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PRICING
Estimate demand (pricing is largely demand driven)
Analyze customers willingness to pay for companys product / service
Target customer segment(s)
Price elasticity
Two-part tariff
of capacity constraints.
Bundling
Warranties
ECONOMICS
GNP = C + I + G + X
C = personal consumption
I = corporate investment
G = government purchases
Draw visuals if possible -- charts (e.g., waterfalls, bubbles) 2x2 matrices, pies, etc.
Summarize conclusions and explain what additional analyses may be relevant
Generate options and alternatives
REMEMBER:
Try and make the interview an interactive dialogue between you and the interviewer. The interviewer is
not an adversary; you are working together to solve the clients problem.
Relax and have fun!
CUSTOMERS
Conduct segmentation of customer base -- who is the target customer?
Existing customers (companys or competitors)
COMPANY ANALYSIS
Consider the companys vision / mission / stakeholders
Examine the companys capabilities:
New customers
Identify what the customers needs are and what they value
Commodity vs. premium products
Assess needs and perceptions against companys product mix
Market trends
Analyze relative buying power -- most powerful when:
few customers exist and they purchase in large volumes
products are standardized and represent high % of final products total costs
profits of buyer are low
buyers present credible threat of backward integration
Consider other key issues:
Product substitutes / complements and switching costs
Demand elasticity
Cost of retaining and acquiring a customer (e.g., use of loyalty programs because its cheaper to
retain customers than to acquire new customers)
Capacity issues (e.g., manufacturing, distribution, human resources) -- how flexible are
facilities / labor?
Understand the companys cost structure:
e.g., how is the marginal cost impacted by building new capacity (i.e., marginal costs will
increase if new capacity is not fully utilized OR marginal costs increase if capacity is
greater than minimum efficient size)
Economies of scale
Analyze the companys financing options:
Access to capital / financing capabilities
Alternatives to internal financing
NPV of alternative options
Consider the impact of external factors (e.g., technology, regulation, competitors, likely competitive
responses, etc.)
9/10/2007
PROMOTION
DISTRIBUTION
Understand current structure -- is it overly complex?
Draw a map (e.g., show plants, distributors, customers)
Outline the value chain (suppliers, manufacturers, distributors, wholesalers, retailers,
customers, etc. -- break down each as a percentage of total costs)
Analyze the objectives of distribution chain for specific case
Channels
Coverage
Price
Growth
Competition
Profitability
Flexibility
Speed
Dilution of message
Barriers to Entry
Identify opportunities to differentiate product (based on dimensions of quality, design, location, service,
advertising, price, etc.) in order to:
REGULATORY
FRAGMENTED MARKET
Understand why the market is fragmented
Anti-trust
Assess regulation as a barrier to entry (through procurement, as well as environmental and safety
standards
Prohibitive costs of compliance for new entrants
Control of licenses by a public authority (approved supplier status)
Trade barriers
GLOBAL ISSUES
Consider key issues in developing a global competitive strategy:
Outline your overall logic, identify key assumption drivers, use round numbers, show your work and
write it down! (be careful not to get too detailed)
United States
Private labeling
Exporting
Joint ventures
US households -- 60 million
World population -- 6 billion
North America -- 450 million
South America -- 300 million
Europe -- 500 million
Asia -- 3.5 billion
Key cities
Economies of scale
Transportation or storage costs and cost of labor, energy, raw materials, etc.
9/10/2007
VALUE CHAIN
Compare value chain to that of competitors and identify sources of differentiation
Construct value chain for the firm and the customer and identify drivers of uniqueness in each
activity
Support : Infrastructure, IT, HR, procurement
Consider complements with current product / markets, potential issues of cannibalization, and market
cross-elasticities
FORMULAS
INFORMATION TECHNOLOGY
PROFIT BEFORE TAXES = Gross Revenue - Returns & Allowances - COGS - SG&A - Depreciation Interest Expense
profitability
NET WORKING CAPITAL = Current Assets - Current Liabilities
Avoid over-investing
Make sure that employees are prepared to learn and adopt new system
MARKET SHARE
Long-term growth rate of existing
markets and new segments not currently
being served
COSTS
Analyze main cost components as a % of Total Costs (and % of Total Sales): Direct Labor (union vs.
non-union), Direct Material, Allocated Overhead (including SG&A and Depreciation),
Distribution Costs, Financing Costs
Diffusion of proprietary
knowledge
Regulatory changes
If the market is growing, the number of entrants increases and its easier for all players to achieve
improved performance (non-zero sum game); therefore its easier and cheaper to take
market share. Strategies include:
Maintain prices as costs and achieve high profitability (price effect)
Drop prices as costs to increase market share (market share effect)
Break down total costs into fixed and variable cost components
Fixed Cost Issues:
- Suppliers (consolidate?)
- Cost control
mechanisms and
incentives in place?
- Outsourcing alternatives
- Impact of horizontal or
sensitivity analysis
vertical integration
Note: in a growing market you want to increase market share over the long-run
If the market is slowing, one firms gain is another firms loss (zero-sum game)
Price competition increases especially when there are large economies of scale, low marginal
costs, and learning curve effects
Check that market share is not from turnover of most profitable customers
9/10/2007
VALUATION
Understand common methods of valuation:
Discounted Cash Flow (DCF) - projection of future earnings and selection of appropriate
discount rate (be prepared to estimate revenues and costs!)
