McCombs 2013 Case Book

Included Cases:
Regional Electric Utility – Bain Mock p2
Fresh Market – BCG Mock p4
Grocery Deli Company – BCG Mock p7
Local Touch Insurance – BCG Round 1 p 11
Airline Food – BCG Round 2 p 14
Deutsch TV – BCG Round 2 p 16
Emerald Swan Soap – BCG Round 2 p 18
Jewelry Case – BCG Round 2 p 21
Turkish Gas – BCG Round 2 p 23
Uranium Processing Plant – Booz Round 1 p 24
Cell Co p 26
Big Box Electronics Retailer – ATK Mock p 29

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Regional Electric Utility
Bain, Mock

Our client is a large regional electric utility company that has seen negative earnings trend in the last 12
months. They think that part of this relates to the write down of a significant amount of bad debt in the
past year. They operate in a state similar to Texas where utilities market is open and competitive. There
are approximately 30 players in the market, and consumers can choose the provider that they want.
Contracts are generally 6-12 months, after the end of the contract customers can change providers with
little or no costs.
1) The client wants to identify the root cause of their loss of profitability
2) What actions should they take to improve profitability.

This company does not produce the electricity. They purchase the electricity on the open market and
deliver and service electricity to their end customers.

Other case facts:

- Revenue has been consistent over the past 12 months. The company has very little ability to
increase prices as it is a very competitive market and customers make choices on price. There
are a lot of rules in place as far as incentives you can offer and differentiation the company can
make.
- They have 1M customers, which is largely unchanged in number from prior years, and the
kilowatts used by these customers is largely unchanged.
- Although the # of customers is consistent, there are large amounts of turnover in customers
each year as their contracts expire. Some customers leave for other providers, and other
customers are obtained.
- Deposits are required to start service: The largest deposit currently in the market is $400. The
deposit we require from all customers is $100.

Costs:
- Largest expense is Cost of Goods Sold. This consists of electricity bought by our traders. This
division has been profitable in the last year.
- Other costs:
o Cost to serve (billing etc)
o Variable (Service Calls)
o Cost to cut-off service:
o Debt Collection:

This is the life cycle of a “bad debt” customer:

Customer sign-up – they pay the $100 deposit
There is a customer acquisition cost (marketing etc)
The customer pays per kilowatt hour, and they receive a monthly bill

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If a customer does not pay their bill, by law their electricity cannot be cutoff for 60 days past due. That
means the company has to provide electricity for 60 days.
If the individual does not pay in these 60 days, the company cuts off their electricity. That costs $75.
The company will try to collect on the bill. It costs $50 to collect, and they are able to recover 50% of
accounts on average.

Customer Segmentation: The only thing the company can look at by law is the customer’s credit profile.
And by law no customer can be turned down for service.
Credit Rating % of total
Strong 30%
Medium 20%
Low 20%
Very Low 30%

We want to analyze the “Low” segment now. We want to calculate a customer lifetime value for these.
The average period of service is 24 months. However for this, assume they stop paying after 22 months.
Cost to acquire: $50
Our cost to serve: $7/month
Electricity usage: 1,000 kw/month
$.10 per kw/hour is our price to them
$.09 per kw/hour is our cost .
Cost to cut-off: $75
Collection Costs: $50 – 50% success rate

Give to the candidate after they calculate the Low category customer lifetime value:
Credit Rating % of total Customer Lifetime Value
Strong 30% $300
Medium 20% $125
Low 20% -$103
Very Low 30% -$350

Collect ideas from the interviewers on ways to increase profitability, as well as risks.
Possible Ideas:
Want to require different deposits based on the credit rating. Higher for lower credit ratings.
Also might want to market to high credit rating customers. Get more of those.
Make bills easier to pay through online tools.
Automate billing processes to reduce costs.
*We cannot reject customers by law.

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Fresh Market
BCG, Mock

Context: Understand Profitability Decline and recommend solutions for improvement

Case Introduction and Problem Statement- The client is a regional market. This client is one of the top
three players in the market, and has above average profits. However, they are seeing a disturbing
trend in the beverage segment. The clients profit has been down in the last year but their
competitors have maintained or improved their profit. Our firm has been brought in to understand
the reason for the decline and offer a solution.

