General Models for Case Solving

1.1 Estimation Cases

Population World: 6 Billion Adults: 3/4 Below Poverty Line: 1/3 US Population US: 300 million No of households in US: 105 million Number of adults in US: 210 Million (18+ yrs) (70%) 200 million (21+ yrs) Number of Cars per household: 2.5 Minimum Wage: $5 per hour Average Life Expectancy: 80 Yrs. In USA fraction of adults is high : 4/5 INDIA Population India: 1000 million No of households in India: 180 million Number of adults in India: 530 Million (18+ yrs) (53 %) 440 million (21+ yrs) Number of Cars per household: 0.02 Minimum Wage: Rs. 15 per hour Average Life Expectancy: 70 Yrs. Assume uniform distribution of Age and Salary among people Upper Class Upper Middle Class Lower Middle Class Lower Class

For estimation cases general guidelines: Supply side: o See who the suppliers are. o What raw materials to be used o An estimate of materials supplied and work from there. Demand Side o Who purchases the commodity? o How many commodities do they need each year?

1.2 Strategy Cases Three Types: Cost, Revenue and Marketing

1.3 The 4 P Model

1) Product What product do you want to sell? What product are you able to produce? What advantages does your product offer? 2) Price What price must you charge to make a profit? What price are consumers willing to pay? What price are your competitors charging? 3) Place Where is there a demand for your product? Where are your suppliers located? What distribution channels are being used? 4) Promotion Who is your target audience? How do you reach them? How much do you want to spend on promotions and advertising?

1.4 The 4 C Model

1) Customer What do the customers want and need? How will you satisfy those needs? What is most important to the customers? How much will they pay for it? 2) Competitors What are your competitors doing? What are their strengths and weaknesses? How are they meeting the customer's demand? What is their cost structure? 3) Capacity What are your company's capacities? Financial Organizational Production Marketing? What are your strengths and weaknesses? 4) Costs What is your cost structure? fixed costs variable costs

How have your costs changed over time?

1.5 Marketing Strategy Model

1) Consumer Analysis What is the relevant market? Who is buying and who is using the product? (see if your customer are individual or families) (Ex. Cassettes) What is the buying process? (direct buyers v/s subscribers your product is used directly or not) How can I segment the market? (different kinds of buyers) Is the market growing? (Miles and Snow Model)

2) Competition

What are your company's strengths and weaknesses? What are your competitor's strengths and weaknesses? What is your relative size and position in the market? How do your resources differ from those of your competitors? How can my product reach the consumer? How much do the players in each distribution channel profit? Who holds the power in each distribution channel available?

3) Distribution

4) Marketing Mix How does my product fit with my other products? (For ex does sales of one effect other do they sell together etc.) (ex medicines and pots etc.) How will I differentiate my product? (low cost leadership or differentiation leadership) How does the product life cycle affect my plans?

5) Economics What are the costs and revenue structure? What is the break even? How long is the payback on my investment or how much market I need to penetrate? Is it possible?

TIPS Whenever problem is of declining profitability it means it is either revenue problem or cost problem or both. Analyze business and revenue structure. Do industry analysis (market growth and future potential decline in sales etc.) and profitability analysis (by cost revenue analysis decline in profit due to stress of lowering price due to competition or increased cost) How many products to make to not go into loss? Break even problem!! When Cost equals revenue generating capability, you close the case. If in an industry new entrants cannot survive, implies that majors had a competitive advantage. Think What!!! Even if high cost majors survive implies that they had Competitive Advantage in terms of their services and proper segmentation of their markets.

A business can increase profits by: - Increasing sales - Increasing prices - Cutting costs (Raw Material Purchasing Practices)

Costs include: Labor, Materials (Purchase practices also important), Manufacturing costs, OH, SG&A, Advertisement cost (Marketing), Distribution costs (Low inventory practices by shopkeepers implies that distribution costs go up because of need of frequent delivery), sales force (sales personnel) When question is of expansion see if expansion helps in anyway. Improving quality or quantity. See if market has scope to absorb increased production. Expansion is by new plants or by acquisition? If by acquisition. Are there enough funds and targets? See if joint venture or government involvement will be of any help. If yes, how? Changing mode of services of a firm: See what customer u drive away How profitable they were how many new customers you attract ... any new service you can provide... how many new customers because of new service. To see viability... do cost/benefit analysis The number of new customers times the expected revenue from them plus the additional revenue generated by potential new services plus the cost savings must outweigh the forgone revenue generated by the customers you end up driving away. (Example: New bank calling centers case; Airline rerouting its flight) Assessing future of a firm: 1. If you are manufacturer of a commodity which is used by some other industry then to see your future; see future of that industry. Also consider cost of various materials likely to be in near future. 2. To assess future look into past. Is there any competition? How has it affected you over the years? What competitive advantage your competitor enjoys? 3. Use Porters Five force model. (Ex. Case 84)

Market Entry (factors to be considered): 1. First of all estimate the size of total market. 2. See size of current leaders in market, their market share (proportion of market served by each), sales, no of stores etc. 3. Look for market segments targeted by your competitor and see if u can provide better services in that segment. Estimate how much your services would be valued by customers against an established brand.

