-V, where P is unit price, and V is variable cost per unit.

Core
Competencies

The activities that a firm does well to create competitive advantage.

Customer
Segmentation

Subdivision of a market into discrete groups that share similar characteristics.

- 19 -

Glossary
Term

Definition

Discount Rate

Also known as cost of capital. There is an opportunity cost associated with

every investment, with the cost being the expected return on an alternate
investment.

Entering New Market

Three main methods: start from scratch, form joint venture, acquire an
existing player.

Five Cs

Company, Customer, Cost, Channels, Competition

Fixed Costs

Costs that do not change with an increase or decrease in the amount of

goods or services produced.

Four Ps

Product, Price, Promotion and Place

Gross Margin

A Companys total sales minus its cost of goods sold, divided by the total
sales revenue, expressed as a percentage.

Horizontal Integration

The acquisition of additional business activities at the same level of the value
chain.

International Expansion

Main mechanisms: exporting, licensing, franchising, joint venture, foreign

direct investment (acquisition or startup).

- 20 -

Glossary
Term

Definition

Inventory Turnover

A ratio showing how many times a company's inventory is sold and replaced over
a period. Should be compared to industry averages: low turnover implies poor
sales or excess inventory; high ratio implies either strong sales or ineffective
buying.

Learning Curve

Visually shows how new skills or knowledge can be quickly acquired initially, but
subsequent learning becomes much slower. A steeper curve indicates faster,
easier learning and a flatter curve indicates slower, more difficult learning.

Market Share

The percentage of market size controlled by an individual firm.

Payback Period

The length of time required to recover the cost of an investment.

Market Size

Total size of a population (usually measured in number of people or actual dollar

value) that would purchase a company's goods or services. Market size is always
relevant and is a question that should be asked.

Product Lifecycle

Four main stages: market introduction, growth, maturity, decline.

NPV

The difference between present value cash inflows and present value cash
outflows.

Product Mix

Total number of product lines that a company offers to its customers. Often an
important area to explore in profitability cases to identify loss-making products.

- 21 -

Glossary
Term

Definition

Porters Five Forces

Buyer Power, Supplier Power, Threat of new entrants, Substitutes, Internal

Competition. Used for evaluating markets. Also key to think about
complements even though that's not mentioned by Porter.

Profit

Revenue minus cost.

Promotion

Coupons, discounts, trials, etc. designed to increase sales of a product or

service.

Rule of 72

Also known as the rule of 70, AKA rule of 69. Simply put 72, 70 or 69 in the
numerator and the projected annual growth rate in the denominator to give
you the amount of time until the investment doubles.

Sales per Square Foot

The average revenue a business creates for every square foot of sales
space. Used in the retail industry as a measure of efficiency.

Same Store Sales

A statistic used in retail industry to determine what portion of new sales has
come from sales growth and what portion from the opening of new stores.

SWOT Analysis

Strengths, Weaknesses, Opportunities and Threats. Very basic framework,

probably not a good idea to put down as your case framework, but good to
have as a mental checklist.

- 22 -

Glossary
Term

Definition

Synergies

The idea that the value and performance of two companies combined will be
greater than the sum of the separate individual parts. Used mostly in M&A.

Value Chain

Another concept from Michael Porter. His Value chain: Inbound Logistics,
Operations, Outbound logistics, Marketing and Sales.

Variable Costs

Costs that vary depending on a company's production volume; they rise as

production increases and fall as production decreases.

Vertical Integration

Degree to which a firm owns its backward suppliers or forward buyers.

Weighted Average

An average in which each quantity is assigned a weight. These weightings

determine the relative importance of each quantity on the average.

- 23 -

Key Facts Review

Market Sizing Facts
A selection of facts that can be useful to review before case interviews. You dont have to know the
exact population of Canada, but you should at least be able to get in the ball park. Furthermore, you
should memorize numbers that occur commonly such as the population of the U.S. It is good to get in
the habit of using numbers that work with the math you are planning to perform. For example, if you are
estimating the population of the U.S. and you have to divide by 4, use 280 MM rather than 300 MM.
Doing math quickly in your head can impress interviewers and make you sound more confident.
Additionally, we would recommend you develop a system to keep track of zeroes while you are doing
your calculations. You dont want to get tripped up because you get 1 MM instead of 10 MM!
Lastly, get in the habit of taking second to think before you speak. It is better to take an extra few
second and be right than to blurt out the wrong answer. Remember, the interviewer is evaluating
whether they would be comfortable putting you in front of a client!

- 24 -

Key Facts Review

Location

World
China
India
Europe
U.S.
Brazil
Japan
Mexico
France
Canada
Australia
New York City
Los Angeles
Chicago

Population

7B
1.4 B
1.2 B
800 M
310 M
200 M
130 M
107 M
65 M
34 M
22 M
8M
4M
3M

Metric

Avg. Household Size

Average HH Income
% With Internet Access
% Computer in Home
Corporate Tax Rate
Corporate Discount Rate
Wal-Mart Revenue
Wal-Mart Profit
Exxon Mobile Revenue
Exxon Mobile Profit
% Americans Over 65
% Americans Under 20
Average GDP Growth US
Average Inflation US

Value

2.5
$47,000
92%
80%
40%
10%
$408 B
$14 B
$275 B
$19 B
13 %
27 %
4%
3.3 %
- 25 -

Decimal Calculations
Decimal Calculations
Many decimal calculations can be made easier by remembering a few numbers. For example, if
you know that 1/8 is .125, it will be easy to calculate 3/8 = 3*.125 = .375. Numbers divided by 7
are also easy to calculate once you memorize the number sequence 142857.

$K * $K = $M
$K * $M = $B

1/2

.5

1/3

.333

1/4

.25

1/5

.2

1/6

.166

1/7

.142857

1/8

.125

1/9

.111

1/7

.142857

2/7

.285714

3/7

.428571

4/7

.571428

5/7

.714285

6/7

.857142

- 26 -

Retail Bank
(McKinsey Quick on your Feet Competition)
Problem statement narrative
Our client is a bank in the US. It has a large retail
footprint and offers a mix of services to endcustomers (checking, debit, credit cards). They also
have loan centers to sell mortgages in the same
markets. The bank currently serves 15 million
customers. Our client has historically been
profitable, but increased regulation and the downturn
in the economy have caused the bank to see a sharp
decline in profitability. The client has engaged us to
help determine next steps for its business and has
asked us to assess ways they can increase profits
within the next 12 months.

Difficulty: Medium

Quant Heavy

Guidance for interviewer and

information provided upon request
Ensure the candidate is familiar with how a bank
earns its profits (e.g. the spread between what
they lend money out at and borrowing costs, fees
on various services).
Note that this is an interviewer-led case; there
are seven questions that the Interviewer will ask
the Interviewee.

Industry: Financial Services

Type: Profitability

- 27 -

Retail Bank
(McKinsey Quick on your Feet Competition)

Additional Questions to Steer Discussion

Questions for the candidate
1.

What are some of the ways the bank can increase profits in the next 12 months?

A good answer is structured and contains a comprehensive set of ideas to both reduce costs and boost revenues as
well as clear examples. Interviewee should use a Profitability framework to approach this problem. Answers include
but are not limited to:
Reduce Costs
Fixed Costs
Reduce underperforming branches (close branches, lease branches to other banks)
Reduce workforce (e.g., push greater use of online channels for banking, outsource functions)
Consolidate the branches and the loan centers
Variable
Reduce costs associated with transactions (paper free, decrease error rate)
Increase Revenue
Quantity
Current Customers
Cross-sell different products (home purchase mortgages, refinancing, credit card, debit card, money market,
advisory services)
Change product mix to higher revenue products
Get rid of unprofitable customers
New Customers
Increase Number of customers
Product Mix
Launch new products
Price
Increase bank fees (Debit fees, ATM fees, call center fees)
Raise rates charged
- 28 -

Retail Bank
(McKinsey Quick on your Feet Competition)

Additional Questions to Steer Discussion

Questions for the candidate
We have worked with our client to narrow down their options to two choices. The first is shutting
down unprofitable retail locations, the second is a better customer segmentation strategy. Lets
explore both:
2. What are some of the risks with shutting down branch locations?
Note: there are a number of ways to think this through look for the structure in how the candidate
responds. A good answer includes, but is not limited to:
Near Term
Poor PR
Legal/contractual complications
Extra costs (severance)
Lose a portion of customers who bank through that branch
Selling off assets could scare investors

Long Term
What happens when the market rebounds?

- 29 -

Retail Bank
(McKinsey Quick on your Feet Competition)

Additional Questions to Steer Discussion

Questions for the candidate
3. The second option the bank is considering is a better retail segmentation strategy: What
segments do you think a retail bank has?
Note 1: This response could have a lot of answers. Look for clear delineation between customers
who are profitable and unprofitable and then list characteristics of each (i.e. Segment 1 is mass
affluent and is highly profitable, uses checking accounts, has a money market account, and has a
mortgage with the bank; they are low cost as they generally use ATMs and the internet to manage
their transactions; Segment 2 is lower income, keeps a small balance in checking, uses tellers and
call centers often) etc.
Note 2: Ensure the candidate does not spend too long on this question.
4. Can you take a look at the below chart and walk me through what the bank is experiencing?
Please walk the interviewee through any questions they have on the chart in Exhibit 1:
Key insights include, but are not limited to:
- Only 30% of the banks customers are currently profitable
- 20% of the banks customers have low revenue potential and could be eliminated
- Our client needs to change the mix of products from group 1 and 2

- 30 -

Retail Bank
(McKinsey Quick on your Feet Competition)

Exhibit 1
Our client has 5 distinct groups of customers
Annual $ per customer1

Revenue
Potential

Margin from
banking costs
100

Group 2

100

Group 3

20

15

-5

50

-60

100

Group 5

100

-5

50

-20

75

-15

-15

-15

-15

% of total
clients

Profit

-15

-15

15

Group 4

Cost to serve

30%

-5

20%

-25

20%

-5

15

Working Draft - Last Modified 10/23/2011 8:45:44 PM Printed

Group 1

Transaction
costs

10%

45

20%

1 15,000,000 customers
SOURCE: Team Analysis

McKinsey & Company | 0

- 31 -

Retail Bank
(McKinsey Quick on your Feet Competition)

Additional Questions to Steer Discussion

Questions for the candidate

5. What is the average annual profitability of a customer?

Average Customer

Category

Profit

Percent of clients

Weighted profitability

Group 1

-5

0.3

$ (1.50)

Group 2

-25

0.2

$ (5.00)

Group 3

-5

0.2

$ (1.00)

Group 4

15

0.1

$ 1.50

Group 5

45

0.2

$ 9.00

Total

N/A

$ 3.00

- 32 -

Retail Bank
(McKinsey Quick on your Feet Competition)

Additional Questions to Steer Discussion

Questions for the candidate

6. What is the annual bank profitability?

Total Profitability
Total Customers
Average Profit per customer
15,000,000
$ 3.00

Total Profit
$45,000,000.00

Note: If the interviewer decides to calculate each group out individually, push them to look
for shortcuts.
Our client has decided to institute a $.85 fee each month for all checking accounts. We have
advised them that they will lose a number of customers. We expect the following % of
customers to remain (read this chart to interviewee):
Percent of customers
that remain
Segment

Percent

Group 1

60%

Group 2

60%

Group 3

20%

Group 4

60%

Group 5

70%
- 33 -

Retail Bank
(McKinsey Quick on your Feet Competition)

Additional Questions to Steer Discussion

Questions for the candidate
7. What is the new annual profitability per customer?
Note 1: If the interviewee is running out of time, help them along to ensure they get to
conclusion (e.g. ask them for their approach).
Note 2: Feel free to let the interviewee round off numbers here. Suggest $0.85 per month
should become $10 per year.