Key to case: Candidate needs to drive to the beverage segment that is driving the decline then offer
solutions on how to improve the profitability.

Information Given Upon Request:

If asked for Revenue and Cost information, give candidate exhibit 1.
Using the volume, price, and average cost data the candidate should solve for profitability in both
years, and realize there has been a decline in profitability of about 10%, primarily driven through the
soft drink segment. Profit for three segments in 2007 is- soft drink 60M, water 10M, and other 1.1M
and for 2008 48M, 9.9M, and 6M. Total 2007 71.1M and 2008 63.9M.

Candidate should then drive to understanding the reason for the soft drink decline.
Information given upon request:
No information on competitor changes.
If candidate asks could there be an issue of a change in product mix within the soda industry hand them
exhibit 2.
Key insights that candidate should note is that volume has increased in volume brands and prices
have declined. The majority of this drop was caused by a drop in volume from brand A, while brand B
has remained constant. Overall insight is that demand has been shifting to lower revenue choices,
and within that category price has dropped as well.

Interviewer should then ask for reasons why prices may have declined. Possible reasons are:
Increased competition, price wars occurring in the value brand segment. Could also be due to
macroeconomic issue, issue may be that consumers purchasing power is down which would shift the
demand to lower quality soda.

Interviewer should then ask for ways to increase prices. Possible ideas are:
Promotions on higher value brands: bundling with other products (salty snacks etc.) and offer a cross
promotion.
Consider price increase on brand B since customers do not seem as price sensitive. Work on increasing
the pricing on the value brand, and maybe some consumers will shift back to that brand.

Information upon request:

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 Exhibit 1: Volume (M Gallons)/Price per gallon/Average Cost per gallon for 2007/08 for soft
drinks, water, and other category. Gallon 2007- 100, 20, 11; 2008- 120, 22, 10. Price for 2007- .90, .70,
4; 2008- .70, .65, 4.5. Cost for 2007- .30, .20, 3.9; 2008- .30, .20, 3.9.
Exhibit 2: Volume (millions) and revenue for three categories of soda, brand A, brand B, and
value brand. 2007 volume is 50, 25, 25 and 2008 30, 30, 60. Revenue 2007 is 50, 25, 15 and 2008 30,
30, 24.

Final Recommendation
Client should offer promos on premium brands and raise prices on value brands. This will
increase demand to a more profitable segment and raise profitability on the lower quality segment.
Risks would be if competitors take share away from client in the value segment.
Next step would be to work with salty snack manufacturers to determine ways to cross bundle.

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Exhibit 1
2007 2008
Category Volume (M Gallons) Price/Gallon Avg. Cost/Gallon Category Volume (M Gallons) Price/Gallon Avg. Cost/Gallon
Soft Drinks 100 0.9 0.3 Soft Drinks 120 0.7 0.3
Water 20 0.7 0.2 Water 22 0.65 0.2
Other 11 4 3.9 Other 10 4.5 3.9

Exhibit 2
2007 2008
Soda Brand Volume (M Gallons) Revenue Soda Brand Volume (M Gallons) Revenue
A 50 50 A 30 30
B 25 25 B 30 30
Value 25 15 Value 60 24

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Grocery Deli Company
BCG, Mock
Case Introduction and Problem Statement
A large supermarket chain has seen declining profits as competition has increased from low cost grocery
chains (Wal-Mart etc). This competition has driven down profits in their grocery department. They want
to find ways to improve profitability in their deli department which has seen flat profits for the last
several years.

The deli department consists of two divisions: Deli Meats and Prepared Meals

Key to case:
Financial results of the 2 divisions
Causes for profit declines – identifying changes
The candidate should identify the cause of profit margin declines and brainstorm ways to improve
profitability

Information upon request:

Exhibit 1 below can be given to the candidate if they ask about financial results of these two divisions.
The candidate should identify key insights including the decrease in the profit margin in the prepared
foods division. This has led to a flat gross margin over the past 3 years.

The candidate should also question the causes of the increases in revenue for the prepared foods
division. Possible questions could be about any changes or new offerings.