4. Look for market segments neglected by the leader. Determine what are the needs of any neglected market, and understand if your client could profitably serve this market. 5. See cost structure of leader and compare it with yours. See sales force, distribution channel of leader. Do you have advantage in any of these areas? DO u have any edge in any of the related factors (say installation, after-sales service.. etc) 6. See which products are most profitable in the industry. You must start up with those and then slowly expand the business. 7. What would be the possible competitive barriers to your entry likely to be posed by the current market leader? To create entry barrier of new players: Pay stress on loyal customers. Promise new and better service. Entry barrier is high if high cost of entry ... industry requires high initial setup cost. Commodity product in general have a slow growth and unattractive industry (Ex: pipelines). Such industries have very high exit barriers. Do extensive marketing. Have better segmentation of your market. Search out for neglected segments. Exit Barriers: Plant fully depreciated then low exit costs If a firm plans to diversify it should consider following options: (remember market entry is a separate thing, expansion or diversification is another thing. This is done by joint venture or acquisition.) 1. 2. 3. 4. What are the diversifying firms distinct competitive advantages? What is its capacity for funding an acquisition? What is the competitive environment like in the proposed region? How does this environment differ from the current markets of the diversifying firm? Is the firm likely to enjoy same levels of sales force and distribution channel, supplies as in original market? The firm should have a distinct competitive advantage. Is there any other way in which company can better use the money used for diversification.

5. 6.

If a company is trying to acquire a target firm it should consider following options: (Ex. Concrete Manufacturer Case) 1. Current market of its own and target firm ... are there synergies? Do they serve different segments? What is the future of your market and target firms market!!! 2. What is the margin of target firm? Can you improve that 3. What is the cost involved in acquisition? Do u have funds? If u are taking this from bank what is rate of interest annually? Does the target firm has potential of returning that much interest in terms of its own profit?

If question is simply assess the strategy of a firm consider: 1. Cost/Sales issue 2. Market issues (growth, competition, new technologies whether your client has it or not, laws concerning your client.) 3. Environmental issues (Ex hazardous chemical producing industry) 4. Use porters five forces.

If sales of a company goes down over years implies that there is a better player in the industry who manufactures what industry wants. Your products might now be obsolete for the industry. Ask for market share trends. It might reveal that over the years your clients market share is being eaten up by competitors. (even if it might enjoy 80% share today) Also if sales go down (market share decreases) but profit goes up implies that market is growing but your client is not keeping pace with it in its cost structure see what critical factors it has neglected like marketing or sales force. (Decrease in sales force and marketing can lead to lower promotion due to which product might loose shelf space also to have a sustained advantage the industry must produce competitive products and new technologies) (Ex. Snack Food Industry.) Specific Industry: Insurance Industry: Sales personnel should be paid based on price of policy sold and also risk involved should be minimum. Specific Industry: Bars and recreational centers: More public on Fridays, Saturdays and Sundays and more in summers than in winters. If a product comes off patent still it can continue to get premium if it has loyal customers and has already established its brand name. If a company finds ways to reduce its cost. It can either lower price or continue to make profit due to increased margin. See substitutes and competitors reaction to this. (Ex Aluminum can case) Specific Industry: Airlines: Cost involves fuel cost, planes cost and landing rights cost, air route cost. If it closes one route, then cost also of cannibalization of that routes customers. It is better to leave customers to cannibalization to that to competitors. MYSTERIOUS MARKET: 1. If the sales goes down but market share increases implies that major players in the industry are closing down. 2. If sales increase, profit made increase, but market share goes down implies that Market is growing but client is not keeping pace with it.

Revenue killers: Concentration of retailers, trade brands, retailers demanding large introductory discounts for new products and high failure rate of new products. (E.g. Candy Case). Reduce production of low margin products.