Comparison of margins
Tax issues
dividend-paying capacity
Exit strategies
Culture implications
Discuss M&A alternatives (e.g., outsourcing, JV, corporate restructuring, etc.)
COMPETITION
Analyze the competitors strengths, weaknesses, opportunities and threats (SWOT analysis)
COMPETITOR INTENSIFICATION
Consider various responses in an intensified competitive environment:
Firm resources
Industry trends
Product differentiation
Capital requirements
Governmental actions
Examine the cost structure of competitors (especially as it relates to the clients cost structure) -- cost
differences may be based on the degree of vertical integration (see COSTS card)
Consider likely competitive responses to the clients actions and potential cooperative strategic
options
Leverage customer information to identify and steal most profitable customers away from
competitors (cream-skimming); likewise, protect your most profitable customers
Grow market share through mergers or acquisitions
Avoid price wars and other irrational behavior; remember that accommodating your competition
sometimes makes the most sense
Establish long-term contracts to lock in customers
REVENUE
9/10/2007
CONSOLIDATION
Examine feasibility and objectives of industry consolidation
create economies of scale or learning curve effects
standardize diverse market needs
make acquisitions for critical mass
recognize industry trends early
Evaluate impact of consolidation
achieve operational and financial synergies
capacity utilization vs. demand
cultural fit
OUTSOURCING
Analyze the make vs. buy decision
Ignore fixed and other sunk costs, only consider variable costs
Examine the companys cost allocation method
Assess benefits of outsourcing:
lowers cost
increases flexibility and access to external capabilities
benefit from economies of scale and specialization of third-party provider
may reduce new product development cycle
Assess costs of outsourcing:
loss of control over manufacturing process, quality, turnaround time, etc.
increased difficulty associated with integrating different technologies and knowledge bases (may
diffuse the concept of core competencies which results in loss of a companys ability to
innovate and develop)
costs of monitoring the contractor and contract specifications may outweigh lower unit costs
OPERATIONS EFFICIENCY
Consider three components when evaluating plant efficiency:
Utilization: percent of total available time that plant is actually running
Identify causes of loss (e.g., lack of demand, labor problems, line breakdown)
SUPPLIERS
Segment suppliers on basis of clients needs (e.g., quality, cost, value-added, timeliness, JIT, service,
etc.)
Identify key decision criteria in evaluating suppliers (e.g., low cost, high quality control, low defect
rates, quick turnaround times, etc.)
Evaluate companys relative bargaining power with suppliers based on % of suppliers total sales
Identify causes of loss (e.g., calibration, labor performance, poor maintenance, other plant
functions)
Waste: measure what percentage of raw material inputs is lost in producing output
Identify causes of loss (e.g., calibration, quality of inputs, machinery breakdowns)
REMEMBER: When asked to analyze capacity utilization of a plant, consider ALL three of the
above points!
Ability to exploit critical internal resources and gain access to resources of partner quicker, at lower
cost, and with less uncertainty
Gain access to markets and technology in much shorter time than would result from firm going at it
alone
Parts of a company are worth more than the whole (reverse synergy)
Immediate infusion of cash from the sale
Evaluate reasons for a spin-off:
Redefinition of core business
Parts of a company are worth more than the whole (reverse synergy)
Capital market factors (greater access to capital markets post-divestiture)
Impact on cost of capital
Assess market conditions
Is timing right to sell?
Competitive response (i.e., lead to price or quality )
Conduct cost - benefit analysis
Can subsidiary inefficiency / high costs be turned around?
Effect on quality of product / service
Impact on economies of scale and scope
Current / future cost breakdown (fixed costs vs. variable costs, transition costs)
9/10/2007
DIVERSIFICATION
Examine existing business situation and understand motivation behind diversification (invest free cash
flow?)
Avoid diversification strategy solely to smooth earnings
Analyze different types of diversification
Expand geographically (local, regional, national, international)
Integrate vertically (offsets power of suppliers, smoother production flow, better accessibility to
markets, distribution cost advantage)
Expand into related markets (product, business, distribution, managerial skill)
Expand into unrelated markets ( risk, benefits from economies of scale, acts as informal
market when external markets e.g., labor or capital, are weak)
Evaluate ability to leverage existing resources, value chain, infrastructure and economies of scope and
scale
CAPACITY
Assess overall fixed asset effectiveness (see OPERATIONS EFFICIENCY card)
Utilization
Throughput against its theoretical potential
Product acceptance and waste levels
Compare to industry averages and recent trends
Identify causes of utilization loss
Lack of demand
Plant breakdowns
Staffing issues
Issues to consider in adding new capacity
Demand considerations
Evaluate companys minimum efficient plant size (MES) relative to total market output (its
easier to enter if MES as % of total market is smaller)
Economic conditions
Market supply / demand
Estimate slope of industry cost curve -- its easier to bring a new plant on-line below capacity if
the cost curve is flat
Regulatory issues
REMEMBER: Importance of utilization as fixed costs as a % of total costs