Case Solving Models

8/13/2019 Case Solving Models

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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 millionNumber 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 uni form distribution of Age and Salary among people

Upper Class

Upper Middle Class

Lower Middle Class

Lower Class


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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 profi t?What price are consumers wil ling to pay?

What price are your competitors charging?

3) Place

Where is there a demand for your product?

Where are your suppliers located?

What dist ribut ion 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?


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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?

3) Distribution How can my product reach the consumer?

How much do the players in each distribution channel profit?

Who holds the power in each dist ribution channel available?

4) Marketing Mix

How does my product fit with my other products? (For ex doessales 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 li fe 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 muchmarket I need to penetrate? Is it possible?

TIPS

Whenever problem is of declining profitability it means it is either revenueproblem or cost problem or both. Analyze business and revenue structure.Do industry analysis (market growth and future potential decline insales 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 acompetitive advantage. Think What!!! Even if high cost majors surviveimplies that they had Competitive Advantage in terms of their services andproper segmentation of their markets.


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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 thatdistribution 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 increasedproduction. Expansion is by new plants or by acquisition? If by acquisition.

Are there enough funds and targets? See ifjo int ventureor government

involvementwill 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 ofnew service. To see viability... do cost/benefit analysis The number ofnew customers times the expected revenue from them plus the additionalrevenue generated by potential new services plus the cost savings mustoutweigh the forgone revenue generated by the customers you end updriving away. (Example: New bank calling centers case; Airlinererouting 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. Alsoconsider cost of various materials likely to be in near future.

2. To assess future look into past. Is there any competition? How has itaffected you over the years? What competitive advantage yourcompetitor 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 ucan provide better services in that segment. Estimate how muchyour services would be valued by customers against an establishedbrand.


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4. Look for market segments neglected by the leader. Determinewhat are the needs of any neglected market, and understand if yourclient could profitably serve this market.

5. See cost st ructure of leaderand compare it with yours. See salesforce, distribution channel of leader. Do you have advantage inany of these areas? DO u have any edge in any of the relatedfactors (say installation, after-sales service.. etc)

6. See which products are most profitablein the industry. You muststart up with those and then slowly expand the business.

7. What would be the possible competitive barriers to your entry likelyto 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 generalhave a slow growth and unattractive industry (Ex: pipelines). Such

industries have very high exit barriers. Do extensive marketing. Havebetter segmentation of your market. Search out for neglected segments.

Exit Barriers:Plant fully depreciated then low exit costs

If a firm plans to diversifyit should consider following options: (remembermarket entryis a separate thing, expansion or diversificationis anotherthing. This is done by joint venture or acquisition.)

1. What are the diversifying firms distinct competitive advantages?

2. What is its capacity for funding an acquisition?

3. What is the competitive environment like in the proposed region?

4. How does this environment differ from the current markets of thediversifying firm? Is the firm likely to enjoy same levels of salesforce and distribution channel, supplies as in original market?

5. The firm should have a distinct competitive advantage.

6. Is there any other way in which company can better use the moneyused for diversification.

If a company is trying to acquire a target firm it should consider followingoptions: (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 marketand 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 aretaking this from bank what is rate of interest annually? Does thetarget firm has potential of returning that much interest in terms ofits own profit?


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If question is simply assess the strategy of a firm consider:

1. Cost/Sales issue

2. Market issues (growth, competition, new technologies whetheryour 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 betterplayer in the industry who manufactures what industry wants. Yourproducts might now be obsolete for the industry. Ask for market sharetrends. It might reveal that over the years your clients market share isbeing 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 lowerpromotion due to which product might loose shelf space also to have asustained advantage the industry must produce competitive products andnew technologies) (Ex. Snack Food Industry.)

Specific Industry: Insurance Industry: Sales personnel should be paidbased 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 hasloyal customers and has already established its brand name.

If a company finds ways to reduce its cost. It can either lower price orcontinue to make profit due to increased margin. See substitutes andcompetitors reaction to this. (Ex Aluminum can case)

Specific Industry: Airl ines: Cost involves fuel cost, planes cost andlanding rights cost, air route cost. If it closes one route, then cost also ofcannibalization of that routes customers. It is better to leave customers tocannibalization 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, retailersdemanding large introductory discounts for new products and high failurerate of new products. (E.g. Candy Case). Reduce production of lowmargin products.


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To estimate the prices of a commodity follow Porters five forces. IndustryRivals, Supplier/Buyer Power (Supply/Demand Level), Threat ofSubstitutes need to be assessed to determine the market price of thecommodity. See what closest substitute is present and what cost it incurson users. What cost if you quote would motivate buyers to buy yourproduct. 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 tocurrent customers selling new products to current customers sellingcurrent products to new customers selling new products to newcustomers. (Key is diversification). The suitability of these options willagain depend on the particular environment.

Suppose to decrease your cost you cannot help with one aspect, think andhit upon another

Profit per unit = Price Variable costs. To maximize profit maximize this.