To estimate the prices of a commodity follow Porters five forces. Industry Rivals, Supplier/Buyer Power (Supply/Demand Level), Threat of Substitutes need to be assessed to determine the market price of the commodity. See what closest substitute is present and what cost it incurs on users. What cost if you quote would motivate buyers to buy your product. See if your product has any advantage over the other (Ex. Windmill Case, Oil Tanker Case) Sales can be increased by: selling more of the current products to current customers selling new products to current customers selling current products to new customers selling new products to new customers. (Key is diversification). The suitability of these options will again depend on the particular environment. Suppose to decrease your cost you cannot help with one aspect, think and hit upon another Profit per unit = Price Variable costs. To maximize profit maximize this. A new product or a recently launched products expansion: See following conditions: o Market Growth o Market share o Competition o Any barriers to entry? o Customer buying habits (all products from same dealer or different)

Credit Cards Cost Revenue Structure Costs Marketing, SG&A, Personnel (Cannot change) Bad credit, theft, etc. (Cannot change) Other costs (Cannot change) Revenue Annual fee - currently $50 (Could change) Annual % rate = 14% (Could change) Merchant fee = 1.5% (Cannot change)

Credit Cards have different kinds of users : o Pay off on full each month: Charge high monthly fee Provide numerous services (Detailed reports, little kudos) o Hold Small Debt for Short Term

Increase the APR slightly Decrease the annual fee o Hold heavy debt for long term Waive the annual fee Increase their credit limits Cash back programs, points Access to Cash Advances, etc.

1.6 Supply & Demand

The Supply Curve -The higher the price of a product or service, the greater the quantity of the item that will be produced, all other things being equal. Supplier will be willing to make more available (i.e., supply). Conversely, the lower the price of a product or service, the smaller the quantity producers will be willing to make available. Please remember that as the supply of one product increases, the supply of another product will decrease. (We live in a world with finite resources but infinite demand.). The Demand Curve - The lower the price of a product or service, the greater that demand for the quantity consumers will be willing to purchase (i.e., demand), all other things being equal. Conversely, the higher the price of a product or service, the smaller the quantity of goods consumers will be willing to purchase.
Price Supply

Demand Quantity

1.7 Porters Five Forces

Michael Porter's Five Forces model analyzes the various competitive pressures at work in a given industry. The results indicate the overall industry attractiveness (i.e.. ease of making a profit), as well as the strength and influence that each of the competitive pressures have on the firms participating in the industry. The following is a brief discussion of the five components.

Industry Competitors (Internal Rivalry) - Often, the most powerful of the five forces is the competitive battle among rival firms which are already present in the industry. The intensity with which the competitors are jockeying for position and competitive advantages indicates the strength of the influence of this force. Potential Entrants This force measures the ease with which new competitors may enter the market and disrupt the position of the other firms. The threat that outsiders will enter a market is stronger when the barriers to entry are low or when incumbents will not fight to prevent a newcomer from gaining a market foothold. In addition, when a newcomer can expect to earn an attractive profit, the barriers to entry are diminished. Threat of Substitutes - The competitive threat posed by substitute products is strong when policies of substitutes are attractive, buyers' switching costs are low, and buyers believe substitutes have equal or better features. Supplier Power- Suppliers to an industry are a strong competitive force whenever they have sufficient bargaining power to command a price premium for their materials or components. Suppliers also have more power whenever they can affect the competitive well being of industry rivals by the reliability of their deliveries or by the quality and performance of the items they supply. Buyer Power - Buyers become a stronger competitive force the more they are able to exercise bargaining leverage over price, quality, service, or other terms or conditions of sale. Buyers gain strength through their sheer size and when the purchase is critical to the sellers success. Also see Cost- Pricing Structure in addition to this. Benefit of Complements This is considered a sixth force that is not directly captured in Porters model. This force is the opposite of the Threat of Substitutes. When the economics are promising for a complementary product, there is a spillover effect on the primary product.
Five Forces Potential Entrants

Complement

Suppliers

Industry Competitors
Rivalry among existing firms

Buyers

Substitutes

1.8 "Star" Diagram/Organizational Analysis

In doing an organizational analysis, one should consider all seven components of the organizational unit. Vision should define Strategy. Strategy determines Structure and Decision Support Systems that are required to make the organization function. The Reward Systems must reinforce what you are trying to accomplish strategically and the Human Resource Systems must select, recruit and develop the personnel the organization needs to accomplish its objectives. Corporate Culture must reinforce all seven components.