Segment
Group 1
Group 2
Group 3
Group 4
Group 5

Profit
$
(5)
$ (25)
$
(5)
$
15
$
45

% of
Customers
who fit
each
segment
30%
20%
20%
10%
20%

% of
customers
that will
stay with
the firm
60%
40%
20%
60%
50%

# of
remaining
customers
2,700K
1,200K
600K
900K
1,500K

Profit per
group
(w/o fee)
(13,500K)
(30,000K)
(3,000K)
13,500,K
67,500K

Profit
from
fees
(@$10
per yr)
27,000K
12,000K
6,000K
9,000K
15,000K

Total
profit per
segment
13,500K
18,000K
3,000K
22,500K
82,500K

(Continued)

- 34 -

Retail Bank
(McKinsey Quick on your Feet Competition)

Additional Questions to Steer Discussion

Questions for the candidate

Total Profit

103,500K

# of Customers
Average Profit per Customer

6,900K
$

15

- 35 -

Retail Bank
(McKinsey Quick on your Feet Competition)

Suggested Solution and Structure

Solution Guide
You are walking down the hall and run into the CEO, he wants to know your recommendation:
A good answer includes, but is not limited to:

Intro:
-The bank should institute a bank fee in order to meet the initial goal of increasing profits. This
is the quickest way to earn new streams of revenue, while segmenting out the unprofitable
customers. By instituting a fee you will be able to increase profit by 5x per customer on an
annual basis.
Note: The interviewee should include a detail or two on each group and how they are able to
increase profits (e.g. Group 3 was losing $3M per year we are now earning $3M in profit from them
on an annual basis).

Risks
-Bad PR
-High transaction costs as people try to figure out if they are affected
-Estimates could be off
-Lose customers that could become profitable in the future

Next steps
-Move forward with instating the fee
-Look at exempting certain groups from the fee
- 36 -

ChairCo BCG Round 1

Guidance for interviewer and
information provided upon request

Problem statement narrative

Our Client, ChairCo manufactures metal parts* that
are used to manufacture chairs. ChairCo primarily
sells these parts to US based chair manufacturers.
They are facing declining revenues and the CEO has
asked us to evaluate the problem and suggest
corrective measures.

If the candidate asks, tell them that there are no

specific financial targets.

Give the exhibits in the subsequent slides only

when the candidate asks for the relevant data.

*Metal bases that are used in the revolving office

chairs.

Difficulty: Easy

Industry: Manufacturing

Type: Profitability, Operations, Chart Based

- 37 -

ChairCo BCG Round 1

Additional Questions to Steer Discussion

Questions for the candidate
After seeing Exhibit 1, the candidate should make an observation that prices and volume are
decreasing and both these issues need to be addressed.
Why did ChairCo have to decrease prices? Because competition has decreased prices.
Why did competition decrease prices? Because metal parts are a commodity and they might
have a lower cost structure than us.
Why do you think our competitor has a lower cost structure? Material and labor could be the two
major reasons.
Why is our client loosing unit sales despite decreasing price? Because their customers are
moving to low cost countries.
Can the client reduce costs? Client is already very efficient and cannot decrease their costs
without shifting operations to China, Indonesia etc.

- 38 -

ChairCo BCG Round 1

Suggested Solution and Structure

Solution Guide

Exhibit 1 Volumes have decreased and so have prices ($10 to $9.5). Ask candidate why he/she
thinks the price must have gone down. The most logical answer should be that since this is a
close to commodity product, prices for the entire industry have fallen down and ChairCo had to
respond. Competitors might have become more cost competitive because their operations are
located outside US.
Exhibit 2 - Competition has significant cost savings in material and labor. The most logical
reasons are that they are based in low wage counties such as China, Indonesia and that they are
using an inferior/cheaper metal.
Exhibit 3 ChairCo customers are moving geographically away which explains the drop in
volume despite the drop in price.

- 39 -

ChairCo BCG Round 1

Conclusion
Recommendation

Next Steps

To become cost competitive and gain proximity to

customers (chair manufacturers), ChairCo has
to shift manufacturing to Asia.

Analyze which country has low cost

base, high proximity to customers and
low barriers (regulations, etc.) to set up
manufacturing.

Risk downsizing in US will lead to a PR

backlash.

- 40 -

ChairCo BCG Round 1

Exhibit 1 ChairCo Sales

$500 M
50M Units
$380 M
40M Units

2010

2011

- 41 -

ChairCo BCG Round 1

Exhibit 2 ChairCo Vs. Competitor cost

ChairCo Costs

Cost Structure
ChairCo

Competitor

Materials

4.9

2.5

Labor

1.5

Transportation

0.5

1.5

Tax

IT

0.5

Overhead

1.1

SGA

COGS

$7.5

$7.4

0.6

$1.5

$1.6

2010

2011

- 42 -

ChairCo BCG Round 1

Exhibit 3 - Manufacturers of Finished Chairs selling in US

Europe

Canada

US

Asia

10.0%
30.0%
50.0%
80.0%

60.0%
40.0%
5.0%
5.0%
2009

5.0%
5.0%
2010

5.0%
5.0%
2011
- 43 -

Molds R Us Bain 1st Round

Guidance for interviewer and
information provided upon request

Problem statement narrative

Our client is a private equity firm interested in Molds

R Us, small company that makes plastic moldings for
houses in Russia. They want to know if we think
investing in this company is a good idea. The firm
also wants to understand what the 2011 market for
moldings, particularly in plastics, will look like.

The PE firm wants to see growth of 20% in the first

year to justify this purchase
This company only plays in the Russian market and
the PE firm is not interested in expanding across
borders
This company is the only player in plastic moldings
Moldings are used where walls meet the ceiling to
add a decorative appeal to houses and are only
used in residential buildings
All housing starts require moldings in the year they
are started, and are all completed by the next year
Molding Product Mix (Exhibit A)
Market Size and Competitive Landscape (Exhibit B)

Difficulty: Hard

Industry: Manufacturing

Type: Mergers and Acquisitions

- 44 -

Molds R Us

Exhibit A: Types of Moldings

No
Moldings

PVC Plastic
Moldings

Rubber
Moldings

Price per 10 Meters

Installation
Requirements

1 Ruble

1.5 Rubles

None

Need Contractor

Replacement

None

Every 5 years

Molding Options

Wood
Moldings

5 Rubles
Need
DIY
Contractor
Every 10
Every 7 Years Years

Plaster
Moldings
15 Rubles
Need
Contractor
Every 25 Years

Other Important Information

A contractor can lay down 1000 feet of molding per hour
A contractor makes, on average, $50 Rubles per hour
DIY-Do it yourself or self installation
The average house has 4000 Meters of walls

- 45 -

Molds R Us

Exhibit B Moldings Used in the Russian Market

Moldings Used in the Russian Market
No Moldings

8%

PVC Plastic Moldings

8%

Rubber Moldings

8%

Wood Moldings

8%

Plaster Moldings

7%

7%

18%
0%

16%
1%

16%

15%

13%

11%

2%

5%

9%

12%

25%

26%

26%

26%

26%

25%

49%

48%

47%

47%

46%

45%

2005

2005
Total
Residences 29,689,297
Housing
Starts
456,097

2006

2007

2006

2007

30,145,394
551,545

2008

2009

2008

2010

2009

2010

30,696,939 31,375,374

32,170,804

33,122,149

678,435

951,345

1,245,890

795,430

- 46 -

Molds R Us

Case Progression
Case Progression

Once the candidate lays out a framework and asks the relevant questions you should give
them Exhibits A and B.

After the candidate analyzes the exhibits ask them to calculate their estimate for the
number of meters of plastic moldings being sold in 2011. This can be done by
multiplying the market share of plastics for 2010 by the number of residences in 2011 (2010
residences + 2010 starts) plus the estimated housing starts in 2011. This gives the
expected number of houses using plastics in 2011. Given that plastic moldings are
replaced every 5 years, the candidate should realize that only 1/5 of existing households
will be replacing their moldings in 2011.

MATH: 34.3M Residences + ~1.4M Starts = Approx. 35.7M houses in 2011

34.3M Residences*25% market share of plastic moldings = 8.6M houses

8.6M Residences/5 years (replace moldings) = 1.7M existing houses replacing moldings in
2011

Estimated 1.4M Housing starts in 2011 *25% market share = .35M

So, 1.7M existing homes + .35M starts = 2.05M Houses in 2011 using plastic moldings.

2.05M*4K meters of wall per house = 8.2B meters of plastic moldings being sold in 2011.

- 47 -

Molds R Us

Case Progression
Estimating the growth opportunity
Once the candidate lays a framework and asks the relevant questions provide them Exhibits
A and B

After reviewing the charts and graphs the candidate should notice the stagnant pace of the
market share of plastic moldings.

A good candidate will begin to calculate the overall changes in market size to see if there is
enough growth to make this deal worthwhile.

Either way, have the candidate calculate the overall market growth rate from 2005-2010.

This will begin to clue the candidate into the major issue, that the growth will not be high
enough for the PE firm to move forward with these moldings.

Existing homes growth rate ~((33.1M 29.7M)/29.7M) / 6 years (2006-2010) = 2%

New homes growth rate ~((1.25M-.45M)/.45M) / 6 years = 30%

The key here is for candidate to recognize that the market of plastic moldings for
existing homes (about 85% of market) far outweighs housing starts (about 15% of
market - see calculations on previous slide) and thus recognize that overall market
growth will fall well short of required 20%. Actual growth rate < 10%.

Once candidate recognizes low growth rate ask them for their final recommendation to
the PE firm

- 48 -

Molds R Us

Conclusion
Recommendation
The PE firm should not purchase Molds R Us.
Plastic molding market share is stagnant
among all moldings sold.
The overall growth in housing does not
make up for the stagnant growth and they
will not grow revenues by 20% in their first
year.

Next Steps
The PE firm should look at rubber molding
companies to see if there is an opportunity to
purchase an organization because of high
growth of market share in the market.
They should look at the sales and marketing of
Molds R Us to see if there is opportunity to
spurn sales to increase growth by investing in
marketing, distribution, or sales channels.

- 49 -

Dr. Rossmans Magic Eye Drops

Bain, 1st Round
Guidance for interviewer and
information provided upon request

Problem statement narrative

Our client, Dr. Rossman, has invented an amazing

product. He has discovered the chemical formula for
Magic Eye Drops. One drop in each eye will cure
short- or long-sightedness in any patient. But Dr.
Rossman is a scientist, not a businessman, and he
has come to our firm because he wants to sell the
rights to his Magic Eye Drops to a business that will
commercialize the invention. What should his asking
price be?

Difficulty: Easy

Dr. Rossman has secured an exclusive,

worldwide patent for the next 20 years. After the
patent expires, generic versions will quickly be
developed.

Obstacles to regulatory approval are not

foreseen

The Magic Eye Drops have no known side

effects or risks.

Give the candidate bonus points for identifying

laser surgery as the closest competitor, but tell
him to focus only on corrective lenses (glasses
and contacts) as competitors for the purposes of
this case.

Direct the candidate to focus only on the US

market.

Industry: Pharma/Med.Devices

Type: Pricing/Valuation
- 50 -

Dr. Rossmans Magic Eye Drops

Bain, 1st Round

Solution Overview

An interviewer should allow the candidate to build a framework

Help candidate understand that this is a valuation problem. The candidate will develop a
structure to estimate the NPV of future expected revenues and costs.
To develop revenue projections, the candidate will have to estimate the market size and the
optimal price. An illustrative example of market sizing is given on slide 2 and an estimate of
revenue, including pricing, is given on slide 3.

Make the candidate brainstorm cost drivers. Once the candidate has listed cost drivers, provide
him with the figures listed on slide 4.

- 51 -

Dr. Rossmans Magic Eye Drops

Bain, 1st Round

Solution Guide: Market Sizing

Age Group

Pop.