If asked you can tell the candidate that 2 years about the store introduced two new products into their
prepared meals division; chicken wings and prepared sandwiches. Both of these products have had $XXX
in revenue.

If asked, you can tell the candidate that the preparation of chicken wings did not require significant
changes in equipment or man power. The sandwiches are made by an employee to order (think
Subway). Sandwiches are made for 4 hours every day (2 hours at lunch and 2 hours at dinner). If asked
about specific cost numbers, give the candidate the information from Exhibit 2 but do not give them the
slide.

Through calculations of margins they should identify that the cause of the decrease in profit margins are
coming from the made to order sandwiches.

Non Financials
Company info
Large national grocery chain
Customer Info/Segmentation
No info
Competition Structure

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Facing significant competition in their groceries division from low cost providers. This has significantly
impacted their profit margins in this area. That is why they are especially focusing on their deli division
as a way to improve profits.

Follow up questions:
Risks?
Other ways to increase Profits?
- Stop producing sandwiches
- Understand elasticity and possibly increase price of sandwiches
- Limit the time these sandwiches are offered. Perhaps only at lunch or only at dinner
- Have sandwiches made each morning and available for purchase, rather than made to order

Final Recommendation
Recommendation

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Local Touch Insurance
BCG, Round 1
Context: Revenue Growth
Case Introduction and Problem Statement
Client is an insurance company. This client operates in a consumer branch model where they have sales
and service reps who serve clients. The sales reps are responsible for renewals, new customers, etc.
while the service reps do everything else, such as manage claims support questions etc. The client has
seen their new customer revenue base growing but their renewal revenue has been flat and our firm
has been brought in to investigate and offer suggestions.

Key to case: Candidate needs to drive at the reason for the revenue decline.
Information Given Upon Request:
Similar pricing to competitors.
Policy Price- $1000/individual policy (auto, home, etc).
40% renewal rate.
This renewal rate is lower compared to competitors.

Candidate should drive at reason for difference.

Information Given Upon Request:
Sales practice is that client does not normally follow up with clients on renewals they just wait for the
renewals to come in.
Sales reps are compensated by paying for renewals and new customers, but more for new customers.

Interviewer should ask: What would be some other ideas of ways they could help increase renewals?
Possible answers:
Bundling
Discounts for renewals
Use service reps to shore up leads* Key Insight
Change Comp structure

After offering idea of service reps, hand candidate exhibit one and ask candidate to walk through
exhibit.
Candidate should calculate increase in renewals from pilot vs. control program. The sales figures the
change would be from 3.75 to 6.4. Or if walking through total leads candidate can estimate 4 and 6.
Key insight is using pilot program increases sales by 50% or more.

Ask candidate what would happen if they instead increased training to boost control from 15-20% what
would be effect. Sales would increase to <=5 so still less than pilot program.

Ask candidate for recommendation.

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Information upon request:
Chart 1: Data vs. control and pilot program. Control has 100% leads, 55% quoted, 15% sold.
Pilot had 60% quoted and 16% sold. Total weekly leads for control are 25 and for pilot are 40.

Non Financials
Company info
Customer Info/Segmentation Repeat vs. New Customers
Competition Structure similar industry breakout
Product: Commodity

Financials:
Rev:
Price (segmentation)
Quantity

Cost
One time investment cost
Fixed Costs
Variable Costs

Market Sizing

Follow up questions:
Risks?
Other ways to increase Profits?

Final Recommendation
Change compensation structure to emphasize renewals. Proceed with pilot program to have
service reps work with sales reps.
Risks: Service reps service will decrease. Increased cost due to compensation structure. Internal
reaction to program, will it be accepted by staff. Competitor reaction, easy model to replicate. If test
branches are not representative of overall branch quality plan may not work in aggregate.
Next steps: Begin doing research on compensation best practices. Start training service reps for pilot
program. Investigate with bundling and repeat discounts.

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Exhibit 1
Control Program Pilot Program
Leads 100% Leads 100%
Quoted 55% Quoted 60%
Sold 15% Sold 16%

Total Weekly Leads 25 40

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Airline Food
BCG, Round 2

Context:
Our client provides catering services to major airlines at Houston Intercontinental Airport.
They are considering investing in new refrigerating equipment that will lead to an overall reduction of
10% of their variable costs. We have been hired to determine if they should invest in the new
equipment.

