Cracking the case interview_25_03_2011

25° March 2011

Tommaso De Benedetti, Pietro Luigi Ghigo

Cracking the case interview

Logo cliente o ESCP-EAP

Questo documento è stato prodotto ad uso interno dell’ESCP Europe. Ne è pertanto vietata la circolazione, la citazione o la riproduzione con l’obiettivo di diffonderlo all’esterno della scuola, senza approvazione scritta dell’ESCP Europe. Copyright © ESCP- Europe Italia 2009

1

Workshop Target

• Give an overview of the possible types of interview, with typical questions and common pitfalls

• Have a first mock case interview experience

• Train for the interviews

Consultancy

Investment Banking

Corporate

Auditing

Before we start... The business world “in a nutshell”

• Companies specialized in strategic and implementative consultancy (as well as legal and fiscal consultancy)

• Companies specialized in verification and certification audits

• Companies specialized in financial services of various kinds (M&A, Asset Management, Capital Market, Private Equity, Venture Capital, etc.)

Major areas of activity

• Industrial, commercial, service companies and “classic” banks

Examples of main players

NON EXHAUSTIVE

http://www2.goldmansachs.com/

http://www.ebay.com/

3

• Typical selection process and interview overview

• Introduction to the Business Case

• Interactive mock interview

Agenda

4

Focus of today’s meeting Typical selection process

CV/Cover Letter Screening

Numeric/Verbal test

Interviews Application

• CV screening based on:

- Academic career

- University/Business

School

- Professional

experiences

- Experiences abroad

- Foreign languages

- Extra curricular

/professional interests

• Test measuring basic knowledge of maths, logic, grammar

• Problem solving abilities

• Usually a multiple choice test in one or more parts:

- verbal

- analytical

- problem solving (business case)

• Types of interview:

A. Introductory/ motivational interview

B. Technical interview

C. Case interview

D. Group Interview

NON EXHAUSTIVE

5

The introductory/motivational interview : overview

• 30-45 minutes

• Analyse the candidate’s CV

• Verify the candidate’s fit to the required profile

• Test the candidate’s motivation

• Human Resources

• Top management

• CV: academic background/work experiences

• Self knowledge and motivation

• Goals and expectations

• Knowledge of the company you are applying to

A

Examples of Questions

• Why would you like to work in investment banking? Why here in Goldman SA?

• Tell me 3 of your strong points and 3 of your weak points

• Tell me about a situation in which you failed

• Tell me about a professional/ academic situation in which you were a leader

• What are your professional goals?

• ... Often the questions are similar: train hard, race easy

Duration

Who does it?

Questions / topics

Goal of the interview

NON EXHAUSTIVE

6

Good and bad answers

Questions Wrong answers examples

•Why would you like to work in consultancy?

• ... Um ... • ... Well, it’s a well paid job

•The most important managers worked in consultancy

Comment and possible approach

•Why would you like to work in Bain?

• ... Um ... •Because you are one of the most important consultancy companies

•Tell me 3 of your weak points

• I’m punctual, attentive and I work a lot

• I’m very lazy, as soon as I have a long term contract I stop working hard

•Difficult question, try not to: - avoid the question and not answer - answer in a way that would put being hired at risk

•The message to convey is: - I’m aware of the problem - I already have a plan to deal with it

•There are no ready made answers that are sure to be correct

•The messages to pass on are:

- strong motivation - energy and drive - self knowledge - you did your homework

•There are however answers which are definitely wrong

•100% guarantee that you will be asked this question

•Avoid abstract and emotional answers (e.g. I’ve always wanted to work in consultancy)

•A possible approach is to convey that: - you know the job you are applying for - you have the required core skills for top performance

- you are highly motivated •Avoid vague answers •Do your homework and study the main features of the company(e.g. International visibility, team orientation, recent operations, type of clients…)

A

7

How to prepare yourself

Get to know the company

Prepare answers to probable questions

Practice

• Research the company on the website:

- company activities

- company philosophy

- differences from other companies in the same field

• Interview workers or people who know the company well

• Preparare answers to a list of probable questions (e.g. CV presentation, strengths & weaknesses, reasons for the application...)