Rate of Sight
Problems

Rate of Adoption

Market Size

0-15

50M

20%

10%

1M

16-30

50M

30%

50%

7.5M

31-40

50M

40%

50%

10M

41-60

50M

50%

50%

12.5M

61-75

50M

60%

40%

12M

75+

50M

75%

20%

7.5M
Total = ~50M

Give candidate bonus points for thoughtful and creative explanations of the assumed rate of sight
problems and assumed rate of adoption within each segment (e.g., adoption among young and old
patients will be lower because parents will be unwilling to test out a new technology on young
children whose eyes are still changing and elderly patients with fewer years to live will realize
fewer years of savings from not having to purchase new corrective lenses).
Give candidate bonus points for recognizing that the market will grow over the course of the 20
year patent. If the candidate raises this point, provide a projected annual growth rate of 3.5%. By
the rule of 70, this means that the market will double before the patent expires, resulting in a true
market estimate of 100M consumers.
- 52 -

Dr. Rossmans Magic Eye Drops

Bain, 1st Round

Solution Guide: Pricing & Revenue

The candidate should weigh different pricing strategies: competitive, cost based and value based.

One pricing strategy is to use competitive pricing, using corrective lenses as the relevant
competition. Based on personal experience, general knowledge or interviewer-provided
information, the candidate should assume an annual cost of corrective lenses at about $200.
Revenue over the life of the patent can be calculated as shown below:
Market Size * Annual Value of Magic Eye Drops * Patent Life= Total Revenue
~100M * $200 * 20 = $400B
The candidate may suggest factors that alter the price point such as convenience (suggesting a
higher price point) and riskiness (suggesting a lower price point). The interviewer should accept
reasonable alterations.
The solutions assumption of 20 years of revenue assumes that all customers will purchase as
soon as the product comes on the market. The candidate may reasonably adjust the years of
revenue downward to account for some customers waiting several years before purchasing.
Make sure that the candidate understands that we will disregard discount rates for the
purposes of this case. In other words, assume a discount rate of 0%.

- 53 -

Dr. Rossmans Magic Eye Drops

Bain, 1st Round

Exhibit 1: Costs
Costs

Driver

Cost

Management/Overhead

33% of operating costs

Operating Costs
Marketing

$150M per year for first 10 years

$50M per year for last 10 years

Production

$20 per drop

Distribution

$100M per year

- 54 -

Dr. Rossmans Magic Eye Drops

Bain, 1st Round

Solution Guide: Costs

Driver

Cost

Math

Total

Management/
Overhead

33% of operating costs

(i.e. 33% of Marketing
+ Production+
Distribution)

1/3 * 6B

2B

Marketing

$150M per year for

first 10 years
$50M per year for last
10 years

$100M * 20 yrs

2B

Production

$20 per drop

$20 * 2 eyes * 50M

customers

2B

Distribution

$100M per year

$100M * 20 yrs

2B
Total = 8B

- 55 -

Dr. Rossmans Magic Eye Drops

Bain, 1st Round

Conclusion
Recommendation
Dr. Rossman should put the invention up for
sale at ~ $392 B (400B Revenues-8 B in
Costs). Sales could however continue even
after expiry of the patent.

Next Steps
Solicit buyers
Focus on strategic acquirers
Attempt to start a bidding war
Speak at conferences extolling the value

This solution has been simplified by assuming

a discount rate of zero, because calculating the
NPV for this case by hand would be overly
complicated.

- 56 -

Baby Dinosaur (McKinsey)

Guidance for interviewer and
information provided upon request

Problem statement narrative

You are an MBA2 student, you walk into your

apartment and you find a baby dinosaur in the corner
of your room, what do you do?

Dinosaur is the only one in the world, and it turns

out he is friendly. No other information is
available.

Candidate should layout some initial decision

tree that could include:

Take Action: run, call 911, call family/friends for

help, pick up a stick to hit it with, stay there and cry
Take No-action: Dinosaur leaves on its own,
Dinosaur is friendly, Dinosaur is not friendly and you
may die.

Difficulty: Easy

Industry: Other

If Dinosaur is friendly, student should think of

ways to monetize it.

Type: Abstract, Decision Trees

- 57 -

Baby Dinosaur (McKinsey)

Structure to Steer Discussion

A strong candidate will be able to structure their thought process to include the following issues:

Should they approach the dinosaur or run away? (depends on whether it is friendly).

What can they do with the dinosaur? (Monetizing activities, vs. non-monetizing activities such as research,
etc.).

When monetizing dinosaur, they should consider selling vs. building a dinosaur business/franchise.
Questions for the candidate

1.

What are possible ways to monetize or make money in this situation? Sell it, or create business
around it. Student should brainstorm possible ways to create a business like using it for a movie, leasing it
to a zoo or an entertainment show, or creating an ecosystem around the dinosaur like a theme park.

1.

What would you prefer to do, sell the dinosaur or use it for a business? Why? What are the
possible costs and revenues you can generate in each case?

2.

What are the potential risks in this situation? Dinosaur dies, dinosaur attacks/eats spectators,
government seizes dinosaur and claims right to it, environmental concerns, etc.

3.

What are the possible ways to hedge against the possibility of dinosaur death? Insurance, clone the
dinosaur, asking science experts in field for ways to take care of it, create an ecosystem around Dinosaur
like a theme park or having it star a movie.
- 58 -

Baby Dinosaur (McKinsey)

Conclusion
Recommendation

Next Steps

A good recommendation will include creating

an ecosystem around the Dinosaur such as a
theme or entertainment park. It will touch on
other ways to hedge against the death of a
dinosaur, and potential risks like legal or
environmental risks.

Next steps may include conducting a feasibility

study around creating an ecosystem/theme
park.

- 59 -

SaveMart Distribution
Accenture, Round 1
Guidance for interviewer and
information provided upon request

Problem statement narrative

Your client, SaveMart, is a discount superstore

similar to Wal-Mart. They have 1000 retail stores
across the United States. Each store receives one
delivery per day from a distribution center.

SaveMart has hired you to investigate if the costs

related to distribution can be reduced.

Difficulty: Medium

SaveMart owns multiple distribution centers

across the United States. (Show figure)

The 4 primary distribution centers are

located in New York, Chicago, Dallas, and
San Francisco.

The 20 secondary distribution centers are

also spread out through the country.

All of SaveMarts products are imported from

Asia and arrive daily at the San Francisco
distribution center.

Steer the candidate away from attempting

numerical calculations.

Industry: Retail

Type: Operations
- 60 -

SaveMart Distribution
Accenture, Round 1

Primary DC
Secondary DC

- 61 -

SaveMart Distribution
Accenture, Round 1

Wait for candidate to specifically ask about

Current Distribution Routes

Every day, trucks transport products from the

San Francisco center to each of the primary and
secondary distribution centers.

Trucks from each of the primary DCs also make

daily deliveries to the nearby secondary DCs.

Each secondary DC makes one delivery per day

to its assigned stores.

All routes to and from the DCs are the same

each day regardless of demand (static routing).

Trucks are rented and are of uniform size.

Capacity

Not all distribution centers (primary or secondary)

are at full capacity. The three primary DCs
(excluding the West Coast DC) are well under
capacity.

Most trucks are NOT at full capacity.

Demand for products is not the same at all

stores.

- 62 -

SaveMart Distribution
Accenture, Round 1

Sample Recommendations

Deliver from the West Coast DC to the other

primary DCs and secondary DCs on the West
Coast. Do not deliver from West Coast DC to
other secondary DCs.

Consolidate secondary DCs that are not at full

capacity.

Determine optimal routes to and from the

DCs.

Dynamic Routing do not make daily

deliveries to stores/DCs if there is low
demand, or keep some extra inventory at the
stores.
Consolidate trucks:

Use smaller trucks if it decreases the

cost.

Buy trucks instead of renting.

Sample Risks/Next Steps

Risks

Other primary DCs may not have

enough capacity to hold the additional
inventory.

By consolidating secondary DCs,

capacity risks are magnified if demand
increases drastically.

Next Steps

Determine capacities of different DCs

to see which trucks to consolidate.

Determine differences in demand of

different stores.

Investigate trucking contracts and if

using different truck sizes or buying
trucks would save money.

- 63 -

Diesel Transportation Co
A.T. Kearney, Round 1
Guidance for interviewer and
information provided upon request

Problem statement narrative

Our client is a national shipping company that

focuses on ground transportation of commercial
freight. For the past 15 years, it has been using
diesel engines to power its fleet of vehicles, but now
wants to explore the possibility of switching to
electric powered engines (EV technology) due to
rising fuel costs. The CEO has approached us for
guidance and wants to know how to proceed.

Difficulty: Medium

Quant Heavy

Our client has identified a supplier to provide the

electric vehicle technology since it does not have
in-house capabilities.

Since it has an extensive fleet of vehicles, our

client wants to retrofit existing vehicles instead of
buying new ones.

No other ground transportation company has

used EV powered engines. If our client proceeds
with the conversion, it will be the first in the
industry to do so.

The candidate should now ask questions about

the current costs of transportation and determine
potential cost savings.

Industry: Transportation

Type: Cost Reduction

- 64 -

Diesel Transportation Co
A.T. Kearney, Round 1

Guidance to Steer Discussion

Overall guidance

The candidate should explain his/her overall

framework, then identify that the current and
future costs of ground transportation will
determine feasibility of project.

Possible framework
Revenue

Explore impact on revenue (e.g. improved

business relationships due to sustainable
operations or reduced carbon footprint in
supply chain for partners).

The candidate should then ask questions to

determine the initial investment required for
EV retrofitting and consider this cost along
with the cost savings of the entire project.

Costs

Candidate can assume that the current

supplier offers the best EV opportunity in
terms of price and efficiency.

Competition/Industry

Labor, insurance, fuel, maintenance, retrofit

initial investment.

New technology may create competitive

advantage for the client, thereby growing its
business.

Failure to properly implement fleet could

disable operations, allowing competitors to
take over.

EV technology has the potential to double

existing fuel efficiency.

Existing Capability

Company has no knowledge of using EV

technology, requiring a learning curve.

First to test the technology may also pose a

risk.
- 65 -

Diesel Transportation Co
A.T. Kearney, Round 1

Costs Page
Breakdown of Current Costs
Provide the following cost data as the right questions are asked but do not give them
away freely.
# of vehicles: 2000
Fuel tank size: 50 gallons
Avg mpg: 10
Cost of fuel per gallon: $3.00
Avg miles travelled per week: 1000
Avg annual maintenance and repair: $500
Insurance: 1K / year
Labor: 20K / year
Breakdown of Future Costs
Of the costs listed below, ask the candidate which would change and why.
# of vehicles: 2000
Fuel tank size: 50 gallons
Avg mpg: 20
Cost of fuel per gallon: $3.00
Avg miles travelled per week: 1000
Avg annual maintenance and repair: $3500
Insurance: 3K / year
Labor: 20K / year
- 66 -

Diesel Transportation Co
A.T. Kearney, Round 1

Suggested Solution and Structure

Solution Guide fuel savings
Current fuel costs
Miles driven per tank = 10 mpg * 50 gallons = 500 miles
Miles traveled per week = 1000 miles
# of times tank is filled per week = 2
Total cost of fuel per week = 2 * 50 gallons * $3.00 per gallon = $300
Average yearly fuel costs (~50 weeks) * $300 = $15K
Future fuel costs (candidate can perform calculations again or receives a bonus for realizing
that doubling fuel efficiency reduces fuel costs by half for the year)
Miles driven per tank = 20 mpg * 50 gallons = 1000 miles
Miles traveled per week = 1000 miles
# of times tank is filled per week = 1

Total cost of fuel per week = 50 gallons * $3.00 per gallon = $150
Average yearly fuel costs (~50 weeks) * $150 = $7.5K
Annual fuel savings per vehicle: $15K $7.5K = $7.5K

- 67 -

Diesel Transportation Co
A.T. Kearney, Round 1

Suggested Solution and Structure

Solution Guide total costs
Total current costs

Switching to EV thus saves $2.5K per

year.

The current vehicles have a remaining

useful life of 10 years.

Thus, switching to EV saves:

Fuel: $15K
Annual maintenance: $500
Labor: $20K / year
Insurance: $1K / year

$25K $5K (retrofit cost) = $20K over

the lifetime of each vehicle.

Total: $36.5K

At a fleet level, this would save the

company $20K * 2K vehicles = $40M over
the lifetime of the vehicles.

Candidate can ignore time value of

money/discounting, but should receive
bonus points for considering it.