Information upon request:

The new equipment will cost $10M.
They currently charge $10 per meal to the airline and incur average costs of $5 per meal due to
ingredients, spoilage, labor, and manufacturing equipment.
The company is looking for a three year, undiscounted payback period.

Non Financials
Competition Structure: our client currently has a 40% market share at the Houston airport.
Product: Airline food is mostly a commoditized product, however we may be able to capture slightly
more market share by providing a fresher product through improved refrigeration.

Financials:
Rev:
Price: $10/meal
Quantity: Determined by market size below.

Cost
One time investment cost: $10M
Variable Costs: Without new refrigeration: $5, after new refrigeration: $4.50

Market Sizing:
The interviewee will need to estimate the number of meals sold at the Houston airport in order
to determine if the investment will be worthwhile.
For example: Determine the number of planes that take off from the airport in one hour. Assume there
are three runways, two for departure and one for landing. The airport has departures throughout the
day, primarily from 6:00am – 10:00pm for a total of 16 hours. These departures can further be
segmented by destination: International, Long-range Domestic, and Short-range Domestic. International
flights serve meals to the entire plane, while Long-range Domestic flights are primarily first class, and
Short-range flights do not serve meals.

Follow up questions:
How will the competition respond? Will we be able to capture additional market share? Is this
industry dying and should we be making new investments?

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Final Recommendation
The market size component of this case will determine whether or not the investment fits the
company’s objective of a three year undiscounted payback period. If the payback period is not met then
you should determine how many more meals per year we would need to sell in order to break even
after three years. At the conclusion the interviewee should take into consideration some of the risks
(competitive response, industry decline, etc.).

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Deutsch TV
BCG, Round 2

Context: Choosing between best scenario for TV content distribution

Case Introduction and Problem Statement- Your client is a German media company. This company
has recently bought the rights to broadcast the European Champions Soccer League. They are trying
to determine whether to broadcast via their free TV or pay TV service, and have brought our firm in to
analyze which option they should pursue.

Key to case: Candidate should evaluate the profitability of both options, then make a recommendation
on which to pursue. This should be more of a candidate led case.

Information Given Upon Request:

Main revenue streams are subscriptions plus the signups in the pay TV and the ad revenue from the free
TV.
Existing staff can cover the additional ad demands, no other significant cost differences.
Costs related to sign up a new customer are both customer acquisition costs and the cost of a
transceiver. Both costs are approximately €100.
Number of games broadcast: There are several rounds to the tournament. The first round is group play.
In this there are six groups with four teams each. Four of these teams are German, one in each group.
These would be the only games they would show in the first round. In this round, each team plays the
other teams in the group once at home and once on the road. 16 teams make it to the next round, and
each plays their opponent once at home and once away. Then there is a quarter final and semi-final in
the same format. There is only one final game.
Candidate should determine this is 53 total games (24,16,8,4,1)
Advertising will be 30 second spots, with ten minutes of ads in the pre-game, 15 minutes at halftime,
and 5 minutes after the game.
Candidate should determine this would be 60 spots.
Revenue on a per spot basis €80,000.
This is gross revenue. Previous revenue was €30,000.
Therefore incremental revenue is €50,000.
Candidate should be able to determine profitability of 159M Euro (50k incremental per spot x 60
spots/game x 53 games)

Candidate should then proceed to look at subscription option:

Information given upon request:
2M subscriber base
20% boost
€50 Monthly subscriber base.
Subscriber will sign up for the entire year.
With this information, the candidate should determine that subscription revenue is €240M (400k
customers x €600/year).

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The company gets €100/activation.
Candidate should determine the additional revenue of €40M
Candidate should determine that would make the total incremental costs €80M and the net profit
€200M. This option is 25% more profitable than free TV.

Final Recommendation
Based on the information, Deutsch TV should broadcast the soccer matches via pay TV. The main risk
they should be concerned with is goodwill, as many people who will not be able to access the matches
may be angry with the client. Therefore, a solution should be pursued where the client can capitalize on
the pay market while not alienating the free customers.

