9/10/2007

PRICING
Estimate demand (pricing is largely demand driven)
Analyze customers willingness to pay for companys product / service
Target customer segment(s)
Price elasticity

PRODUCT / LINE MIX

Understand the product mix and features -- variety, design, packaging, substitutes, product crosselasticities.
Identify the size of the product portfolio mix -- could the company be spreading its resources too thin
across a large product portfolio?

Price of substitute products / services

Value-added of companys product / service (either real or perceived)
Consider costs, but dont let costs dictate the outcome.
Adjust for anticipated competitor response.
Analyze companys strategy:

Analyze product profitability mix:

Profit margin of each product line
Product breakdown as a % of revenues, cost, profits, growth rates, etc.
Consider discontinuing unprofitable products in the mix

Premium vs. value product / service

Niche vs. large market share
Capabilities in positioning product / service
Consider various pricing strategies:
Price discrimination

Explore possibility of introducing new products

Consider issues of cannibalization and effect on brand equity
Evaluate pricing strategy -- premium vs. value products (see PRICING card)
Examine companys core competencies, ability to leverage economies of scope and scale, potential issues

Two-part tariff

of capacity constraints.

Bundling

Analyze market direction and threat of new entrants

Warranties

GENERAL CASE TIPS

ECONOMICS
GNP = C + I + G + X

Repeat the question

State your hypothesis / key decision criteria

C = personal consumption

Explain the framework to be used

I = corporate investment

Walk the interviewer through your analysis

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

X = net (exports - imports)

Market equilibrium: Price -- Quantity point where demand equals supply (does not change unless
demand or supply shifts).
Marginal Costs < Average Costs implies economies of scale

If you get stuck, restate what facts you know

Marginal Costs = Average Costs implies constant returns to scale

Marginal Costs > Average Costs implies dis-economies of scale

REMEMBER:

Price elasticity of demand = (% change in Quantity / % change in Price)

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!

if > 1 implies elastic

if < 1 implies inelastic
Consider diminishing marginal utility and diminishing returns

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

Firm resources (people, capital, technology, etc.)

Profitability of target customer segments vs. other potential segments

Core competencies (economies of scope)

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

Analyze segments (who, what, where, how, value)

Understand audience needs / perceptions (conjoint surveys, trends, etc.)
Benchmark with other industries
Estimate potential per segment
Demand

Price

Growth

Competition

Profitability

Consider various issues in companys advertising and PR strategy including:

Flexibility

Differentiation and sustainability of promotion

Speed

Dilution of message

Barriers to Entry

Use of specials, discounts, etc.

Consider various tradeoffs:

Sales force effectiveness

Cost vs. proximity

Identify opportunities to differentiate product (based on dimensions of quality, design, location, service,
advertising, price, etc.) in order to:

Service vs. product implications

Expand feasible set of strategies (not limited to 1 dimension / product attribute)

JIT vs. inventory

Make demand less elastic

Internal vs. external distribution issues

Evaluate impact of trends (IT, deconstruction of value chain)
Consider cost-benefit analysis of alternative distribution methods

Avoid price warfare

REMEMBER: The goal is to send the right message to the right people in the right way!

REGULATORY

FRAGMENTED MARKET
Understand why the market is fragmented

Understand key regulatory issues:

Pricing guidelines (e.g., as % of costs) --> no monopoly pricing
Tariffs

low barriers to entry and / or high barriers to exit

absence of economies of scale or learning curve effect
high transportation costs

Anti-trust

high inventory costs or erratic sales fluctuations

Patent infringement, intellectual property rights

diverse market needs (i.e., need for customized offering)

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

high product differentiation

government prohibition of concentration / local regulations
newness of industry
Examine whether or not fragmentation can be overcome
(Is consolidation feasible? See CONSOLIDATION card)
Determine if overcoming fragmentation is profitable for the company

Analyze impact on the company as well as the competitors

Leverage regulatory asymmetries (in your own market, other countries, etc.)

If fragmentation is inevitable, identify best alternatives for coping with it

tightly managed decentralization
increased value added

Look to the past for precedents

specialization by product type, product segment, customer type, region, etc.

backward integration

GLOBAL ISSUES
Consider key issues in developing a global competitive strategy:

BUSINESS ESTIMATION STATISTICS

Factor cost differences among countries

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)

Differing circumstances in foreign markets (i.e., 4 Ps)

United States

Different roles of foreign governments

US population -- 270 million

Differences in goals, resources, and ability to monitor foreign competitors

Evaluate various mechanisms for participation in global activities:
Licensing

Private labeling

Mergers and acquisitions

Exporting

Joint ventures

Foreign direct investment

Assess market conditions

National, economic, social, and political conditions and circumstances
Competitive landscape and competitive reaction (signaling?)
Analyze cost - benefit of participation (does it add shareholder value?)

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

Tokyo, Japan -- 27 million

Transportation or storage costs and cost of labor, energy, raw materials, etc.