Total future costs

Fuel: $7.5K
Annual maintenance: $3.5K
Labor: $20K / year

Insurance: $3K / year

Total: $34K

- 68 -

Diesel Transportation Co
A.T. Kearney, Round 1

Conclusion
Recommendation

Given the existing data, our

client should proceed with
retrofitting its vehicle fleet to
EV since it would save 40M
over their remaining useful
life.

Risks

Our client would be the first in

the industry to use EV
technology, therefore its
effectiveness in commercial
transportation is untested.
The vehicles need to
commute 1000 miles per
week and current EV
technology is limited to short
range use.
There are limited recharging
stations in the US.
There may be other
unanticipated costs to using
the new technology.

Next Steps
Work with suppliers to test
the effectiveness of the
new technology.
Run a pilot test to
determine whether EV
technology works and does
not negatively impact
normal transportation
operations.
Gain input from drivers on
efficacy of EV technology.
Perform research to
determine whether there
are government incentives
for EV adoption.
Perform research to
determine whether EV
adoption grows customer
base/revenue.

- 69 -

Midwest Hospital BCG Round 2

Guidance for interviewer and
information provided upon request

Problem statement narrative

Midwest Hospital is a research-based hospital and
takes pride in its joint replacement surgery
department. Recently they did a P&L analysis for all
departments and found that the joint replacement
surgery department is making losses. The CEO has
asked for our help.

Difficulty: Hard

If the candidate asks tell them that there are no

financial targets.
Give the exhibits in the subsequent slides only when
the candidate asks for the relevant data.
Candidate should figure out during the course of the
case that there are several levers that can increase
profitability:
1.

Increase price

2.

Change patient mix

3.

Increase total number of surgeries

4.

Decrease costs

5.

Provide post surgery services such as

physiotherapy (vertical integration)

Industry: Healthcare

Type: Profitability
- 70 -

Midwest Hospital BCG Round 2

Additional Questions to Steer Discussion

Questions for the candidate

At some point near the start of the case, interviewer should take the lead and ask these questions
after exhibits has been given
1.

Exhibit 1: Would it be advisable to not cater to Medicare patients (assume no backlash)?

2.

Exhibit 2: What is the number of surgeries that Midwest needs to conduct in a year to
breakeven?

3.

Exhibit 3: Why is Company D able to stay profitable despite having fewer patients and
unfavorable patient mix?

- 71 -

Midwest Hospital BCG Round 2

Suggested Solution and Structure

Solution Guide

1.

On fully cost allocated basis Medicare patients are unprofitable but they are still paying $1K
above the variable cost (marginal cost). This helps cover the fixed costs of the department.
So, it is not recommended to stop conducting surgeries for Medicare patients.

2.

Average revenue per patient is 19K. Average variable cost is 14K. Gross margin per patient is
5K. Fixed costs are 7M, so 1400 surgeries are required for breakeven. Assuming same
proportion as in Exhibit 1 the hospital requires 140 commercial, 420 insurance, and 840
Medicare patients.

3.

Comp D might have a lower cost structure or are able to negotiate better pricing from payers.

- 72 -

Midwest Hospital BCG Round 2

Conclusion
Recommendation
Increase total number of patients.
Change mix of patients to have a higher
proportion of commercial and insurance
customers.

Next Steps
Analyze scope for cost reduction, starting with
competitive benchmarking.
Analyze scope for increase in price, starting
with competitive benchmarking.
Analyze profitability of post care services
provider.

- 73 -

Midwest Hospital BCG Round 2

Exhibit 1: Patient Mix

Payer Type

# Surgeries

List Price

Invoiced price

Commercial (Enterprises)

100

$40,000.0

$40,000.0

Insurance

300

$40,000.0

$20,000.0

Medicare (Government )

600

$40,000.0

$15,000.0

- 74 -

Exhibit 2: Joint replacement department P&L

Revenue
VC

FC

19M
Physician

5M

Materials

5M

Others

4M

Facilities

3.5M

Others

3.5M

Costs

21M

Profit

(2M)

- 75 -

Midwest Hospital BCG Round 2

Exhibit 3: Competitive Benchmarking

Surgeries

Commercial

HMO

Medicare

Profitable

Midwest Hospital

1000

10%

30%

60%

No

Comp A

1200

20.0%

20.0%

40.0%

Yes

Comp B

800

30.0%

20.0%

50.0%

Yes

Comp C

900

10.0%

20.0%

70.0%

Yes

Comp D

1000

5.0%

25.0%

75.0%

Yes

- 76 -

Caribbean Pay Phones

Bain, Final Round
Guidance for interviewer and
information provided upon request

Problem statement narrative

A Ross MBA student is on a career trek to the

exotic Caribbean island of Arborea Anna. Arborea
Anna (AA) is not quite as rich or as technologically
developed as the US. About 50% of the population
has cell phones, and that percentage is increasing
quickly. As our Ross student wakes up, he looks out
his hotel room window and sees a crew of workers
from the AA Telephone Company ripping out the pay
phone on the street corner and replacing it with a
new model. After putting his curiosity and his broken
Spanish to use, he learns from the workers that they
are not just installing a new model on this street
corner, but replacing all 500 pay phones in the
country with new models. He wonders why they are
going through the time, trouble and expense when
pay phones are obviously a dying technology.

The only significant difference in the new model

of pay phone is that it is equipped to accept
payment via prepaid phone cards that are
available for sale in local convenience stores in
addition to traditional payment with coins.

Pay phone service in AA has been de-regulated,

but no competitors to the privatized former
government monopoly have entered the market.

There is no government mandate to update pay

phone technology.

The useful life of a pay phone (both old and new

model) is 10 years.

Why are they replacing the phones?

Difficulty: Medium

Industry: Telecom

Type: Profitability, Cost Reduction

- 77 -

Caribbean Pay Phones

Bain, Final Round

Solution Overview
This is a profitability case. The most direct approach to cracking the case is to compare the
profitability of one old model phone with one new model phone.

If needed, interviewer should encourage the candidate to list drivers of revenue and costs and
consider how installation of the new model is likely to affect each driver. Potential drivers and
effects are listed on slide 2. The interviewer should dismiss effects not listed. The key driver to
identify is the reduction in maintenance costs. If needed, the interviewer should give the
candidate hints until he/she identifies this effect.
After the candidate has listed and considered drivers, the interviewer should encourage the
candidate to develop quantitative estimates of cost effects, providing guidance as needed. As
outlined on slide 2, there will be no revenue changes.
Competition with cell phones and deregulation are red herrings. This is a case about the
management of a stable business with slow or negative growth.

- 78 -

Caribbean Pay Phones

Bain, Final Round

Revenue & Cost Effects (Qualitative)

Revenue Drivers
Driver

Potential Effects of New Model

Explanation

Customers per day

No change

Extra payment option for customers

without coins brings new customers,
but offset by generally declining
demand

Price per minute

No change

Supply and demand not affected

Average length of call

Slight increase, but not relevant

Calls priced with flat fee for unlimited

minutes

Advertising

No change

No additional ad space on new model

Cost Drivers
Driver

Potential Effects of New Model

Explanation

Installation

Significant increase

One-time installation fees will be

substantial

Maintenance

Significant decrease

Company wont have to empty coins

out of machine as frequently

Interchange fees (fees paid to the

owners of the phone lines)

Slight increase, but insignificant

Will increase average length of day

increases, but not a big cost

Rent

No change

Value of land unchanged

- 79 -

Caribbean Pay Phones

Bain, Final Round

Cost Savings (Illustrative)

Breakdown of Costs

Old Model

Installation

Maintenance

Costs (Useful Life)

$0

$1000/yr

$1000*10=$10,000

Assumption

$40/visit to unload
quarters
1 visit/2 weeks
50 weeks/yr

New Model

$2200

$250/yr

Assumption

Equipment cost =
$2000
10 hours of labor
@$20/hr

1 visit/8 weeks

$2200+$250*10=$4700

Total Cost Savings

Cost Savings per Phone * Total Phones = Total Cost Savings
($10,000-$4,700)*500 = $2,650,000
*Assume discount rate of zero
- 80 -

Caribbean Pay Phones

Bain, Final Round

Conclusion
The AA Telephone Company is replacing its
phones in order to save maintenance costs.

Bonus Questions
1.

What is the most important assumption

made in your analysis? (Reduction in
number of visits to empty quarters because
a significant number of consumers will
change to card payment).

2.

How could you test that assumption?

(Customer survey, benchmarks from other
industries that have shifted to cashless
payment, install one new phone and run a
pilot).

3.

If you were the CEO of the AA Telephone

Company, how would you spend your
profits? (Dividends, new services,
geographic expansion).

- 81 -

Hotel Co. Spinoff

Bain Style Case: Difficult

Guidance for interviewer and

information provided upon request

Problem statement narrative

Your client is Hotel Co., an international hotel
corporation that owns and operates 2,700 hotels
worldwide, as well as a separate timeshare business
with 75 properties worldwide. Their hotel rooms are
typically sold on a per night basis, whereas their
timeshare properties are sold more like traditional
homes via a mortgage which in turn gives the buyer
the right to stay at a timeshare property for a set
period of time each year.

Hotel Co. wants to weigh a few criteria, including

the financial impact, risk, and strategic outlook.

Hotel Co. only uses a five year timeframe for all

financial decisions.

Hotel Co. would be spun off and taken public,

with 20% of the IPO proceeds being paid back to
Hotel Co. The remainder of IPO proceeds would
go to Timeshare Co. and the underwriters.

The CEO of Hotel Co. has approached you and has

asked for guidance on whether or not they should
spinoff their timeshare business into a separate
stand alone entity called Timeshare Co.

Hotel Co.s bankers think they can sell 10 Million

shares at $220 each.

Difficulty: Hard

Quant Heavy

Industry: Hospitality

Type: Divestiture
- 82 -

Hotel Co. Spinoff

Bain Style Case

Question 1: Financial Impact

Questions for the candidate
What is the financial decision making process for whether or not to spin off Timeshare Co.?

Provide Exhibit 1 (Profit Projections)

Candidate should notice that industry home sales are a good proxy for Timeshare Co.s
revenues, and forecast out five years of profits.

2011 Forecast: -50M

2012 Forecast: 0M

2013 Forecast: 100M

2014 Forecast: 150M

2015 Forecast: 250M

Total 5 year forecast profits of Timeshare Co: 450M.

Per the opening information, if spun off, Hotel Co can expect 20% of IPO proceeds. Bankers
expect to IPO 10 Million shares at $220 each, or $2.2 Billion total. 20% of $2.2 Billion is $440M
to be earned by Hotel Co. if they spin off.

Based on those amounts, it does not make financial sense to spin off Timeshare Co.
($440M if spun versus five year projected revenues of $450M if kept in-house.)

Mitigation: $450M revenues are expectations and subject to a lot of risk and variability versus
little to no risk if Hotel Co. just takes the IPO payment.

- 83 -

Hotel Co. Spinoff

Bain Style Case

Question 2: Risk
Questions for the candidate
What is the risk decision making process for whether or not to spin off Timeshare Co.?

Provide Exhibits 2 (Mortgage Default Rates) and 3 (Mortgage Portfolios Contribution to Profits)

Exhibit 2: Candidate should notice that default rates spiked in 2008/2009, and seem to remain
much higher than in the past.

Exhibit 3: Candidate should notice how important mortgages are to overall success of business.
Mortgage revenues always account for around 95% of total revenues.

Main takeaway: Timeshare Co.s revenues are risky given the variability of mortgage default
rates, and it seems as though default rates will never return to pre-2008 levels. A new low
seems to have been established around 4.5%.

Thus, it seems risky to keep Timeshare Co.s business in house. The economic uncertainty with
mortgage portfolios puts too much risk into Hotel Co.s business. Spinning off Timeshare Co.
would get rid of a lot of risk to Hotel Co.

Mitigation: While spinning off the business would be one way to achieve less risk, there are
other options available to reduce risk from Timeshare Co.