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Emerald Swan Soap
BCG, Round 2
Context: Understand Reason for Revenue Decline and Offer Recommendations for Improvement
Case Introduction and Problem Statement- Client is a soap manufacturer, and have seen declining
revenues in recent years. Volume has been relatively constant and they have seen a decline in prices.
The company has asked our firm to come in and understand the reason for the price decline, then
offer suggestions on what can be done.

Key to case: Candidate needs to determine if this is an industry or company specific issue. They then
need to understand different customer segments and find the segment that is driving the loss. After this
they should proceed to make recommendations on ways to improve revenue.

Information Given upon request:

Industry or client specific problem- Some other competitors have seen declines in revenue but our
clients has declined the most.
Client Sells Bar and Liquid soap
Price decline primarily in bar soap, which is problematic because this soap is 2x more profitable than
liquid soap.
Customer tastes are shifting and company has been dropping prices to hold share.
Prices to end consumers have also dropped, but not as much as the clients prices have dropped.
Customers buy from three categories of stores: grocery, club, and mass stores.
Prices are down in all three segments, but down by the most in the grocery segment.
If candidate asks about taste shifting in the soap markets give candidate chart 1.
Key insight is that consumer preferences are shifting within all categories that are less important to
the client, so this is not the driving issue.
Client has 50% share in the high quality branded soap market but a 30% share overall.
There has been a shift towards more large size soap packages, but the customer is at a price
disadvantage in this segment.

With this information candidate should ask about the reason for the largest decline in the grocery
segment.
Information given upon request:
The client is running promotions in the grocery stores to try and hold share in that segment. These
promotions are typically 20-30% which puts the pricing in line with other stores.
Overall customer habits are shifting from groceries to mass market stores.

Information upon request:

Chart 1: 2x2 box with quality of soap (high, low) for rows and branded vs. generic in the
columns. Growth in each category is 0%, +15%, -20%, +5%

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Non Financials
Company info- Strong recognizable brand
Customer Info/Segmentation- Broken out by store preference and quality preference
Competition Structure- Not much data on competition, but prices have declined for them as well
though not as much as the client.
Product: More commodity, differentiated on brand and marketing.

Financials:
Prices down about 30% overall.

Final Recommendation
The company needs to get ahead of the curve and move stronger into the mass and club stores. They
should do this by strengthening the relationship with these customers to get better shelf positioning and
end space promotions. They should also revamp their pricing on larger quantity packages to better
compete in those segments since tastes are shifting that was as well. They should also end such
extreme promotions in the grocery segment to bring prices back up there.

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Exhibit 1

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Jewelry Case
BCG, Round 2

Context:
Our client is a family-run Jewelry Store that has been in operation for 50 years. They recently
approached our firm expressing an interest in suggestions to maximize revenue. We would like your
suggestions on how to approach this problem.

Information provided upon request:

Non Financials

 The client has 200 locations, almost all in strip-malls or enclosed malls
 Industry has been declining at 5% year-over-year
 Competition revenues have been declining at the same rate as the industry
 Client revenues have been declining at 10% year-over-year
 The client sells 3 products (provide exhibit below; interviewee should notice both the higher
revenue opportunity and profit margin associated with the higher end products)
 Additional information about the revenue and product mix: our client sells roughly 1/3 (in
terms of volume sold) of each product.

Customer Info/Segmentation

 There is no particular customer segment that our client targets and we have no additional
information on our customers

Competition Structure

 Competition has similar location types, but perhaps a few more in standalone storefronts than
malls
 Competition sells the same 3 products as our client, but not necessarily in the same volume
ratios
 We have no additional information about the competition sales volumes, revenues or streams

Financials

 Revenue streams and price/cost per unit:

Item Price Cost

Men’s Rings 250 150
Women’s Earrings 350 200
Diamond Rings 450 250

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Follow-up Questions

 What risks should our client consider in your strategy? What else?
 Any other ways to increase revenues that come to mind?