• Practice mock interviews or in front of the mirror

Decision to join a specific company

A

8

Technical interview: overview

• 30-60 minutes

• Evaluate the candidate’s level of knowledge and understanding of specific topics (e.g. Corporate finance, management control, accounting, marketing)

• Medium seniority roles with specific skills in particular fields

• CV: academic/professional background

• Technical questions that don’t just test the general knowledge of a topic but tests the real understanding of it


• How do you evaluate an asset?

• How do you interpret P/E=40?

• If the stock is higher at the end of the year than at the beginning of the year, is it a loss or a profit?

• What are the 4Ps in the marketing of services?

• ...

B

Duration

Who does it?

Questions / topics


NON EXHAUSTIVE

9

How to prepare yourself

Know your enemy Prepare Challenge

• Research the job you applied for. E.g.: if you apply for management control, no one is likely to ask you the option pricing model, but you should, for example, know the balance sheet

• Study the identified topics

• Are you sure you have really understood what you have studied? Did you study superficially?

• The point is not to memorise the formula, but to reach a deep understanding of the topics : the question will always be asked from different points of view

B

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The case interview

• 30-45 minutes

• Evaluate the candidate’s ability to face new problems

• Business case

• Guestimate

• Brainteaser


• How many ping pong balls can a 747 Boeing contain?

• My company produces coffee pots, is it worth it to enter the Spanish market?

• How much is my service station worth?

• …

More in depth considerations further

on...

C

Duration

Who does it?

Questions / topics


• Managers, medium seniority roles

NON EXHAUSTIVE

11

• Typical selection process and interview overview

• Introduction to the Business Case

• Interactive mock interview

Agenda

12

Introduction to the case interview

Why a case interview

• It’s the analysis of a problem, of a business question, of a brain teaser

• It’s an interactive process

• It normally lasts 30-45 minutes

• The working world today requires effective solutions that transform a problem into a goal. The cases are studied to evaluate the candidate’s ability in this area.

What is a case?

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What is being looked for in the solution given by the candidate?

• An eager and thorough mind

• Ability to formulate hypotheses, to structure a problem by dividing it into smaller parts

• Clarity and logical reasoning

• There is no “correct” answer

• Common sense

• Basic macro-economic/financial knowledge

• Achievable solutions

• Ability to summarise and communication skills

• Familiarity with quantitative problems and with calculation (oral and written)

Ability to structure problems

Familiarity with numbers

Pragmatism and “business acumen”

14

3 kinds of case interview

Description Variants

•The candidate is confronted with a business scenario to analyse and he/she is required to make recommendations

Example

•Oral vs written •Group case interview •Loads of data vs hypothesis driven

•The Panoramix company sells newspapers and is considering reducing the price from 1€ to 0.8€ per newspaper, what do you suggest?

• “Back-of-the-envelope” calculation

•Requires making hypotheses

• It’s often part of a business case

• - •How much does the Colosseum weigh?

•How much is the ski market worth in Italy?

•Riddles / brainteasers •Time limit •Under pressure vs friendly environment

•What’s the distance between the minute hand and the hour hand when it’s 3.15?

in depth later on

Business case

Brainteaser

Guestimate

There are different kinds of business case NON EXHAUSTIVE

New Product launch/ new market entry

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Description

• The case requires: - considering the possible causes of profit loss - giving a recommendation for a possible

solution

Example

• We are an Italian bank ... We recently doubled our branches but our profits have had a 5% decrease, why? What can we do about it?

• The case requires estimating the value of something

• How much is a cow worth?

Profit drop

Evaluation

• The case requires designing the introductory strategy for a new product or entry onto a new market

• I would like to sell coffee pots in Spain. Is it worth it? What should I do?

Binomial case

M & A Case

• Case with a choice between two possible solutions (e.g. Go vs Not go, Get a loan vs Pay rent...)

• I own 300K € and I’ll be living in Milan for the next 10 years. Should I rent or buy a house?