Vision

Strategy Decision Support Systems Human Resource Systems

Structure

Reward Systems

Organization Culture Performance

Problems arise when these seven components do not reinforce one another. For example, managers will have trouble if they are in a decentralized structure while information and planning systems are centralized. When considering change, all seven components must be considered. If one component is changed, it is most likely that the other components will have to be changed to be consistent with each other.

1.9 The BCG Growth-Share Matrix

The BCG Growth-Share Matrix provides a valuable framework that enables us to identify and evaluate the company's products relative to market share and the extent to which the market, as a whole, is expanding or contracting. The model can also be utilized to analyze a portfolio of companies held by a single organization by classifying them within the matrix; each as independently held businesses.

Products or categories businesses are as follows: Star A product with high market share in a high-growth market; every mother's prayer. Problem Child (also called "Question Marks") A product with low market share in a high-growth market; mother is concerned because her child is not growing as anticipated. Another perspective is that the manager shouldn't be quite so concerned if the product has carved out a little niche that is impervious to the competition; maybe slow yet consistent growth isn't so bad. Cash Cow A product with high market share in a low-growth market. Since the cow is generating milk (i.e., cash), the marketer may elect to "milk the cow dry," so to speak, accelerating cash flow and, not coincidentally, the product life cycle. Dog A product with low market share in a low-growth market. In this sense, "dog" is certainly not "man's best friend." Rather, it is analogous to a "bomb" (i.e., something that fails miserably) or to a "lemon" (i.e., something that is defective or undesirable). Therefore an astute business manager would want to drop a dog from the product line, unless there are some extremely important overriding issues that outweigh the products market performance.
Hi Low

Hi Market Share Low

Star

Problem Child

Cash Cow

Dog

Profitability

1.10 Value Chain

A business manager must understand the internal relatedness of the many activities involved in the production of a product or service. Every business unit is a collection of discrete activities ranging from sales to accounting that allow it to compete. Michael Porter calls these activities value activities. It is at this level, not the company as a whole, that the unit achieves competitive advantage. The value activities are grouped into nine categories, as indicated in the exhibit below. Primary activities create the product or service, deliver it to the market, create a demand for the product, and provide after-sale support. The categories of

primary activities are inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities provide the input and infrastructure that allow the primary activities to take place. The categories are company infrastructure, human resource management, information systems, and procurement. Value chain analysis is useful in discerning possible synergies among various units of an organization (e.g., shared procurement). Value chain analysis is also helpful in determining which value activities are best outsourced and which are best developed internally. Finally, value chain analysis provides a structure that provides great insight into the flow of activities that lead to the creation and distribution of a particular product or service. (e.g., What value is added to the manufacture and sale of gasoline at each point in the value chain, and by whom?).
Value Chain Company Infrasructure Human Resource Management Information Systems Procurement

Support Activities

Primary Activities

Inbound Outbound Operations Logistics Logistics

Marketing & Sales

Services

1.11 Generic Strategies (Porter)

Michael Porter suggests that business strategies can be classified as pursuing cost leadership, differentiation, or focus. Each of these strategies is described as follows: Overall Cost Leadership: Here the business works hard to achieve the lowest production and distribution costs, so that it can price its products lower than its competitors and win a large market share. Firms pursuing this strategy must be good at engineering, purchasing, manufacturing, and physical distribution of the products. Texas Instruments is an excellent implementer of this strategy. The problem with this strategy is that other firms will usually emerge with still lower costs (from the Far East, for example) and hurt the film that rested its whole future on being the lowest cost producer. The real key in this strategy is for the firm to achieve the lowest costs among those competitors adopting a similar differentiation or focus strategy, and remaining so in the long run. Differentiation: Here the business concentrates on achieving superior performance in an important customer benefit area valued by a large part of the market. One example is if the company strives to be the service leader in its

industry, the highest quality producer, the style leader, the technology leader, and so on; but it is hardly possible to be all of these things. The firm cultivates those strengths that will give it a competitive advantage in one or more benefits. Thus the firm seeking quality leadership must make or buy the best components, put them together expertly, inspect them carefully. This has been Canon's strategy in the copy-machine field. Focus: Here the business focuses on one or more narrow market segments rather than going after a large market. The firm gets to know the needs of these segments and pursues either cost leadership or a form of differentiation within the target segment. Thus, Annstrollv Rubber has specialized in making superior tires for farm-equipment vehicles and recreational vehicles and keeps looking for new niches to serve. According to Porter, those firms pursuing the same strategy directed to the same market or market segment constitute a strategic group. The firm that carries off that strategy best will make the most profits. Thus, the lowest-cost firm among those pursuing a low-cost strategy will do the best. Porter suggests that firms that do not pursue a clear strategy - middle-of-the-roaders" -- do the worst.