A new product or a recently launched products expansion: Seefollowing conditions:

o Market Growth

o Market share

o Competition

o Any barr iers to entry?

o Customer buying habits (all products from same dealer or different)

Credit Cards Cost Revenue Structure

Costs Revenue

Marketing, SG&A, Personnel Annual fee - currently $50

(Cannot change) (Could change)

Bad credit, theft, etc. Annual % rate = 14%

(Cannot change) (Could change)

Other costs Merchant fee = 1.5%

(Cannot change) (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


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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 thequantity of the item that will be produced, all other things being equal. Supplierwill 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 tomake available. Please remember that as the supply of one product increases,the supply of another product will decrease. (We live in a world with finiteresources but infinite demand.).

The Demand Curve - The lower the price of a product or service, the greater thatdemand for the quantity consumers will be willing to purchase (i.e., demand), allother 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

Quantity

Demand

Supply

1.7 Porters Five Forces

Michael Porter's Five Forces model analyzes the various competitive pressuresat 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 ofthe competitive pressures have on the firms participating in the industry. Thefollowing is a brief discussion of the five components.


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Industry Competitors (Internal Rivalry) - Often, the most powerful of the fiveforces is the competitive battle among rival firms which are already present in theindustry. The intensity with which the competitors are jockeying for position andcompetitive advantages indicates the strength of the influence of this force.

Potential Entrants This force measures the ease with which new competitorsmay enter the market and disrupt the position of the other firms. The threat thatoutsiders will enter a market is stronger when the barriers to entry are low orwhen incumbents will not fight to prevent a newcomer from gaining a marketfoothold. 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 isstrong 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 wheneverthey have sufficient bargaining power to command a price premium for theirmaterials or components. Suppliers also have more power whenever they can

affect the competitive well being of industry rivals by the reliability of theirdeliveries or by the quality and performance of the items they supply.

Buyer Power - Buyers become a stronger competitive force the more they areable to exercise bargaining leverage over price, quality, service, or other terms orconditions of sale. Buyers gain strength through their sheer size and when thepurchase 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 directlycaptured in Porters model. This force is the opposite of the Threat of Substitutes.When the economics are promising for a complementary product, there is aspillover effect on the primary product.

Industry

CompetitorsRivalry among

existing firms

Suppliers

Substitutes

Potential

Entrants

Buyers

Five ForcesComplement


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1.8 "Star" Diagram/Organizational Analysis

In doing an organizational analysis, one should consider all seven components ofthe organizational unit. Vision should define Strategy. Strategy determinesStructure and Decision Support Systems that are required to make theorganization function. The Reward Systems must reinforce what you are trying to

accomplish strategically and the Human Resource Systems must select, recruitand develop the personnel the organization needs to accomplish its objectives.Corporate Culture must reinforce all seven components.

Strategy

Reward

Systems

Human

Resource

Systems

StructureDecisionSupport

Systems

Vision

Organization

Culture

Performance

Problems arise when these seven components do not reinforce one another. Forexample, managers will have trouble if they are in a decentralized structure whileinformation and planning systems are centralized. When considering change, allseven components must be considered. If one component is changed, it is mostlikely that the other components will have to be changed to be consistent witheach other.

1.9 The BCG Growth-Share Matrix

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


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Products or categories businesses are as follows:

Star A product with high market share in a high-growth market; every mother'sprayer.

Problem Child (also called "Question Marks") A product with low market sharein 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 soconcerned if the product has carved out a little niche that is impervious to thecompetition; maybe slow yet consistent growth isn't so bad.

Cash Cow A product with high market share in a low-growth market. Since thecow 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 orundesirable). Therefore an astute business manager would want to drop a dog

from the product line, unless there are some extremely important overridingissues that outweigh the products market performance.

Cash Cow

StarProblem

Child

Dog

Market

Share

Profitability

Hi

Low

LowHi

1.10 Value Chain

A business manager must understand the internal relatedness of the manyactivities involved in the production of a product or service. Every business unit isa collection of discrete activities ranging from sales to accounting that allow it tocompete. 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 exhibitbelow.

Primary activities create the product or service, deliver it to the market, create ademand for the product, and provide after-sale support. The categories of


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primary activities are inbound logistics, operations, outbound logistics, marketingand sales, and service.

Support activities provide the input and infrastructure that allow the primaryactivities to take place. The categories are company infrastructure, humanresource management, information systems, and procurement.

Value chain analysis is useful in discerning possible synergies among variousunits of an organization (e.g., shared procurement). Value chain analysis is alsohelpful in determining which value activities are best outsourced and which arebest developed internally. Finally, value chain analysis provides a structure thatprovides great insight into the flow of activities that lead to the creation anddistribution of a particular product or service. (e.g., What value is added to themanufacture and sale of gasoline at each point in the value chain, and bywhom?).