• The case requires evaluating the synergies of a deal

• We are an Italian company that produces tennis rackets. The XY bank recommends buying the ROCA company which produces skis. Do you think it’s worth it?

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The case interview: how to manage it (1/2)

Take notes •Listen to the interviewer and write down the main aspects of the problem

•Rephrase the question before you begin • If there’s anything you don’t understand, say so

Take your time

• It’s ok to have 30 seconds of silence in order to think out and structure the problem, if you ask the interviewer first. 1 minute of complete silence is too much

Present your agenda and your strategy

•Explain your strategy for solving the case •Try to refer to a concept pattern (e.g. Gains and losses tree, Porter’s five forces,...) without referring to it explicity

Analyse the problem •Divide the problem into its main features and analyse them one by one

Make sure you have fully understood the question

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The case interview: how to manage it (2/2)

•The case is an interactive process: you need to ask the correct questions in order to put together an accurate picture of the case

•Listen carefully to the answers •Don’t ask questions if you don’t know exactly what you’re getting at

Think aloud

•Practise taking the logical steps without jumping to conclusions: the target is to show the interviewer how you think

• It requires practice!

•Frameworks help structure the problem •Don’t abuse them

•Before getting to your final recommendation, look critically at the final result (e.g. If the weight of the Colosseum works out to 1000 Kg, there are some mistakes in your hypothesis)

•Summarise your analyses and recommendation •Remember you have to answer the original question

Ask questions (and listen to the answers)

Use simple frameworks

Look critically at the solutions you come up with, summarise and recommend

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Corollary to the interview

Before the interview During the interview

After the interview

•Arrive on time •Dress properly •Bring with you:

- Copies of your cv

- 1 pen/pencil - 1 writing pad

•Make a good connection with the interviewer

•Ask questions about his/her job at the end

•Send a thank you note •Don’t try to speed up the process

•Capitalise on what you learnt!

- Solve the case again on your own time (the same cases are often used by different interviewers)

- Try to understand what you did well and what could be improved

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Interactive business case: the taxi licence

Question: how much is a taxi licence worth?

Answer: it’s worth 1 Million Euro

•Avoid an impulsive answer, even if you already know the answer •You have to prove you can:

- Structure the problem - Logically organise hypotheses, arguments, deductions

This is a RAC!!

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Interactive business case: the taxi licence

Take notes

Make sure you have fully understood the question

Take your time

Present your agenda and your strategy

“ So you are asking me to estimate the price of a taxi licence in Torino”

“ Do you mind if I take 30 seconds to think about it?”

“ The value of an asset is proportional to the future cash flow it can generate, so if you agree, I’ll try to figure out:

- “standard” profits - “standard” costs

Of a taxi in Torino. The difference between these two numbers will give me the average annual cash flow. By subtracting them I can evaluate the licence

Taxi licence in Torino

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Taxi licence

Analyse the problem

“ First let’s talk about profits” A taxi driver works 8 hours a day 8. Let’s suppose the taxi runs 60% of the time, so for about 5 hours a day. An average 15 minute journey costs 15 €. So, a taxi driver earns 300 € a day, that is 46.000 € a year (220

working days). “Let’s talk about costs” A taxi driver has the following costs:

- Car amortization, a 20K € car produces 4K € annual costs for 5 years - Petrol; assuming that in an average 15 minute journey you cover about 10 Km, you cover 200 Km per

day, that is about 44.000 km per year. - With a kilometer cost (that includes maintenance, insurance, petrol, etc.) of 0,5 €/km, the taxi driver

spend 22.000 € per year - Let’s suppose the car was paid with your own money without making debts - Let’s suppose we add 2.000 € per year for hazards (e.g. fines) - So, the total cost is about 24.000 €

Ask questions

• “ Which tasso di attualizzazione should be used for a taxi? Is 10% ok?” • “Does a taxi license expire?”