Final Recommendation

 Essentially, move into a higher revenue product mix rather than even split they are currently
experiencing
 Train sales team to upsell higher revenue brands/product lines

 Optimize the buying experience by reducing clutter in the jewelry displays, improve lighting to
make items more appealing, provide seating/refreshments for significant others accompanying
spouses
 Rework/educate the sales team and provide a proper salary/commission structure to incentivize
sales of higher revenue items
 Consider moving storefronts or investigating whether accelerated revenue decline is associated
with mall locations
 We have been around for 50 years, leverage the family relationships and history you have with
your customers to create higher lifetime value

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Turkish Gas
BCG, Round 2
Context:
Our client is a major global oil and gas company. They distribute fuel (gas and diesel) to
stations throughout Turkey. Our client has approached us to help them determine a plan for
expansion.

Information upon request:

There are two major customers segments throughout Turkey, Individual customers and Fleet
sales.
The overall gasoline market is 40% diesel and 60% gas.
Our client distributes gas to mostly suburban and rural locations and is one of the major
suppliers in the country.

Non Financials
Customer Info/Segmentation: As Turkey’s economy continues to grow, the customer base is expanding
as GDP per capita increases for the country. These customers are moving away from rural regions and
settling in major cities.
Competition Structure: We are one of the major players in the region, but there are other stations that
are supplied by other oil and gas majors.
Product: Fuel is a highly commoditized product

Follow up questions:
There are several risks with regard to government regulations as a foreign company operating in
a developing market. Additionally, developing economies are more volatile and are more susceptible to
drastic downturns. If the company invests heavily in expanding their distribution network to booming
cities and transportation routes, than we are betting on the success of a young economy.

Final Recommendation
The company should expand into urban areas and they should also focus on stations along
major shipping routes throughout Turkey in order to capture the fleet customer segment. This could be
accomplished by offering fuel discounts to push out the competition, acquiring smaller chains of stations
in urban areas, or building our own stations along major shipping routes. There are costs and benefits
to each of these approaches, however, the future growth of Turkey’s fuel use will be in urban, suburban
and major travel routes and it is a market that we need to be in to grow alongside the company.

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Uranium Processing Plant
Booz, Round 1

Our Client is a Uranium enriching facility, the way they work is they buy uranium from mines, clean
the uranium, enrich it, and sell it to nuclear plants within the US. They have seen declining operating
income and have hired Booz to figure out why has this happened and they want us to come up with a
couple of actions to reverse it.

KEY TO THE CASE: The candidate has to figure out what has changed in the market and how were profits
affected. The candidate should make recommendations on how to reverse the declining operating
income trend.

INFORMATION UPON REQUEST:

- The company was a monopoly before foreign companies entered the market.
-Uranium is a commodities market, customer decide product solely on price.
-120 million KW/ hr are used to enrich 40 million lb of Uranium
-The capacity of the plant is 10 million lb/year.
-The plant is working at full capacity
-Electricity is a commodity
-Nuclear production outside the US has declined because of the Fukujima incident; it is hard to sell to
other countries.

What has changed?

The company was forced to reduce their prices because foreign companies entered the U.S Market with
lower prices; they had lower costs because they were more energy efficient.

REVENUES
$60/lb of Uranium

COSTS
Fixed Costs:
$100 million

Variable Costs:
Raw materials $0
Electricity $40/KW hr

COSTS OF PRODUCTION

(3 kw/hr *$40) = $120 to produce 1 lb of Uranium

The plant has a $60 loss / 1 lb of Uranium

Total Loss (FC + (Rev-VC)

$100 million+$60 million = $160 million

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Possible Recommendations
Cost Reduction

- Generate electricity themselves to reduce costs.

- Buy newer equipment that is more electricity efficient.
- Layoff people
- Automate processes
Exit Strategy

- Outsource to finish contracts.

- Sell company to competitors.

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Cell Co
Student Prepared

Context: Candidate needs to determine reason for profitability decline and strategize ideas to improve
profitability
Case Introduction and Problem Statement- Your client is Cell Co., a large scale cell phone
manufacturer. Over the last year the client has seen a decline in profits and is not sure why. The
client has brought our firm in to analyze the reason for the decline and recommend ways to improve
profitability.