Connect timeshare buyers with mortgage companies and collect a finders fee instead of
carrying mortgages in-house

Buy mortgage default insurance to reduce volatility

- 84 -

Hotel Co. Spinoff

Bain Style Case

Conclusion
Recommendation
Spinoff Timeshare Co.

IPO proceeds are only slightly less than

the 5-year expected profits, but profits
are extremely volatile.

It also makes sense from a risk

standpoint. While there are other ways
to reduce risk, spinning off Timeshare
Co. helps achieve a reduction in risk.

Next Steps
Must examine the impact of cross selling.
How many timeshares are sold to hotel
customers? How can we continue to cross
sell after a spin off?
Must consider other ways to reduce risks at
Timeshare Co apart from simply spinning off
the business.

- 85 -

Hotel Co. Spinoff

Bain Style Case
EXHIBIT 1: Timeshare Co. Historic and Projected Profits

Timeshare
Co. Sales
(Millions)

$250.00

25%

$200.00

20%

$150.00

15%

$100.00

10%

$50.00

5%

$0.00

0%
2007

2008

2009

2010

2011*

2012*

2013*

2014*

2015*

-$50.00

-5%

-$100.00

-10%

-$150.00

-15%

-$200.00

-20%

-$250.00

-25%
Profit ($M)

US Home
Sales (%)

Home Sales (%)

- 86 -

Hotel Co. Spinoff

Bain Style Case
EXHIBIT 2: Mortgage Default Expectations

Year Default Rate

2007

1.5%

2008

8.5%

2009

11.0%

2010

9.5%

2011*

8.5%

2012*

6.0%

2013*

4.5%

2014*

4.7%

2015*

4.3%

- 87 -

Hotel Co. Spinoff

Bain Style Case
EXHIBIT 3: Mortgage Portfolios Contribution to Profits

Year

Portion of Profits

2007

95.0%

2008

94.0%

2009

92.0%

2010

94.0%

2011*

95.0%

2012*

96.0%

2013*

95.0%

2014*

97.0%

2015*

96.0%

- 88 -

Upscale Restaurant
McKinsey Final Round
Problem narrative
Our Client is a upscale restaurant in TianJin,
serving government officials and high-level
business customers. Its monthly revenue is 1.2
Million Yuan. The CEO recently hired McKinsey to
help them increase profits.

Information provided upon request

As Chinas economy is booming, the upscale
dining market is growing at 20% every year.
Customers for high-end dining are generally price
insensitive.
All competitors are earning money. Competitors
price and value proposition are similar.
Variable costs across industry is 50% of revenue.
Assume no fixed costs.
On weekdays, there is always a line for individual
rooms. As a result, the restaurant has to turn
away half of its customers due to capacity
constraint.

Difficulty: Hard

Quant Heavy

Industry: Hospitality

Type: Profitability
- 89 -

Upscale Restaurant
McKinsey Final Round

Information provided upon request by Candidate

Big Room : 20 tables

Individual Room : 20 tables

Week Day

Weekend

Lunch

Occupancy: 80%
Price per person:
150
Party size per table:
4

Occupancy: 30%
Price per person:
100
Party size per table:
4

Dinner

Occupancy: 100%
Price per person:
300
Party size per table:
6

Occupancy: 50%
Price per person:
200
Party size per table:
6

Week Day

Weekend

Lunch

Occupancy: 20%
Price per person:
100
Party size per table:
4

Occupancy: 30%
Price per person:
100
Party size per table:
4

Dinner

Occupancy: 30%
Price per person:
200
Party size per table:
4

Occupancy: 30%
Price per person:
200
Party size per table:
4

- 90 -

Upscale Restaurant
McKinsey Final Round

Reason for low profits

Government officials and business customers prefer individual rooms to big rooms because of their
requirement for privacy. Currently our client is not meeting customer demand.

Question

What are potential solutions for this situation?

Solution

Raising price.

Turning big room tables into individual rooms.

- 91 -

Upscale Restaurant
McKinsey Final Round

Question

Solution

Through market research, we have determined that

if we raise weekday individual room price by 33% ,
we will lose 10% of customers. How will it change
our profitability?

For weekday lunch, changing the price will result in

10% customer loss.
Previous
Now
Customer
4 x 20 x 80% = 64
64 x (1 - 10%) = 58
Price
150
150 x (1 + 33%) = 200
Revenue
64 x 150 = 9600
58 x 200 = 11600
Profit
9600 x 50% = 4800
11600 x 50% = 5800
Incremental Profit
5800 - 4800 = 1000

For weekday dinner, the underlying demand is

200% of current capacity, so raising price
WONT reduce volume.
Previous
Customer
6 x 20 = 120
Price
300
Revenue
120x 300 = 36K
Profit
36Kx 50% = 18K
Incremental Profit

Now
120
300 x (1 + 33%) = 400
120 x 400 = 48K
48K x 50% = 24K
24K 18K = 6K

Daily Incremental Profit: 1K + 6K = 7K

- 92 -

Upscale Restaurant
McKinsey Final Round

Question
A second solution is converting half of big room
tables into 5 individual rooms. It will take 2 weeks
for the restaurant to finish the decoration, during
which time the restaurant has to be completely shut
down. The decoration will cost 100K Yuan. What
is the total cost of this project?

Solution
Cost
Capital investment: 100K
Opportunity Cost: ~300K** (2 weeks of profits)
*** Note: The observant candidate will quickly
calculate this from the initial revenue info given at
beginning of case rather than making heavy
calculations involved with calculating it from the
table of data.
Total cost = 400K Yuan

- 93 -

Maries Caf
Guidance for interviewer and
information provided upon request

Problem statement narrative

Maries Caf is a small local coffee shop that serves

coffee and latte. Maries has been around for
decades and is known for its high quality drinks and
cozy atmosphere. The caf has seen declining
profits over the last few quarters, and the owner has
hired you to increase its profits.

Difficulty: Medium

Quant Heavy

There are two other coffee shops in the nearby

area that sell coffees and pastries. (There is no
further information on these competitors.)
Caf currently serves two items (coffee and latte)
in three different sizes.
Note that this is an interviewer led case.

Industry: Hospitality

Type: Profitability, Operations

- 94 -

Maries Cafe

If the candidate touches on prices or costs

1. How much profit does Maries Caf currently make per customer?

Show tables below.

Each customer only purchases one drink per visit.

Product

Price

% Customers who
Purchase

Coffee (8)
Coffee
(12)
Coffee
(16)

$1.00

15%

$1.50

Product

Cost

Cup (8)

$0.30

Cup (12)

$0.40

15%

Cup (16)

$0.50

$2.00

15%

Latte (8)

$3.00

20%

4 oz of
Coffee

$0.10

Latte (12)

$4.00

20%

4 oz of
Latte

$0.50

Latte (16)

$5.00

15%

- 95 -

Maries Cafe

1. Solution: Average Profit = $1.50 / customer

Product
Coffee (8)
Coffee (12)
Coffee (16)
Latte (8)
Latte (12)
Latte (16)

Price
$1.00
$1.50
$2.00
$3.00
$4.00
$5.00

% Customer
Purchases
15%
15%
15%
20%
20%
15%

Cost
$0.50
$0.70
$0.90
$1.30
$1.90
$2.50

Profit
$0.50
$0.80
$1.10
$1.70
$2.10
$2.50
Average
Profit

Profit per
Customer
$0.08
$0.12
$0.17
$0.34
$0.42
$0.38
$1.50

Strong candidates will point out that larger sizes yield larger profit margins, and suggest new
profit increasing strategies (like promoting sales of larger sizes, introducing a 20oz size,
eliminating 8oz sizes, etc.).

- 96 -

Maries Cafe

2. What is the average profit that Maries Caf earns per day?

Each customer purchases exactly one beverage.

Two baristas are working at any given time. Baristas are paid $15/hour.
Hours: 7AM to 10PM, Monday through Friday. Closed on weekends.
The number of customers per hour is listed below. Customers leave if they cant be served
quickly.
On average, it takes 2 minutes for a barista to complete an order. Coffee is served fairly quickly,
while lattes take significantly longer to make. (Candidate should realize that only 60 customers
can be served per hour.)

Time

Average Demand per

Hour

7AM to 10AM

100

10AM to 1PM

80

1PM to 4PM

60

4PM to 7PM

40

7PM to 10PM

15

- 97 -

Maries Cafe

2. Solution: Assuming 2 baristas per hour, $607.50 (See below).

-

Candidate should realize that the caf is losing money in the evening hours. Candidate should
suggest adding or subtracting baristas based on demand.
3. If you could change the number of baristas during each time period, what would be the daily
profit for Maries Caf?

Solution: By adding a third barista in the morning shifts and reducing one at night, the
new profit would be $787.50 see below.

Served Current Profit

Optimal
Baristas

Optimal
Served

Optimal
Profit

Time

Demand per Hour

7AM to 10AM

100

60

180

90

270

10AM to 1PM

80

60

180

80

225

1PM to 4PM

60

60

180

60

180

4PM to 7PM

40

40

90

1 or 2

30 or 40

90

7PM to 10PM

15

15

-22.5

15

22.5

$607.50

$787.50

- 98 -

Maries Cafe

4. Maries Caf does not offer wireless access for its customers. Should the caf add this service?

Positives
More customers
Potentially charge customers for service
Customers may order larger sizes of drinks
Negatives
Costs of wireless setup, outlets
Sufficient room for customers
Customers stay longer, slowing sales during busy periods
Image of caf may change current atmosphere

- 99 -

Maries Cafe

If candidate mentions that competitors sell pastries while Maries Caf does not
5. What factors should Maries Caf consider before purchasing an oven to sell pastries?

Revenues
Doughnut sales, increased synergies with coffee/volume of customers.
Costs
Fixed costs - purchasing/maintaining oven, setting up display case, storage, advertising.
Variable costs - ingredients, hiring/training staff.
Capacity
Room in caf for oven and ingredients.
Baristas available to accommodate for increase in demand.
Brand image Maries is known for its coffee and atmosphere; adding pastries may change image
and drive away loyal customers, especially if they are low quality.
Competition price and quality compared to competitors.
Alternative opportunities purchasing doughnuts from somewhere else.

- 100 -

Maries Cafe

6. A new espresso machine, priced at $2000, can greatly decrease the time it takes to make a latte.
The average time it takes to complete an average customers order decreases from 2 minutes to 90
seconds. How long would it take to pay back the machine?

Daily profit shown below, calculated with the optimal number of baristas.
Machine would be paid back in 14.8 days (922.50 787.50 from Question 3).
4 Baristas in the 7-10AM would also yield similar profits with the advantage of turning away
fewer customers.

Time

Demand per
Hour

Profit

Optimal
Baristas

Optimal
Served

Optimal
Profit

Served

7AM to 10AM

100

80

270

100

315

10AM to 1PM

80

80

270

80

270

1PM to 4PM

60

60

180

60

180

4PM to 7PM

40

40

90

40

135

7PM to 10PM

15

15

-22.5

15

22.5

$787.50

$922.50

- 101 -

Chinatown Bus
Guidance for interviewer and
information provided upon request

Problem statement narrative

Info to be provided on request:

Your client is a Northeast-based bus company that
operates inter-city passenger buses along the
Boston DC corridor. The client has been in this
market for over 40 years and has been reasonably
profitable for most of that time.
In recent years, the clients market share and
profitability have been declining. Looking at the
competitive landscape, the client recognizes that a
number of low-cost, no-frills bus companies have
entered the market. As a result of these new
entrants and high gas prices, overall demand for bus
services has been on the rise even as our client
loses customers.
The client has hired us to determine whether they
should launch their own low-cost bus line and if so,
how they should compete in this market?
Difficulty: Medium

Industry: Transportation

The client targets a 40% gross margin for any new

investments.
The overall market is growing at about 5% per
year.
The clients two main routes are Boston New
York and New York DC. There are 5-6
competitors on each route.

The low-cost bus lines typically operate out of

Chinatown in the respective cities or pick up on the
street (not in stations). They tend to use older
equipment and have poor reputations for reliability
and safety.
The client is struggles most with first-time riders,
who tend to be younger, perhaps in college, and
are riding inter-city buses for the first time. The
client has a stable base of long-term customers
where they have not seen much erosion.