Look critically at the solutions and summarise the question

“Tha annual cash flow is about 22.000 €, che attualizzato al 10% come una rendita costante dà circa 220.000€”

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Some useful frames of reference

Reference

• Cost and revenue tree • Analyse the 5 forces • The 4 Ps • The 3 Cs • Supply and demand

Application

• Profitability/general • Analysis/appeal of the sector • Marketing • Company position • Economics

These frames of reference are to help you structure your reasoning and isolate the crucial aspects of the examined cases. Never force a problem into a particular framework. On the other hand, referring perfunctorily to the frames is a losing strategy. Use the framework to encourage your creativity.

Source: McKinsey&Company, interviews in consultancy, students material

Cost and revenue tree

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Profit

Revenue

Cost

Price

Quantity

To external clients

To new clients

Fixed cost

Variable cost

Example of fixed costs • Real estate • Prodution plants • Large machinery

Example of variable costs • Workforce • Raw material • Advertising


5 forces analysis

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Threat of alternative products and services

• Other products meeting functional needs • Brand vs. generic

Level of competition in the sector

• Concentration in the sector • Price competition • Exit barriers • Growth rate of sector

Sector appeal

Threat of potential competition

• Fixed/high capital costs • Scale economies • Adjustment costs • Access to the distribution channel • Product differentiation

Bargaining power of purchasers

• Concentration of purchases • Over or under capacity of the sector

Bargaining power of suppliers • Excluding suppliers • Number of potential suppliers • Lack or excess of supply


The 4 Ps of marketing

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Product • In which way is the product different form that of the competition? • What’s the value proposition of the product/service?

Price • What’s the product’s price range (compared to the competition and to alternative products)?

Distribution (Path) • How the product gets to the market (direct sale, distributor, retail etc.)

Develop/ understand a marketing strategy Promotion

• Where is the product advertised (newspapers, radio, TV, trade)? • Does the product require a marketing push or pull approach?


The 3 Cs

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Clients • Who are they? • Why do they buy? • Which are the client segments? • Other

Competitors • Who are they? • What are their similarities and differences? • What are their strengths and weaknesses? • Other

Costs • What are the key components of Company X’s costs? • And the competition’s ? • What trends can be detected? • Other

What is the position of company X?


Different kinds of interview

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From one extreme... • Detailed introduction • Specific problems to solve • A little information to start off with • A lot more available, just ask • Chatty and relaxed tone during the interview

Why? • Make the candidate feel at ease • Test analytical skills, ability to detect key elements and keep focused

...to the other • Brief introduction • Broad description of the problem (e.g. Inadequate performance) • Little or no information • “What do you think?” is the answer to almost every question

Why? • Test problem structuring and hypothesising skills, creativity, business intuition and ability to feel at ease in ambiguous situations

What should I expect?


Common Pitfalls

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• Misunderstanding the question or answering the wrong question • Proceed randomly, instead of identifying the main issues that need to be examined, or skipping from one question to the other • Ask a lot of questions without explaining why • Unnecessarily apply some familiar frame of reference to every answer whether it’s applicable or not just because it’s familiar (or use the correct frame in the wrong way because it’s not too clear), instead of using common sense • Being unable to sum up a point of view on the basis of information provided by the interviewer


Reference material

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www.wetfeet.com

• The Wharton MBA Case Interview Study Guide • Mckinsey & Company: The WetFeet.com Insider Guide • Ace your Case TM The Essential Management Consulting Case Workbook • 15 Questions: More Practice to Help You Ace Your Consulting Industry • Killer Consulting Resumés • The WhartonMBA Case Interview Study Guide: Volume I •The WhartonMBA Case Interview Study Guide: Volume II • Harvard Business School Management Consulting Career Guide 2000 • Student Recruitment Report 1999: Understanding the Student Perspective

www.vault.com

• Vault.com Guide to the Case Interview • The Vault.com Career Guide to Consulting

Other websites

• consultingcentral.com

Other publications • Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter • True Professionalism, David H. Maister • The Mckinsey Way, Ethan M. Rasiel


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•Typical selection process and interview overview

•Introduction to the Business Case

•Interactive mock interview

Agenda

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2 activities

• A volunteer is interviewed by a teacher • The other students observe but can be called to participate • A feedback session follows

• Student vs student interview, in pairs • Students divided into 2 groups prepare 2 different cases • A feedback session follows

Mock interview aquarium

Mock interview in pairs

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Appendix – Other examples of business cases

The barrel producer (1/4)

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Our client is a company that produces a very simple product: metal containers for chemicals, barrels. The production process is: • purchase steel coils • cut • roll the steel into a cylinder • weld the bottom • weld the top, different from the bottom because it has a hole • put in the cap, bought externally • paint • oven dry • store This company is the Italian branch of a multinational company; the parent company noticed an unsatisfactory profitability: what do we do about it?