Key to case: Candidate needs to determine that the profit decline is due to an increase in testing costs
on the high tier phones.
Information given upon request:
Some competitors have seen profit declines but not all.
Client sells primarily in the US but sells globally as well.
Cell Co. sells three types of phones, High Tier smart phones, Mid-Tier smart phones, and mass market
phones.
Customer demand has been shifting towards HT smart phones.

If candidate asks if there is any information on the revenue break out from the last year and the current
year hand them exhibit 1.
With this information the candidate should compute that revenues went from 1.65B last year to 1.7B
this year.

If candidate asks how costs have changed hand them exhibit 2.

With this candidate should determine that costs went from 960M last year to 1.1B this year, and was
primarily driven because of an increase in High Tier testing costs. Overall profit fell from 690M to
600M.

When candidate determines the reason for the increase is primarily increased test costs on the HT
phones tell them the following information.
It appears that the increased costs are due to the implementation of 4G. This testing requires different
equipment, and the 3rd party test vendor Cell Co. utilizes has limited capacity of this equipment. The
vendor has increased their testing costs since they can still fully utilize their equipment at these higher
prices.

Cell Co. is actually thinking about purchasing equipment to be able to do the testing internally. This new
equipment would cost 47M, but would allow Cell Co to bring the HT smart phone test costs to 15% of
revenue. However, since they would be taking business away from the test vendor they would raise
prices on the Mid-Tier phones, to 14% of sales. Since Cell Co believes their vendor can have capacity
next year and will lower the test costs back to 10% they are only looking at a 1 year payback period, and
they believe the machine would not have a salvage value. Should Cell Co make purchase based on last
year sales volume?

Candidate should determine that cost decrease on High Tier would save 50M, but increase in Mid-Tier
would cost an additional 8M. Since the machine costs 47M this is not a profitable investment.

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After candidate solves this read them the following prompt:

OK, that seems reasonable. However, considering volume for next year is not known, Cell Co wants to
know what volume of High Tier phones they would need to sell before this machine would break even,
assuming Mid-Tier phones remain constant?
Since they need to save an additional 5M they would need an additional 100M of sales (100M x
5%=5M). Therefore the sales volume needed would be 1.1B.

After candidate solves this math ask them the following:

Considering the fact that even with these changes Cell Co.’s profitability will still be down next year,
what are some other ideas you may have for improving profitability?
Possible answers are expanding to other markets, perhaps selling more mass market phones to other
regions; exploring using other test vendors whose costs are lower; working on initiatives to lower
development costs. Candidate may have other ideas as well.

Information upon request:

Exhibit 1: Revenue Detail for phone categories for last year and this year. Values are: Last year
HT- 1.5M volume $500 price, MT- 1.5M $200 price, MM- 12M price $50. Total values 750M, 300M,
600M (candidate computes). Current year: HT- 2M volume , MT-1M volume, MM- 10M all prices remain
the same. Total values- 1B, 200M, 500M (candidate computes).
Exhibit 2: Development and test costs as a % of revenue. For last year: all three development
costs 50%, Testing- HT 10%, MT 10%, MM 5%. Total values: HT- 450M, MT- 180M, MM- 330m
(candidate computes). For this year: all three development costs 50%, Testing- HT 20%, MT 10%, MM
6%. Total values HT- 700M, MT- 120M, MM- 280M (candidate computes).

Non Financials
Company info- primarily selling in US but has global presence. Strong brand, competitive phones in
marketplace.
Customer Info/Segmentation- Demand shifting to high tier phones.
Competition Structure- No dominant player in market.
Product: Different Product lines

Final Recommendation
Recommendation- Client should not invest in new equipment unless they believe sales volumes
should increase beyond 1.1B for HT phones. They should also consider engaging new test vendors and
selling increased volume to other regions.
Next Steps- Begin looking for new test vendors and engaging customers in other regions.