Type: Profitability, Competitive Response

- 102 -

Chinatown bus

Suggested Structure
Guide to Structure

A good structure for this case would focus on profitability, but might also touch on issues of
assessing the market, differentiation of the competitors, the clients capabilities, and customer
segmentation. Ideally, the case taker should ask if there are any metrics that the client focuses on
before structuring the case, which would demonstrate that profitability is going to be the focus. You
can allow the interviewee to pursue some other areas of investigation initially but try to guide them
towards the profitability question eventually.
While there could be a number of ways to look at profitability (and you should let the case taker
think through how to approach this), the case takes a simplified approach of looking at one bus
operating on one route and assumes that this would be scalable across additional buses. The
fictional data presented below is for the Boston-New York route. Feel free to make the math a little
harder (e.g. bus makes 900 trips per year) if the interviewee needs to practice.
Once the interviewee has completed the profitability analysis, have them brainstorm responses for
the second question of the case: How could the client effectively compete in this market?

- 103 -

Chinatown bus

Revenue and Costs Page data provided on request

Breakdown of Revenue

The client currently charges $40/one way on the BOS-NYC route

Low cost competitors are currently charging an average price of $15/one way

Each bus has capacity of 60 seats and estimated avg. utilization of 67%

Total revenue per trip (new bus line) = $15 * 40 = $600

Breakdown of Costs*
Fixed Costs: (bus operates 330 days/year
at 3 trips per day)
Bus: $250k (useful life of 10 years) =
$25/trip

Variable Costs:
Labor: 1 driver @ $25/hour for 5 hours =
$125/trip

O&M: $20k/year = $20/trip

Fuel: $4/gallon, 200 miles, 10 miles per

gallon = $80/trip

Insurance: $15k/year =$15/trip

Tolls: $75/trip

Total Cost = $340 / trip

Profits = $260

Profit Margin = 43.3%

* Since our focus is on gross margin the interviewee can ignore SG&A costs

- 104 -

Chinatown bus

Question 2: How should the client compete?

Potential Responses

Good responses to this question should recognize that customers that take the new bus-lines are
very price conscious and thus the client will have to compete on price (i.e. match competitors
prices). However, given that the client should look for how they can differentiate their product from
the new competitors. Potential responses include:
Focus on safety and reliability

Offer additional amenities (e.g., wifi, music, movies, etc.)

Offer food and drink service (bonus points if they mention this as an additional revenue
opportunity)
More direct routes
More convenient pick-up locations
Loyalty programs
Leverage existing brand (WARNING: This would likely hasten cannibalization and is not a good
idea)

- 105 -

Chinatown bus

Conclusion
Recommendation

Next Steps

Client should launch their own low-cost bus line

Potential next steps include:

Meets gross profit target of 40%

Identify opportunities to generate additional

revenue sources in order to make up for lower
profitability of new bus line

Room for new competitor in growing market

Will continue to lose customers if they do not
act
Risks:
Cannibalization of existing customers (THIS IS
A BIG ONE)
Competitor Response: engaging in a price war
with competitors that have lower costs

Rising fuel costs

Conduct market study of first time riders to

determine what additional amenities they
would value the most
Develop retention strategy on existing bus
service to minimize cannibalization
Develop distinctive branding strategy for new
bus line
Launch pilot on one route to validate financial
assumptions and test competitor response

- 106 -

CPD - Content Publisher and Distributor

Guidance for interviewer and
information provided upon request

Problem statement narrative

Our Client is a research content aggregator and

distributer to academic institutions, local libraries,
government institutions. The 2010 revenues are 1
billion dollars.
However, the CEO thinks that the organization has
not tapped into potential opportunities that are out
there and wants your help in understanding how to
go about these opportunities.

Industry: although recession had a negative

impact on some local libraries, the industry is
pretty stable.

Competition: low medium in research content

space.

Products: the firm has three products one for

each segment. These products are ACA_RES,
LIB_RES, GOV_RES. These products are web
solutions that can operate independently or in
integrated fashion with other database tools
clients typically have.

Individual revenue streams: ACA_RES,

GOV_RES revenues went up, but LIB_RES
revenues went down.

If asked, mention that the revenues of LIB_RES

went down by 3% compared to previous year.

How would you approach the situation?

Difficulty: Medium

Industry: Online Services

Type: Profitability, Industry Analysis

- 107 -

CPD - Content Publisher and Distributor

Additional Questions to Steer Discussion

Questions for the candidate

Ask why the LIB_RES revenues may have gone down.

- 108 -

CPD - Content Publisher and Distributor

Suggested Solution and Structure

Solution Guide

Economy: many local libraries depend on funds from local city government and state/federal
grants. The 2008 recession had an impact on the peoples livelihoods because of which the tax
dollars went down constraining grants to local libraries.

Also due to poor economy, libraries were not able to raise funds from private institutions as they
were able to pre-recession period.

- 109 -

CPD - Content Publisher and Distributor

Additional Questions & Guidelines

Guidelines for Interviewer

Candidate should go back to the original question of how to tap into some of the market
opportunities.

Candidate should pick up that it is a revenue related question and put out his/her approach on
how to increase the revenues.

A good candidate will prioritize the issues related to revenues and would say he/she will take a
look at the LIB_RES product and its revenues and see what caused the decline besides
economic issues and if something can be done about that.

Additional Questions

Directly ask the question What do you think about the LIB_RES product? if candidate does not
point it out.

- 110 -

CPD - Content Publisher and Distributor

Additional Questions & Guidelines

Guidelines for Interviewer

Candidate should ask about all the aspects of revenues and costs:

# of clients: 2000 in the US

Average sale price: 45,000 per annum

Contract period: 1 year

Sales channels: direct sales force

Cost to sell and manage each contract: $20,000 including sales overhead and
salaries

Candidate should identify that number of clients may have changed due to economic pressures.

Candidate must calculate the profitability of this segment.

Candidate Hypothesis

Candidate should identify that it is a profitable segment (profit of 25,000 per client) and price
could be the most likely reason for declining revenues.

- 111 -

CPD - Content Publisher and Distributor

Additional Questions & Guidelines

Guidelines for Interviewer

Candidate should get product and its pricing.

Possible questions candidate may have:

Candidate Questions

Answers

How is the product sold?

Sold as a package whether the client uses the

features or not.

Does the client have options from

competitors?

Yes, but our product is best in the industry for

ease of use especially for children and elderly
that frequent the public libraries.

Refined Hypothesis

Candidate should pick up on given information and point out that there are some features that
our clients do not want in our product. Maybe there is an opportunity to examine some of the
key feature offerings and unbundle and offer them as a configurable, customizable product for a
lower price.

Offer the product based on number of users license based.

Charge clients based on usage of our information.

- 112 -

CPD - Content Publisher and Distributor

Additional Questions & Guidelines

Guidelines for Interviewer

Our client wants to go with license-based pricing.

Ask the student to calculate the price per user license.

Ask also for the breakeven volume of seats.

Candidates Questions

A good candidate will ask one or more of these questions.

Average number of users per public library (per month):

Segments within Public Libraries

Small, Medium, Large

# of users of these libraries

small 2000, medium 5000, large 8000

# of libraries

small 800, medium 750, large 450

# of users of our product

60% on average

- 113 -

CPD - Content Publisher and Distributor

Calculations
Candidates Calculations

Average number of users per public library (per month)

Small

Medium

Large

2000 * .6 = 1200

5000 * .6 = 3000

8000 * .6 = 4800

Candidate should mention that to keep up with our revenues and possibly increase them, we
should price each license at a minimum price of current revenue for the product / Total users.

Total users per month: 1200 * 800 + 3000 * 750 + 4800 * 450 = 5,370,000 per month.

Current revenue = $45,000 * 2000 = $90,000,000.

Price = $90,000,000 / 5,370,000 => approximately $17 dollars. (If they rounded 5,370,000 to
5,000,000 they would get $18 dollars which can also work)

A good candidate will also look at profits for each segment within LIB_RES and calculate
breakeven licenses for all segments.

Break Even = Costs/Margin per seat = 20,000/16 = 1250 licenses per library, assuming the
variable cost of each license is $0 because it is a software product.

- 114 -

CPD - Content Publisher and Distributor

Conclusion
Recommendation

Next Steps

Given the license price we just arrived at, our

client should sell each seat at a minimum of
$17.

Client should conduct a survey to see if clients

are interested to pay per seat/license including
the price point per seat.

A good candidate will say that because of our

product quality, larger clients may pay more for
each seat, e.g. $20 a seat. In that case, the
revenues can be greater than the current
revenues.

This would also help our client understand

other issues public libraries may face in terms
of customer visitation patterns and how that
can impact the per license sale of our clients
product.
Other ways to increase revenue is to sell to
consortiums (group of libraries in a State/City).

- 115 -

Ross School of Business On Campus Summer Employment

Guidance for interviewer and
information provided upon request

Problem statement narrative

Assume that Ross has 500 students in each class

The Ross School of Business is looking to promote

its MBA programs reputation and ranking position,
by improving its on-campus summer internship
employment stats. Currently, only 60% of Ross
MBAs secure an internship through on-campus
recruiting. The Dean has hired our firm to provide
insight and recommendations on how to improve the
on-campus offers.

Push interviewee to understand the value chain

of on- campus recruiting (see next slide)

Wait for interviewee to ask clarifying questions about

specific objectives:
1. Primary objective: increase on-campus internship
offers to 75%
2. Secondary objective: the school is very cost
sensitive and is only willing to spend up to $500K

Difficulty: Medium

Industry: Education

Type: Value Chain, Operations

- 116 -

Ross School of Business On Campus Summer Employment

Value chain
Ask interviewee to brainstorm the value chain for Ross to assist its students to get
internship offers.
Data for current on-campus recruiting:
#of companies that recruit on-campus = 100
avg. # of positions offered per company = 2
# of interview slots per position = 15
Interview success rate = 10%
(assumption = each student receives only one offer)
Then ask interviewee to brainstorm on possible ways to increase # of total offers made (he
should go over the value chain )
The school is looking into two possible strategies:
Increase the number of companies that recruit on campus

Improve the interview success rate

- 117 -

Ross School of Business On Campus Summer Employment

Increase # of companies
To attract more companies, OCD needs to hire additional firm relations managers.

Each manager can handle 5 companies and requires an annual salary of $75K. Additional costs
(travel, marketing expenses, etc.) per manager are estimated at $50K.
Target # of offers = 500 * 0.75 = 375
Current # of offers = 300
(375-300)/300 = 25%
Ross needs to increase the number of firms by 25% * 200 = 50
# of additional OCD firm relations managers = 50/5 = 10
Annual cost = 10 * (75K+50K) = $1.25MM

- 118 -

Ross School of Business On Campus Summer Employment

Value chain
Have interviewee brainstorm on possible ways to increase interview success rate
According to recent a survey the most important factor in interview success rate is the number of
mock interviews.
For every 0.5% increase in success rate Ross will need to hire 15 MBA2 counselors
Each MBA works 40hrs , with an hourly wage of 20$
Recruiting lasts 5 months

Every 2% increase in success rate attracts 5 new companies that recruit on campus.
Adding 2%:
(100+5) * 2 * 15 * 12% = 378 offers
Annual cost = 2%/0.5%* 15 * 40 * 20$ * 5= $240K
Good candidate will make sure we have sufficient MBA2 Capacity

- 119 -

Ross School of Business On Campus Summer Employment

Conclusion
Recommendation
Recommend that Ross hires 60 additional MBA2 OCD counselors. This will increase total # of
offers to 378, (meeting the goal of increasing on campus offers to 75% ).
Possible Risks (mitigation)/ Next steps)
1.

Difficulty recruiting so many MBA2s (can increase hourly wage up to $40 without exceeding
target budget)

2.

Economic downturn may cause companies to reduce the number of positions / slots

3.

Limited # of study rooms at Ross to accommodate such an increase in the # of mock

interviews (reach out to law school / Michigan Union to get access to their rooms)

4.