What’s the market like in terms of maturity, trend and competition? The market is mature and stable, there are 6-7 companies, including us, with comparable market shares.



34

Who are our clients? Chemical companies and big industrial companies; there are about 50 of them. When you mentioned unsatisfactory profitability, what did you mean exaclty? Profitability needs to be improved in the sense that the RO level is lower than in the other European branches.

Let’s analyse the various elements of RO , that is: RO = (Pu – CVu) x Q – CF The Q quantity depends on the market, on market share, on the productivon capability and on its saturation. We know that the market is stable and that our market share can be compared to the competitors’ ; what information do we have regarding the production capability? We are at full productive capability and we can’t expand it. Therefore Q is not a problem; let’s look at the price: in a relatively concentrated sector for an undifferentiated product, we can say that the price is basically a market price.



35

Let’s look at the costs: purchase of raw materials, workforce, consumption, transportation costs, amortization, general and administration costs. It would be interesting to know in what proportion they each weigh upon the company. This is the cost distribution: Raw materials 50% Painting 20% Transportation 10% Workforce10% Amortization 5% General/Administration. 5% The revenue is 62 mln € and the costs are 52 mln € In order to improve profitability let’s start from the greatest cost: raw materials. Steel has a price fixed by the market, I can have a discount for large orders, therefore I can only work on quality. Let’s suppose that by choosing a lower quality the price decreases by 5%. What do we do then? We need to verify if a lower quality raw material will have a negative effect on the production costs in terms of waste and machinery stops/breakdowns.



36

Let’s assume that waste goes from 1% to 2% and that machinery stops /breakdowns, as well as flawed coils, go from 2% to 3%. We know that we use 10.000 coils per year and that a machinery stop/ breakdown costs 26.000 € Therefore: Raw material: +5% x 26 mln € = +1,3 mln € Waste: -1% x 26 mln € = -0,26 mln € Machinery stops /breakdowns : -1% x 10.000 x 26.000 € = -2,6 mln € We would lose 1,56 mln € : it’s not therefore worth it to buy lower quality steel. Let’s talk about transportation costs, what would you take into consideration? I would consider where we are compared to our clients and the efficiency of the distribution network. Our company is in Northern Italy where our clients are. We don’t have midway warehouses. We deliver using our own means of transportation. How can I improve efficency? Transport can be optimised by loading trucks to their maximum capacity. By taking into consideration the client’s turnover, if few clients generated the greater part of my income I could take into consideration assembling the barrel directly on the client’s premises.


The petrol station (1/2)

37

We are in Milan, the petrol market is 10 million litres/year, there are 20 petrol stations that all apply the same price and have an equal share of the market . 3 new petrol stations have opened out of town; they apply a 10% lower price; the market in town decreases by 9 million litres/year. If you had a petrol station in Milan, what would you do? In order to make a decision, I first need to know the elasticity of the petrol demand in Milan: what would happen if prices decreased by 10%? If prices decreased by 10%, you would sell the same amount of petrol you sold before the opening of the 3 petrol stations out of town. Now I have to think consider the first gross margin. In the 2 following cases: • I make a 10% price reduction and bring the quantities back to the orignal level • I don’t change the price and I accept the quantity reduction What does my cost structure look like?


The petrol station (2/2)

38

Let’s assume that the price of petrol is 1,20/litre and that it costs 0,90/litre. If I make a 10% price reduction, and bring the quantities to their orginal level, we have: Invoice: -500.000 litre x 1,20 €/litre x 10% = -60.000 € Variable costs: unchanged = 0 First gross margin: = -60.000 € If I don’t change the price and I accept the quantity reduction we have: Invoice: -500.000 litre x 1,20 € /litre x 10% = -60.000 € Variable costs: +500.000 litre x 0,90 € /litre x 10% = +45.000 € First gross margin : = -15.000 € I will therefore choose the second option which gives me a lower loss.