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Exhibit 1
This Year Last Year
Categories Units (Millions) Price per Phone Categories Units (Millions) Price per Phone
High Tier Smart Phones 2 500 High Tier Smart Phones 1.5 500
Mid Tier Smart Phones 1 200 Mid Tier Smart Phones 1.5 200
Mass Market Phones 10 50 Mass Market Phones 12 50

Exhibit 2
This Year Cost as % of Revenue Last Year Cost as % of Revenue
Categories Development Cost Test Cost Categories Development Cost Test Cost
High Tier Smart Phones 50% 20% High Tier Smart Phones 50% 10%
Mid Tier Smart Phones 50% 10% Mid Tier Smart Phones 50% 10%
Mass Market Phones 50% 6% Mass Market Phones 50% 5%

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Big Box Electronics Retailer
ATK, Mock

Context:
Your client is a big box electronics retailer. The CEO has a hunch they are in trouble and has hired ATK
to figure out what’s going on, are they actually in trouble and how to respond.

Key to case: compare competitor and find that the client’s product mix is putting them at risk.
Information upon request: (Italics represent insights interviewee should arrive to on their own; prompt
them if necessary: “what does that mean”, “what’s the importance of that knowledge”

1. Revenues and Margins have both increased. Client’s annual Revenue: $10B
If asked, give first two columns of data below; candidate should calculate last two columns and total
profit.
% of Profit $
Rev Margin Revenue $ Profit
Computers / TV 70% 20% 7B 1.4B
Media (DVDs
etc) 20% 70% 2B 1.4B
Appliances 0% 30% 0B 0B
Accessories 10% 100% 1B 1B
38% Profit
Totals 10B 3.8B Margin

2. One main competitor. Competitor’s annual Revenue: $10B. If asked, give first two columns of data
below; candidate should calculate last two columns and total profit.

% of Profit $
Rev Margin Revenue $ Profit
Computers / TV 20% 20% 2B .4B
Media (DVDs
etc) 30% 70% 3B 2.1B
Appliances 30% 30% 3B .9B
Accessories 20% 100% 2B 2B
54% Profit
Totals 10B 5.4B Margin

3. Product line:
a. Client: sells less variety; offers 2 brands within each options, both of which are always in stock.
b. Competition: offers 5 options, but sometimes out of stock; because they carry more variety,
distributors like them more: offers them preferential pricing.
c. Takeaway: competition’s COGS are lower.

4. Store location: Fixed costs such as rent and utilities are the same for client and competition, despite
differences in stores.
a. Client: 15,000 sqft and in secondary locations (less desirable)
b. Competition: 10,000 sqft and in primary locations (more desirable)

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c. Takeaway: Competitor attracts more customers leading to higher Revenues, though fixed store costs
are the same: Higher profits

5. Staffing: Client: staff is mainly made up of long term employees who are well educated and very
smart: lots of technology knowledge
b. Competition: staff mainly consists of college students who are big users of the products
c. Takeaway: client salaries will be higher: higher VC. This also ties to what products they are selling:
client is selling much more TVs and computers and high end within those categories, all of which may
require more technical knowledge. Competitor are paying their employees a lot less and their
employees also correspond with what the competitor is selling: more media and accessories

Synthesis of above data: We know that client and competitor have the same Revenue and the same
profit margin by product line but higher overall profits; fixed costs are the same so assume the
difference in salary does not account for the 16% difference in profitability. Infer: Competitor is selling
higher quantities of lower priced items. This ties back to their product mix: selling more media and
accessories.

Recommendation:
Yes, the client is in trouble. They need to revisit product mix, store location and staffing model if they
are to remain competitive.

1. Push higher margin products such as Media and Accessories: perhaps carry more of a selection of
these items.

2. Move stores to more desirable locations to increase customer base, foot traffic, and quantity sold.
Can start by rolling out just a few in more desirable locations.

3. Staffing Model: train salesforce to push higher margin products and make sure that they are up to
date with the latest accessories and media; better align compensation structure: commission based.
Consider restructuring: let go of some of current SF: too expensive and higher cheaper college students.

Risks:
1. Changing store locations: financial risks, can they afford, how to finance. Employee morale.
2. Staffing: employee morale, are they onboard, back-lash from firing. Somehow take advantage of the
technical knowledge of staff.

Other ways to increase Rev:

1. Go online
2. Increase prices
3. Sell warranties, services: ex: ‘geniuses’ in store, taking advantage of technical knowledge of staff
4. Customer loyalty programs
5. Advertise, marketing campaign

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