With so many MBA2s spending so much time on counseling, their grades may be negatively
impacted, affecting the total Ross brand image (employ grade non disclosure policy)

- 120 -

Coming to America - BollyFlix

Guidance for interviewer and
information provided upon request

Problem statement narrative

Our client, BollyFlix, is an Indian company providing

DVD rentals by mail, as well as movie and TV
streaming services, to the Indian market, both under
a subscription model. The company serves content
made in India for the Indian market (known as
Bollywood content), and currently has no
international operations.

BollyFlix provides only movies and television

content made in India (Bollywood) for the Indian
market.

Major US competitors (like Netflix, Blockbuster,

etc.) do not serve any Bollywood content.
BollyFlix does not serve any non-Bollywood
content.

Recently, driven by the explosive growth of Indian

immigrant and Indian American citizen populations in
the United States, as well as the increasing
popularity of Indian movies among non-Indians
around the world, BollyFlix began to consider
launching operations in the United States.

There are outlets, in both traditional retail and

online, that sell such content, but none offering a
rental /streaming model in the US at this time.

BollyFlix operates their DVD and streaming

businesses separately.

BollyFlixs only goal is to establish a profitable

business.

Note that this is a longer case in terms of time.

Should the company enter the US DVD rental

market, the online streaming market, neither, or
both?
Difficulty: Hard

Quant Heavy

Industry: Media

Type: Market Entry

- 121 -

Coming to America - BollyFlix

Guidance for interviewer and
information provided upon request

Market Sizing

A good candidate will recognize that a proper market

sizing is an essential first step to this problem. If
they do not, steer them toward this exercise with a
question like Who do you think might be the target
customers for such a business?.

The population of the US is about 300M, and

about 1% (~3M) claim Indian descent.

70% of those who claim Indian descent were

born outside of the US. 30% were born in the
US.

Based on demographics and market research,

we believe that of those born outside the US,
30% would be likely customers. Of those born in
the US, 10% are likely customers. These
numbers hold for both lines of business.

0.1% of non-Indian US residents are interested in

Bollywood content and are likely to become
customers.

BollyFlix plans to charge $100/year for their

DVD rental subscription service, and $50/year for
a subscription to their online streaming service.

Let the candidate brainstorm as to what inputs they

would like.
Good answers might include (but are not limited to)
requests for data on

Size of the American and Indian American

population

Segments within these populations

Data on non-Indian consumption of Bollywood

content

Data on current patterns of non-Bollywood

content among target populations

Next provide them with the data in the next column

and ask them what the market for both their DVD
subscription service and video streaming
subscription service would be.
- 122 -

Coming to America - BollyFlix

Market Sizing Calculations

Market sizing calculations are in the table below. Tell the candidate to assume that we capture
100% of likely customers. Suggest to round to 1M customers and $150M in revenue if they do
not ask.

- 123 -

Coming to America - BollyFlix

Cost information

Having established a market size, the next step is to

determine what it would cost to operate in the US
market.
Ask the candidate what sorts of costs a company like
this are likely to encounter.
Good answers may include
- Content rights fees (streaming)
- IT infrastructure/bandwidth (streaming)
- Postage
- Costs to establish and operate distribution centers
- Purchase of DVDs

Guidance for interviewer and

information provided upon request
For DVD customers, our variable costs would be:
$60/year/customer to purchase DVDs and
cover overhead
$20/year/customer to cover shipping costs
It costs $4M/year to lease and operate a distribution
center in support of the DVD rental business.
Nationwide coverage for DVD distribution would
require 6 distribution centers.
Rights to stream Bollywood content in the US would
cost $20M.
IT Infrastructure, bandwidth and other overhead
within the streaming business would cost $8M.

- SG&A
- Marketing

- 124 -

Coming to America - BollyFlix

Market Sizing Calculations

The candidate should compute roughly the numbers below. They should conclude that given
available information, the DVD rental business is not viable, whereas the online streaming business
is very high margin.

Next, tell the candidate that we have engaged in a market segmentation study, and come to realize
that concentrations of our target population vary considerably by region within the United States.
Show them Exhibit 1 and ask for their immediate takeaways.

- 125 -

Coming to America - BollyFlix

Exhibit 1
Distribution Center Service Regions

Note: Assume that likely customers include 0.1% of the general population, and 25% of the overall Indian
population

- 126 -

Coming to America - BollyFlix

Regional analysis
If the candidate does not suggest such an analysis on their own, ask them to determine if the
DVD business might be viable on a regional basis, if not a national one. To ease calculations,
you may remind them that 80% of revenues are immediately eaten up by variable costs, leaving
$20/customer in potential profit, and that the cost to serve a region is $4M (the distribution
center).
Given time, they should be able to produce roughly the following calculations.

Note to Interviewer: Revenue here assumes $20 per customer (what is left over after subtracting
$80 in per-customer fixed costs). General population numbers are rounded.
- 127 -

Coming to America - BollyFlix

Regional analysis

The candidate should recognize that it is profitable to serve Regions 1 and 6, and very close
to profitable to serve Region 3. Ask them what might change in region 3 that could effect this
in the future.

Good answers could include:

-

A reshaping of the region so that it better encompasses target populations

Growth in the Indian population, either organically or via immigration

Growth in demand for Bollywood content among either the Indian or non-Indian
population (either natural or spurred by increased marketing)

Pricing changes that drive revenue or volume

Consumption via DVD could increase (or decrease) overall

- 128 -

Coming to America - BollyFlix

Recommendations/Risks

The candidate should conclude that BollyFlix

should enter the streaming business
immediately, and enter the DVD rental business
on a regional basis.
Changes in demographics or consumer
preference could have a large effect on this
business.

Next Steps

- Begin setting up infrastructure to open the

content streaming business.
- Move to open warehouses and begin
marketing in Regions 1 and 6.
- Examine potential levers to move Region 3
into profitability.

This may be easily copy-able by competitors.

Slim DVD margins could disappear overnight.
High margins in the streaming business could
attract competition, driving up content prices
and pressuring consumer pricing power.

- 129 -

Retailer Business Restructuring

Business Situation

Problem Statement

Our client, Unlimited Brands, is a large national

retailer with revenues of $12B. Recently they
have experienced declines in revenue and profits.
They attribute these declines to both changes in
consumer tastes as well as decreased investment
in several brands due to the desire to preserve
capital during the recent downturn. There are two
units they are interested in potentially divesting:
Fast Fashion: a young womens
professional clothing retailer with sales of
$500M last year (cater to 18-25 yr old
women).
Devine Design: a fashion forward clothing
retailer offering both professional and
casual clothing at competitive prices, with
sales of $750M last year (cater to 40-55 yr
old women).
You have been hired to determine the most viable
business unit to divest and plan for the separation
of the unit from the firm, while maximizing
shareholder value.
Difficulty: Hard

Quant Heavy

For interviewer to provide upon problem

statement clarification. No other data will be
provided outside of the tables given.
Assumptions are ok and encouraged.
What things will the firm need to consider
when selling one or more of their business
units? (note to interviewer: this should be a
brainstorming session and focused on retail
business, force the interviewee to continue
to provide ideas until they say they have
explored all they think they can)
Which business unit of the two initially
decided upon should Unlimited Brands
consider selling to strengthen its cash
reserves and deliver the most value to
shareholders? What price should they
target for each unit?
To sell additional work to the client what
ideas would you recommend to Unlimited
Brands to strengthen their business?

Industry: Retail

Type: Restructuring
- 130 -

Retail Business Restructuring

Prompt Questions and Responses (For interviewer reference ONLY)

1.

What things will the firm need to consider when selling one or more of their business units? (continue to probe until the
interviewee declines for exploration)

Culture/People Impact: Selling off assets can disrupt your employees and impact the image of the company. Retaining
key talent is also very important to maintaining the strength of the company. Employees may worry about what will be
sold next, and be less effective until they know better.

Impact to Revenue: Although these units have been viewed as underperformers, it will be important for the firm to make
sure they explain the impact to earnings to shareholders and think how decreased earnings could affect their borrowing
options in the future.

Potential Buyers: Need to understand who the potential buyers will be and what selling to them will do to the clients
competitive position. Will this change give a competitor strength over the client?

Separation: Considering the separation issues that will occur is important. IT, stores, shared space in malls, distribution
of products and suppliers are all important for performing a smooth transition to a buyer.

Which business unit of the two initially decided upon should Unlimited Brands consider selling to strengthen its cash reserves
and deliver the most value to shareholders? What price should they target for each unit?
[Note to interviewer: Provide data sheet to the candidate]
Based on the data provided
Candidate should walk through the tables and determine:
Revenue and profits have been decreasing at Fast Fashion while increasing at Devine Design.
A good answer is when the candidate simply takes the average PE from each deal table they will determine that the implied
potential price for Fast Fashion is $1.2B (16 PE x $75M NI), and $2.1B (14 PE x $150M).
A better answer will see that the PEs used to value similar firms to Fast Fashion most recently have been higher, at 20 and
would yield $1.5B. Similarly, the PE has been declining for Devine Design to 10, and would result in $1.35B.
The other table will show that the Fast Fashion customer segment is growing fast, while Devine Designs is actually declining,
but the revenue is actually projected to grow faster for Devine Design than Fast Fashion. The number of competitors does not
drive much of the analysis. (these facts should supplement their choice)
The candidate should decide which business unit they would select and defend their choice:
Fast Fashion: Higher price based on most recent multiples, fast growing segment with increase spend could yield upside to a
buyer and thus result in a higher price.
Devine Design: Lower price based on recent PEs but if using average higher price. Revenue and profits have been
increasing and revenue is projected to grow faster even with a slight reduction in spend.
2.

- 131 -

Retail Business Restructuring

Unlimited Brands Business Restructuring Data Sheet

Fast Fashion
Revenue ($M)
Net Income ($M)

2009
625
125

2010
550
96

Devine Design
2011
500
75

Revenue ($M)
Net Income ($M)

Fast Fashion Comparable

Deals
Deal Date PE
Multiple Deal Size ($B)
Fast A
Fast B
Fast C
Fast D
Fast E
Fast F

Oct 2009
Apr 2010
Dec 2011
Nov 2010
Mar 2011
Jun 2009

12
16
20
16
20
12

0.6
0.7
1.4
1.9
2.5
3.1

2009
600
90

2010
625
109

2011
675
135

Devine Designs
Comparable
Deals
Deal Date
PE Multiple
Deal Size ($B)
Fast A
Fast B
Fast C
Fast D
Fast E
Fast F

Dec 2011
Oct 2009
Mar 2011
Apr 2010
Jun 2009
Nov 2010

10
18
10
14
18
14

0.4
0.6
1.1
2.2
3.0
4.0

Industry Overview

- 132 -

Retail Business Restructuring

Prompt Questions and Responses (For interviewer reference ONLY)

3. To sell additional work to the client what ideas would you recommend to Unlimited Brands to strengthen

their business?
Several examples below:
Improved Pricing
Could examine their current pricing structure and ensure price realization is maximized
Promotion strategy; when to promote, who to target, what to promote, etc
New Market Opportunities
They may be able to target new customer segments or sell new classes of products to existing
customers
Acquisitions
Could use the proceeds from the sales of an underperforming unit to buy a smaller player in a
different space to enhance the companies portfolio of brands

- 133 -

Retail Business Restructuring

Conclusion

Client should sell Fast Fashion for $XB or Devine Design for $XB (Note to interviewer: rationale should come from their
defense earlier, either answer is reasonable, key is to make them choose and stick to it)

Assist the client by:

Creating a clear plan and strategy to effectively separate the businesses
Maximize value to shareholders by attaining the best price

Risks:
Selling to a competitor and providing them opportunity to succeed at our expense
Not calculating the right value
Losing talent to attrition and fear of being sold

Next Steps:
Identify potential buyers
Establish Day 1 and Day 2 plans for separation after client sale
Work with client to sell additional work highlighted earlier

- 134 -

Electric Vehicle Auto Manufacturer

Problem statement narrative

Guidance for interviewer and

information provided upon request

Our Client is an electric car manufacturer and wants

to know how to position a new car model in the
market.