Company Infrasructure

Procurement

Information SystemsHuman Resource Management

Inbound

Logistics Operations

Outbound

Logistics

Marketing

&

Sales

Services

Support

Activities

Primary

Activities

Value Chain

1.11 Generic Strategies (Porter)

Michael Porter suggests that business strategies can be classified as pursuingcost leadership, differentiation, or focus. Each of these strategies is described asfollows:

Overall Cost Leadership: Here the business works hard to achieve the lowestproduction and distribution costs, so that it can price its products lower than itscompetitors and win a large market share. Firms pursuing this strategy must begood at engineering, purchasing, manufacturing, and physical distribution of theproducts. Texas Instruments is an excellent implementer of this strategy. The

problem with this strategy is that other firms will usually emerge with still lowercosts (from the Far East, for example) and hurt the film that rested its wholefuture on being the lowest cost producer. The real key in this strategy is forthe firm to achieve the lowest costs among those competitors adopting asimi lar differentiation or focus strategy, and remaining so in the long run.

Differentiation: Here the business concentrates on achieving superiorperformance in an important customer benefit area valued by a large part of themarket. One example is if the company strives to be the service leader in its


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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 cultivatesthose 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'sstrategy in the copy-machine field.

Focus: Here the business focuses on one or more narrow market segmentsrather than going after a large market. The firm gets to know the needs of thesesegments and pursues either cost leadership or a form of differentiation withinthe target segment. Thus, Annstrollv Rubber has specialized in making superiortires for farm-equipment vehicles and recreational vehicles and keeps looking fornew niches to serve.

According to Porter, those firms pursuing the same strategy directed to the samemarket or market segment constitute a strategic group. The firm that carries offthat strategy best will make the most profits. Thus, the lowest-cost firm amongthose 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 toPorter's three Generic Strategies). A firm can only pursue one of these strategiesat a time, but it is common for a company to shift from one strategy to another asits situation, and the industry, changes.

Defenderthose firms that have a leadership share of the market will oftenconcentrate on staving off the competition, moving to erect as many barriers toentry as possible. They are closely related to Porter's Low Cost Producers,

leveraging their advanced position along the learning curve and their namerecognition to maintain a superior market position.

Reactor Such companies are second-movers, letting others show them theway to success. They react to changes in the market and moves of theircompetitors and so must maintain flexibility. While this strategy may be profitablein the short run, its long-term value is questionable.

AnalyzerAnalyzers pick apart the market very carefully looking for niches anddemand/supply gaps. This strategy is akin to Porter's focused companies. Thesefirms are not necessarily innovators, but instead concentrate their efforts in verycarefully and narrowly defined efforts.

ProspectorThese firms are the first-movers and the innovators. This is a high-risk strategic avenue to follow, but those who are successful can change the waythe game is played and create very strong competitive advantages.


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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 otherwords, the materials arrive at the customer's factory exactly when needed. JIT

calls for synchronization between suppliers and customer production schedulesso that inventory buffers become unnecessary. Effective implementation of JITshould result in reduced inventory and increased quality, productivity, andadaptability 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 costof adding new production capacity when Q reaches certain levels.)

Break-even Point: Break-even analysis is a managerial planning technique usingfixed costs, variable costs, and the price of a product to determine the minimumunits of sales necessary to break even or to pay the total costs involved . Thenecessary sales are called the BEQ, or break-even quantity. This technique isalso useful to make go/no-go decisions regarding the purchase of newequipment. The BEQ is calculated by dividing the fixed costs (FC) by the priceminus the variable cost per unit (P-VC):

BEQ = FC/(P-VC)The price minus the variable cost per unit is called the contribution margin. Thecontribution margin represents the revenue left after the sale of each unit afterpaying the variable costs in that unit. In other words, the amount that"contributes" to paying the fixed cost of production. To determine profits, multiplythe quantity sold times the contribution margin and subtract the total fixed cost.

Prof it = 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


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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

- Common Stock

- Retained Earnings

2. Porters Five Forces

- Suppliers- Potential Entrants

- Buyers

- Substitutes

- Industry Competition

- Complements the forgotten force


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3. Business System

3.1 R&D

- Product Development

- Innovation

- Responsiveness3.2 Manufacturing

- Cost

- Quality

- Speed

- Supply

3.3 Marketing

- Pricing

- Product

- Place

- Promotion

3.4 Distribution

- Cost

- Channel

4. Issue Tree

4.1 Do not use this framework in an interview without practicing it a few

times before hand.

4.2 Top-level identifies the highest level issues that need to beanswered to solve the problem. Use MECE (Mutually Exclusiveand Collectively Exhaustive) to ensure that all issues are covered.

4.3 Break each level down into parts that are more manageable.

4.4 Focus on most important branches or components first.

4.5 An example of an issue tree is provided with China Factory case.

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

5.1 Supply chain5.1.1 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?

Case Solving Models

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