The risky loan (1/2)

39

You are the manager of the loan department of an Italian bank. One day an entrepreneur asks you for a 5.200.000 € loan in order to open a business in the travel sector. The entrepreneur says that if the business is successful he will be able to return the loan and the interest within a year; if the business should prove to be unsuccessful he won’t be able to return the loan. You have to decide the interest rate to apply considering that a risk-free investment yields 8% and that in 20% of cases that type of business goes bankrupt within a year. In order to decide the interest rate first I have to consider what rate will make the risk-free investment and the travel business investment which has a 20% bankrupcy probability indifferent.


The risky loan (2/2)

40

I take into consideration the following decision tree:

5.200.000 €

Event 5.616.000 €

5.200.000 € x (1+t) 0 €

Risk-free investment Travel business investment

80% success

20% bankruptcy

Development: 5.616.000 = 5.200.000 x ( 1+t) x 80% The choice is the same when t = 35%

The pay-off of the event is: 0 x 20% + 5.200.000 x (1 + t) x 80%


Rana tortellini

41

Giovanni Rana calls you and asks you to invest 0,05 € in promotion or advertising. What do you say (considering that Rana is the leading fresh pasta brand in Italy with over 50% of the market share and that its major competitor is Buitoni with 5%) ? Advertising is a fixed cost while promotion is a variable cost. A fixed cost is both an entrance barrier and a way to weaken competitors. If Rana invested 0,05 € in advertising Buitoni should do the same and this would have a relevant effect on the RO since Buitoni’s sales correspond to one tenth of Rana’s sales. On the other hand, if Rana invested 0,05 € in promotion, Buitoni should invest only 0,005 €, since promotion costs are a variable cost which is proportional to sales.

In order to weaken the competitor Rana should, therefore, invest in advertising


M&A in the food sector (1/2)

42

Company A is a leader in 3 food categories: spirits, spices and infusions (teas and camomile teas). Company A is considering whether or not to buy Company B. Company B is a leader in sweeteners and in sugar free sweets. Does this acquisition make sense? Can we assume that the 3 sectors that Company A is working in are mature and that Company B’s sectors are expanding? Yes, we can. We can therefore assume that Company A needs to expand by using its income in the most profitable way. From this point of view Company B seems interesting. What would you take into consideration in evaluating the acquisition of a company? We have to consider the value that is created , that is: > + and therefore the possible synergies.


M&A in the food sector (2/2)

43

Synergies can be, for example, supply, production and distribution. Considering the categories involved it seems difficult to obtain supply and production synergies so I will concentrate on distribution. How is distribution structured in terms of channels and location? Company A is operative on a national level in the supermarket channel (spirits and spices) and in the centre-north of the country in the café channel (infusions). Company B is operative on a national level in supermarkets with sweets and and in the centre-south of the country in cafés with sweeteners. We can hypothesise the following procedure: • rationalise the distribution in supermarkets, both in terms of agent networks and logistics; • expand the geographic coverage in cafés in the south with infusions and in the north with sweeteners; • rationalise the sales network and logistics for cafés in central Italy


44

The Newspaper

The management of a renowned national newspaper is considering reducing the cover price from 0,80 € to 0,60€. What do you suggest? In order to decide what to do, whether or not to reduce the cover price, I need to know: • current circulation • elasticity of demand • the product profit and loss up to the first gross margin Currently the circulation is 700.000 issues per day and we can assume that these are all sold. From market research we find out that the probable volume of sales corresponding to 0,60 € is equal to 800.000 issues per day. The variable unit cost of the newspaper is 0,40€. At this point I need to consider the first gross margin and take note of the fact that the turnover doesn’t only depend on the cover price but also on the income from the sale of advertising space.


45

The Newspaper (Cont.)