1.12 Strategic Types (Miles & Snow)

Miles and Snow have divided strategic options into four categories (in contrast to Porter's three Generic Strategies). A firm can only pursue one of these strategies at a time, but it is common for a company to shift from one strategy to another as its situation, and the industry, changes. Defenderthose firms that have a leadership share of the market will often concentrate on staving off the competition, moving to erect as many barriers to entry as possible. They are closely related to Porter's Low Cost Producers, leveraging their advanced position along the learning curve and their name recognition to maintain a superior market position. Reactor Such companies are second-movers, letting others show them the way to success. They react to changes in the market and moves of their competitors and so must maintain flexibility. While this strategy may be profitable in the short run, its long-term value is questionable. Analyzer Analyzers pick apart the market very carefully looking for niches and demand/supply gaps. This strategy is akin to Porter's focused companies. These firms are not necessarily innovators, but instead concentrate their efforts in very carefully and narrowly defined efforts. Prospector These firms are the first-movers and the innovators. This is a highrisk strategic avenue to follow, but those who are successful can change the way the game is played and create very strong competitive advantages.

1.13 Just-in-Time (JIT) (Very Important in reducing costs. Inventory costs tend to zero)
The goal of JIT production is a zero inventory with 100% quality. In other words, the materials arrive at the customer's factory exactly when needed. JIT calls for synchronization between suppliers and customer production schedules so that inventory buffers become unnecessary. Effective implementation of JIT should result in reduced inventory and increased quality, productivity, and adaptability to changes.

1.14 Fixed vs. Variable Costs

Variable Costs (VC): The costs of production that vary directly with the quantity (Q) produced: these costs generally include direct materials and direct labor cost. Fixed Costs (FC): The costs of production that do not vary with the quantity (Q) produced: these costs generally include overhead costs. Semi-variable Costs: The costs of production that vary with the quantity (Q) produced, but not directly. (Typically, these are discrete costs, such as the cost of adding new production capacity when Q reaches certain levels.) Break-even Point: Break-even analysis is a managerial planning technique using fixed costs, variable costs, and the price of a product to determine the minimum units of sales necessary to break even or to pay the total costs involved. The necessary sales are called the BEQ, or break-even quantity. This technique is also useful to make go/no-go decisions regarding the purchase of new equipment. The BEQ is calculated by dividing the fixed costs (FC) by the price minus the variable cost per unit (P-VC): BEQ = FC/(P-VC) The price minus the variable cost per unit is called the contribution margin. The contribution margin represents the revenue left after the sale of each unit after paying the variable costs in that unit. In other words, the amount that "contributes" to paying the fixed cost of production. To determine profits, multiply the quantity sold times the contribution margin and subtract the total fixed cost. Profit = Q x (P-VC) - FC

1.15 General Models

1. Financial Frameworks - For profitability cases you should explore cost and revenues 1.1 Income Statement Net Income - Cost of Goods Sold (COGS) Labor Materials

Overhead Delivery Gross Margin - Depreciation - Sales General &Administrative (SG&A) Operating Profit - Interest Expense Earnings before Taxes (EBT) -Taxes Net Income 1.2 Balance Sheet Assets Cash Investments Accounts Receivables Inventories Property, plant & equipment Intangibles Liabilities Accounts Payables Other Short Term Debt Long-term Debt Other Liabilities, Reserves Shareholders Equity 2. Porters Five Forces Suppliers Potential Entrants Buyers Substitutes Industry Competition Complements the forgotten force Common Stock Retained Earnings

3. Business System 3.1 3.2 3.3 3.4 4. Issue Tree 4.1 4.2 Do not use this framework in an interview without practicing it a few times before hand. Top-level identifies the highest level issues that need to be answered to solve the problem. Use MECE (Mutually Exclusive and Collectively Exhaustive) to ensure that all issues are covered. Break each level down into parts that are more manageable. Focus on most important branches or components first. An example of an issue tree is provided with China Factory case. Supply chain 5.1.1 Raw Materials o Who makes the plastic needed for golf balls? o Obtain the quantity of material supplied and work from there. 5.2 Demand side Who purchases golf balls? How many golf balls do they need each year? R&D Product Development Innovation Responsiveness Manufacturing Cost Quality Speed Supply Marketing Pricing Product Place Promotion Distribution Cost Channel

4.3 4.4 4.5 5.1

5. Framework for a Zinger case like How many golf balls in Albuquerque?