Company background: client is a startup, started in

2003, that has developed a new patented battery
technology that is validated and tested for viability in
cars.

1. Ask the candidate whether the industry is

attractive for our client.

When candidate asks about the current car model,

provide the information on the slide about their
current product.

2. CEO hired you to help him develop strategies to

identify the right segment they can sell the
vehicles to.
3. Secondary goal (if asked): Profitability.

Difficulty: Hard

Quant Heavy

Industry: Automotive

Type: New Product

- 135 -

Electric Vehicle Auto Manufacturer

Additional Information to Provide

Current Car Model
Client has currently one product in the market and they are planning to release their second vehicle
in the next 24 months.

Sportster

110,000

Premium Sports Segment

The Sportster has the following ratings across its features.

Sportster

Purchase
Price

Styling

Performance

Quality

Safety

Features

Green
Rating

110,000

10

10

For segment worth and Competitors market share, refer to Exhibit C.

- 136 -

Electric Vehicle Auto Manufacturer

Additional Questions to Steer Discussion

Candidate Structure

Candidate should come up with the below structure for the industry attractiveness.

Using Porters 5 forces its clear that the industry is attractive for incumbents.
Buyers power

High

Suppliers power

High in EV segment as the technology

is new.

Competition

Very High (entire auto industry)

Substitutes

Very High (other modes of

transportation)

Barriers to Enter

Med-High. This means that it is hard

for new entrants to enter.

- 137 -

Electric Vehicle Auto Manufacturer

Suggested Solution and Structure

Financial Status and Cost Structure

The client has yet to make a profit. The Sportsters sold 2000 units across 30 countries in the
world.
Client has funding from government, private equity firms and recently they went public and
raised money.
Depending on the target segments needs the production cost for 100K vehicles is given below
(all costs inclusive in USD)

AT THIS POINT, PROVIDE EXHIBITS TO INTERVIEWEE

Premium Sedan

43,000

Sedan

38,000

Coupe

33,000

- 138 -

Electric Vehicle Auto Manufacturer

Calculations
Price per Unit and Profitability per Unit (provide this to Interviewee):

- 139 -

Calculations (Continued)
Potential market size and profitability calculations (this also requires information from the exhibits):

- 140 -

Electric Vehicle Auto Manufacturer

Additional Questions & Guidelines

Guidelines for Interviewer

Ask the candidate which segment to target.

Candidate Hypothesis
Candidate should identify that per unit profitability is high for vehicle in premium sedan segment
(7000). So this might be the profitable segment to go after. Also, because electric technology is
still new, customers in premium sedan segment might be willing to pay a premium for the ecofriendly factor. Whereas customers in other segments may not put much emphasis on this
aspect as they are more price sensitive.

- 141 -

Electric Vehicle Auto Manufacturer

Conclusion
Recommendation
After doing the analysis, client should enter
premium sedan segment for the following
reasons:

Competition is low as addressable market

size is 25%

Segment profitability is high with 7000 per

unit profitability

Customers in premium segment are more

likely to pay a premium for the eco-friendly
feature of our client model.

Risks
Getting the product right to suit the customer
needs is necessary as the client is already
under financial pressure.
Client may not be able to service all the
vehicles in the premium sedan segment as the
segment is large. Relationships need to be
established with service providers.
As the client is still new in the market,
establishing brand value is necessary,
especially in the premium segment where
brands like BMW, Mercedes, Lexus compete.

- 142 -

Electric Vehicle Auto Manufacturer

Appendix A: Electric Vehicle Utility By Feature

- 143 -

Electric Vehicle Auto Manufacturer

Appendix B: Customer Preferences and Relative Sensitivity

- 144 -

Electric Vehicle Auto Manufacturer

Appendix C: EV Segments and Share of Competitors

Segment

Segment
Worth

Competitor Share

Avg Units Sold

Sports Segment

1 billion

80%

8,000

Premium Sedan Segment

1.2 billion

75%

18,000

Sedan Segment

1.8 billion

82%

36,900

Coupe/Other

1 billion

95%

32,000

- 145 -

Grocers Decision to Add a Pharmacy

Guidance for interviewer and
information provided upon request

Problem statement narrative

You have a friend who owns a single supermarket
(mom & pop). This friend has called you for some
free advice because you are an MBA and consultant.
He says that he has noticed his supermarket
competitors have added pharmacies and he is
wondering whether or not he should do that himself.
He has some data sources and can provide you with
what you need but first needs to know what data do
you need to make this decision.

Difficulty: Medium

Quant Heavy

This case interview is meant to be conversational

with the giver of the case to ask enough probing
questions to keep the interviewee on their toes and
thinking through the problem.
Investment criteria: because this is a small
operation, needs a payback of < 2 years (no
discounting necessary).

Industry: Retail

Type: New Product/Market, Bus. Dev.

- 146 -

Grocers Decision to Add a Pharmacy

Suggested Structure & data to be provided upon request

Customers

He has 10,000 unique customers every month.

On average, 50% of the population have
prescriptions.
They average 1 filling per month.

Competitors

Revenues

Each customer spends $100/month at his store

(assume 1 visit/month).
Each prescription sale brings in revenue of $50.
Each prescription customer tends to spend 30%
more on groceries at the store.

2 Pharmacies and 2 Grocery Stores within 4

miles of his store.

Costs

Initial investment for pharmacy: $1.2m.

For pharmacy assume costs are equal to 90% of
revenue.
Current grocery operations cost structure:
70% Food / COGS
15% Labor
10% Fixed Overhead

- 147 -

Grocers Decision to Add a Pharmacy

Additional questions that help to steer discussion

Not all questions need to be asked if the candidate is leading the conversation

Questions for the candidate

What is the population of the town/addressable market?
What is the minimum market share needed to break even in 2 years? Is this reasonable?
What are the two major costs of operation that the grocer will incur when opening a pharmacy?

What margin do you asses for incremental grocery sales? (Only if the individual asks about
revenue synergies)

- 148 -

Grocers Decision to Add a Pharmacy

Suggested Solution
Solution Guide
Current population estimate:

Estimate current market share of grocery business at 33%

10,000 / .33 = Unique customers each month = 33,000

33,000 customers * 3 people per household = Population = 100,000

Pharmacy market is then 50,000 customers

Odds of each household containing at least 1 pharmacy customer = 1 - 0.5^3 = 87.5%

Of your 10k customers, 8,750 have prescription needs

Incremental value of a pharmacy customer per year:

$240 = 12 months * $20; $20 = $5 margin (drug sales) + $15 incremental margin (food
sales)

To break even in 2 years

1.2m / $480 = 2,500 pharmacy customers

Only need ~ 30% of the households who have prescriptions and currently shop at your
store to break even in two year

- 149 -

Grocers Decision to Add a Pharmacy

Conclusion
Recommendation
Invest / Expand to include a pharmacy
because there is an extremely high likelihood
that you will break even in less than two
years.
Value of a pharmacy customer is very high
because of margin on pills and increased
sales in the store.
Only need 30% of your current customers
who have prescriptions to switch to your
store to make it profitable.

Next Steps
Some suggestions:
Make design plans for the pharmacy
Get a bank loan
Interview pharmacists
Market the new service to customers

Contact drug reps / determine suppliers

Contact drug-store competitors to see if they
want to do a JV/partnership because you will
probably put them out of business

- 150 -

Lonestar Oil
Guidance for interviewer and
information provided upon request

Problem statement narrative

Your client, Lonestar Oil, is a large petroleum refining
company that owns service stations. Lonestar is
looking to expand, and is looking to run a service
station in one of the main ports in Seattle. The CEO
has hired you to determine how to proceed.

Difficulty: Medium

Port is operating 24 hours per day.

Port area is slowly growing because of
consolidation occurring along Northwest ports.
There are three existing service stations in the
vicinity. These stations are of equal size and
capabilities.
Two of these are owned by major corporations
like Lonestar Oil, and the third is family owned.
Lonestar requires a 5-year payback on initial
investment. Disregard cost of capital.

Industry: Energy Retail

Type: New Product

- 151 -

Lonestar Oil

Notes for entering port

Market

All three stations are similar in location, operations, demand, etc.

All stations are currently operating at full capacity. There is no concrete information on full
demand, but estimates place demand between 15,000-20,000 gallons of gasoline per day
for the port.
Building new service station
Revenue
Gas
Minimart sales Existing stations in area do not have minimarts
Costs
Initial investment
Fixed: PPE, maintenance, labor, utilities, marketing
Variable: gas, minimart items
Buying existing station (do not mention this upfront)
Can only buy the privately owned station; other two are not for sale.

- 152 -

Lonestar Oil

How much would a new gas station make per year?

(Info on request)

New station costs $650,000 in initial costs, and

includes a minimart.
New station can sell 5,000 gallons per day.
Gas sells for $3.00 per gallon.
Station makes margin of 10 cents per gallon.
Assume 300 days in a year.
Costs $250 to run the station (utilities, labor, etc.)
per day.

Solution Gasoline only

Including the minimart:

Operating the minimart costs an additional $100 /

day.
Daily sales: $500
Daily cost of merchandize for the station: $200

Calculation: $0.10 per gallon x 5000 gallons +

250 = $250 / day in profit.
$250 x 300 = $75000 profit per year on gas
alone.

Solution

Calculation: $500-200-100 = $200 / day in profit

for minimart.
Total profit : $ (250+200) / day x 300 days / year
= $135,000 per year.
In five years: $135,000 x 5 = $675,000 ->
Enough for payback (by $25,000)

- 153 -

Lonestar Oil

Purchasing the existing station

The owner is looking to sell his station and wants
$530,000, but the station has no minimart. Building
a minimart would cost an additional $130,000.
The station has the same capabilities as previously
calculated (5000 gallons per day).

Guidance for interviewer and

information provided upon request
If the student chooses to calculate breakeven with
no minimart: $75,000 profit/year (see earlier) * 5 =
$375,000, not enough to cover the $530,000
investment.
With the minimart, the station would earn
$675,000 (see earlier) with a $660,000 initial
investment, thus earning a $15,000 profit over 5
years.
Based on numbers alone, student should
conclude that building is a better strategy. But
purchasing the existing station may be the better
decision (see next slide).

- 154 -

Lonestar Oil

Other factors to consider

Demand although demand exceeds supply now, there may not be enough demand to support
four stations. Therefore, buying a station is considerably safer in this instance.

Timing it would take longer to build a new station, thus favoring buying.

Competition another company could buy the existing station, thus favoring buying now.
Buying would also deter new entrants as there isnt necessarily enough demand to support four
stations.

Expansion could add more pumps to the existing station to support demand.

Marketing could sell more variety of products at the minimart. Adding a minimart could also
drive traffic towards Lonestars station and away from competitors, although this would only be
useful if Lonestar can expand.

Next steps closer analysis of demand to confirm that buying is a better idea than building a
new station.

- 155 -

Case Recommendations
Top 20 Recommended Cases from Old Casebooks

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

UPS Italy, Columbia 2007

Wind Turbine, Ross 2009
Airport Parking, Ross 2009
Jamaican Land, Wharton 2008
Office Vending Services, Ross 2008
Apache Helicopter, Ross 2008
Airplane Deicing, Ross 2006
Regina Jet, HBS Case
All-Mart, Wharton 2008
Cash Rich Energy Co, Wharton 2008

11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

Sandwich Bags, Ross 2005

Great Burger, Ross 2007
Giant Bank, Ross 2007
Fertilizer Innovation, Ross 2005
Moldavian Coffins, Wharton 2005
De Beers Retail Venture, Wharton 2008
Hong Kong Port, Ross 2005
Bottled Water Market, Wharton 2008
Winter Olympics Bid, Kellogg 2003
Bagging Co, McCombs 2008

Operations Examples (non-revenue related components and cost based):

UPS in Italy, Columbia 2007
Benjamin Carpet, Cornell 2004
Canadian Oil Sands, McCombs 2007
New Airline Routes, Ross 2009

- 156 -