Moreover, the price of those spaces should increase in the event of a higher circulation because the value of advertising is usually proportional to the number of contacts. More precisely, let’s conservatively assume that the price of advertising space doesn’t vary after a circulation increase and that it’s 0,05 € per page, for a total of 10 pages per day. Reasoning differentially we therefore have : • Revenue from newspaper sales -0,20€ x 700.000 issues= -140.000€ +0,60€ x 100.000 issues= +60.000€ • Revenue from advertisement sales +0,50€ x 100.000 issues = +50.000€ • Variable costs -0,40€ x 100.000 issues = -40.000€ • First gross margin -70.000€

It’s not worth it, I would lose 70.000 a day (calculated on the first gross margin)


46

On-line trading (1/4)

A bank is interested in selling an on-line trading service. Let’s evaluate this opportunity considering only the revenue. It is important to understand what kind of bank we are talking about, both in terms of the type of customer and of services offered. The bank currently serves “retail” customers to whom it mainly offers current accounts and mediation of securities. At this point it is important to understand the size of the bank in its various areas of business, comparing them to the competition. How many clients does the bank have and how are they distributed among types of products? The bank has 2.000.000 customers spread out as follows: all of them have a current account, 10% make use of the securities mediation service. What is the market share of the bank and of its competitors for the two products sold? The bank holds in both segments (current accounts and mediation of securities) 10% of the market, whereas its three main competitors have 30%.


47


Now I would like to better understand the banking sector with regard to the activities we’re interested in. What are the growth rate and the current value in millions of the current accounts and securities mediation market? Regarding the last one I’m interested both in the traditional channel and in the on-line channel. The current accounts market is worth 5 mln, while the traditional mediation market is worth about 1.000 billion; no growth rate is expected in either sector. The on-line mediation sector is now worth 1 billion with an expected growth rate of 25% per year. Let’s suppose that the bank sells the on-line trading service only to the “captive” customers. To estimate the number of bank customers who will use the on-line trading service I need to know: • the number of customers, among those who don’t use the mediation service – there are about 1.800.000 of them - who have a extra money to invest. This number must then be reduced depending on internet penetration; • the percentage of the 200.000 customers who will pass from the off-line trading to the on-line one, which also depends on the available capital and of internet penetration.


48


Let’s assume that 50% of the clients who don’t use the securities mediation service have extra money to invest and that 80% of those who already use this service are willing to switch to the on-line channel. The internet penetration is 5%. We therefore have the following number of customers who will use the on-line service: • customers who didn’t use the mediation service: 1.800.000 clients x 50% x 5% penetration = 45.000 clients • clients using the traditional mediation service and are willing to switch to the on-line channel: 200.000 clients x 80% x 5% penetration = 8.000 clients Assuming that the transactions are worth 5.000€ on-line and 10.000€ off-line, that commissions are, respectively, 0.2% and 0.7% and that 2 transactions per day are made in each channel, we can estimate the following revenue: +45.000 x 5.000 x 2 x 0,2% = +900.000€ /day +8.000 x (5.000 x 2 x 0,2% - 10.000 x 2 x 0,7%) = -960.000€ /day Total = -60.000€ /day


49


We have a forecast of –0,06 mln € per year, considering 220 days a year suitable for on-line trading. Why then should the bank enter the on-line trading business? If the bank didn’t offer an on-line trading service it would risk losing a large part of its customers to the advantage of the banks offering this service, since this service requires opening a current account.


50

The bank (1/4)

You receive a phone call from the CEO of an Italian bank whose branches have gone from 300 to 600 in the last five years. The bank’s market share hasn’t changed over the years, and has remained at about 3%. The CEO asks you to decide whether or not to close the new branches . In order to decide if and which branches to close, we must identify the reasons that have lead to a constant market share throughout the years, even though the number of the branches has doubled. Considering the typical services offered by a bank, that is collection and loans, I consider it reasonable to consider two market shares; I’d therefore like to know if this 3% we mentioned includes both collection and loan, or if it refers only to one of the two sectors. Let’s assume that the value of the market share that has remained constant refers to collection. Doubling the branches, while maintaining the same market share for collection, can be basically due to two factors: • poor commercial effectiveness from the new branches • customer loss from old branches


51

The Bank (2/4)

Let’s suppose that: •The branches are evenly spread across the national territory •The old branches are situated mainly in the centre of big cities •The new branches are situated on the outskirts of and in small towns • The bank has the same product system for all the branches

The market share for collection, therefore, can be divided geographically into big and small towns. The fact that the whole market share has remained constant probably hides the fact that one of them has increased while the other has diminished: This could tell us whether the new branches have been ineffective or if the old ones have lost customers. Let’s make some hypotheses regarding the level of competition of the two segments. The competitors of the old counters are big commercial banks traditionally situated only in large urban areas and in the centre of big cities; post offices and small local banks are the newly opened branches’ main competitors. We can therefore hypothesise that the competitive pressure is higher in large urban areas.


52

The Bank (3/4)

Considering the fact that the evolution of the financial market has lead savers towards more sophisticated forms of investment, we can conclude that the customers of the old branches have gradually moved towards the bank’s competitors, who can offer products that better suit their changed needs. This migration was balanced by the new customers acquired by the suburban branches, where the bank’s products outclass traditional products offered by post offices and local savings banks: government securities, savings accounts, certificati di deposito. The disappointing growth of our bank could be explained by an out of date product system, which can attract only marginal savings areas not served by competitors. I thus deduce that closing the new branches wouldn’t be a good idea. Ok, but how can we improve the situation? We should probably configure a differentiated product system on a geographic basis. We would divide it into three segments: traditional collection, common funds and funds management.


53

The Bank (4/4)

The challenge in big cities, where I am less competitive, is mainly between the last two elements; I could therefore: • Change our funds manager and financial manager. • Get external help for funds management, and close internal activities. • Increase the service level to avoid losing important customers, for example adding internet services.


54

The Insurance Market

Your client is a bank interested in entering the insurance market. What do you suggest? The insurance market can be divided into: the car field, the life insurance field (additional pension) and other risks field (theft, fire, …). The car field isn’t particularly interesting because it’s fully penetrated by highly specialised operators. Entering that field would mean taking clients away from competitors thus generating more or less aggressive reactions. Assuming that the turnover in the life field is currently 6,2 billion €, do you find it an interesting/ attractive field? Let’s evaluate the life insurance potential market. • Let’s assume that the Italian population is about 60 mln and that the average life span is 75 years with an even distribution in the different age groups • Assuming that all those between 30 and 60 years of age are interested in this type of product, that is 2/5 of the population, the number of potential customers is: 60 mln x 2/5 = 24 million • Considering the fiscal limit in terms of deductibility we can assume that the highest cost for life insurance is 1.300€ per year

So, the potential market is 31,2 billion €; the field has a 20% penetration and it can therefore be considered interesting/ attractive.


55

The Sanitary Fittings Company

The CEO of a big company producing a wide range of products for different segments of customers has asked for our help to examine operations in his division. The products include, among others, bath tubs, toilets and urinals. In particular, the CEO would like to know whether he should approve a $200 million expense for new production structures. The company is one the seven leading sanitary fittings producers in the US; the number one company has a 20% share; our client is in third position with a 15% share. • Our client’s prices have remained unchanged for awhile • As far we know, the two major competitors have a very small margin; our client breaks even • The major competitor has just announced the decision to build a large technologically advanced plant Question: What elements should we take into consideration?


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The Sanitary Fittings Company: data gathering

Let’s clarify the problem: • Will the investment reduce costs? (Yes, but not substantially, mainly because the new process will help create a better finish) • Does the company have a limited quantity of raw materials? (No, raw materials can be easily found.) Domande che porterebbero a risposte di livello “minimo”: • Market size/expansion: - What was the field growth like per number of units? - Is this growth related to the new housing projects? • Competitive position: - What’s the excess capacity like? - What are the prices of the various competitors (are their production costs higher or lower than our client’s?) • Market segmentation: - How is the market divided (e.g. Residential, industrial, commercial)? - Do prices change depending on the different kinds of customers? According to the market?


Cracking the case interview_25_03_2011

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