New York City -- 16 million

Access to established distribution channels

Los Angeles -- 12 million

Ability to leverage value chain asymmetries

Buenos Aires , Argentina -- 12 million

Consider management structure (i.e., multinational, centralized, transnational)

Beijing, China -- 11 million

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

NEW MARKET ENTRY

Ask if this fits the companys mission / culture -- e.g., why does the company want to expand?
Invest excess cash flow
Increase market share
Decline in existing market (shrinking sales, higher costs, lower margins)

Primary : Suppliers, inbound logistics, operations, manufacturing, outbound logistics,

marketing and sales, support
Identify primary activities such as:
Outbound logistics: activities needed to convert inputs to outputs OR outputs to final
destination
Sales and marketing: activities necessary to inform / persuade customers to but outputs and
order-taking processes necessary to complete sales (e.g., sales force effectiveness,
customer satisfaction, use of ads to enhance brand image)
Rate relative importance of each activity

Assess the firms resources and capabilities:

Economies of scope and scale
Ability to leverage current value chain components (infrastructure needed)
Capital, labor, and capacity constraints (see CAPACITY card)
Evaluate market conditions
Size and growth rate of new target market
Competitive profile / trends and likely competitive responses
Barriers to entry (and how to overcome them) and regulatory considerations

Analyze cost drivers and cost interactions

Consider complements with current product / markets, potential issues of cannibalization, and market
cross-elasticities

Identify possible outsourcing opportunities

Select attributes that promise high differentiation between cost and price premium
Break down each activity as a % (i.e., as % of every incoming dollar)
Locate linkages between value chain and customers

Analyze cost - benefit of new market entry

Niche vs. large market share
Consider methods of entry (e.g., JV, direct investment, exporting, acquisition)

FORMULAS

INFORMATION TECHNOLOGY

TOTAL ASSETS = Current assets + PPE + Investments + Other Assets

Evaluate cost - benefits of IT investment

Is the project a strategic necessity? If so, dont evaluate IT investment based on current project

BALANCE SHEET = Assets = Liabilities + Stockholders Equity

evaluation methods (i.e., 5 year payback, ROI criteria, etc.)

STOCKHOLDERS EQUITY = Shareholders Equity + Common Stock + Retained Earnings

Outsource vs. develop in-house

Understand that IT infrastructure determines what a company will be able to do and not do in the future

REAL INTEREST RATE = Nominal Interest Rate - Inflation

Defines a companys organizational capability

Must have close link between strategic planning and IT infrastructure planning

PROFIT BEFORE TAXES = Gross Revenue - Returns & Allowances - COGS - SG&A - Depreciation Interest Expense

Assess competitor strategies with respect to IT investments

Consider impact of current IT issues (e.g., the Year 2000 problem) on the companys costs and

GROSS MARGIN = Gross Revenue - Returns & Allowances - COGS

profitability
NET WORKING CAPITAL = Current Assets - Current Liabilities

Avoid over-investing
Make sure that employees are prepared to learn and adopt new system

BREAKEVEN VOLUME = Fixed Costs / (Price - Variable Costs)

Identify the impact of IT infrastructure on redefining the value chain

MARKET SHARE
Long-term growth rate of existing
markets and new segments not currently
being served

COSTS

Entry or exit of major firms

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

Consider potential flaws in the companys cost accounting method

Consider changing market characteristics:

knowledge

Customers and how they use the product

Regulatory changes

Product, process, and market innovation

Changes in cost structure

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:

Variable Cost Issues:

- Capacity utilization (if its low, identify

- Suppliers (consolidate?)

cause, e.g., demand vs. efficiency)

- Break-even analysis
(BE volume = FC / (Price - VC))

- Cost control
mechanisms and
incentives in place?

- Economies of scope and scale

- Outsourcing alternatives

- NPV of fixed cost investment with

- 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

Determine slope of industry cost curve

Compare cost structure to that of competitors
Identify and leverage potential cost advantages (e.g., raw materials, labor, energy sources,
infrastructure, patents, location)

9/10/2007

MERGERS & ACQUISITIONS

Assess goals and objectives for such consideration

VALUATION
Understand common methods of valuation:

Increase market access

Discounted Cash Flow (DCF) - projection of future earnings and selection of appropriate
discount rate (be prepared to estimate revenues and costs!)

Diversify horizontally or vertically

Pre-empt competition
Achieve operating synergies (e.g., economies of scope or scale)

Comparable Multiples - apply multiples of income or revenues of comparable companies to

establish purchase price
Asset-oriented Approaches - fair market value, fair value, book value, liquidation value

Achieve financial synergies (e.g., lower cost of capital)

Realize tax gains (e.g., acquirer transfers tax losses of target to offset income)
Consider impact on acquirers financial condition

Consider the following factors in valuing a closely-held or private company:

nature and history of the business

Comparison of margins

Ability to finance the acquisition

economic and industry conditions

Issues of accretion / dilution on EPS

Tax issues

book value of target company and its financial conditions

Evaluate impact on competitive environment

earnings capacity of the company

Competitive trends and likely competitive responses

dividend-paying capacity

Legal and regulatory implications (anti-trust)

evidence of goodwill or other intangibles

Consider post-merger integration issues

Strategic fit

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)

other sales of stock

prices of comparable stocks
Assess means of financing the transaction

COMPETITOR INTENSIFICATION
Consider various responses in an intensified competitive environment:

Firm resources

Use resource advantages to raise barriers to entry

Management profile and style

Raise switching costs for customers

Product line (i.e., substitutes)

Step up marketing effort

Clout and leverage with buyers and suppliers

Increase promotional efforts (e.g., implement customer loyalty programs)

Industry trends

Consider price signaling (e.g., lower your price in a smaller market)

Determine if there are any Barriers to Entry ?

Economies of scale

Product differentiation

Existence of learning curve effects

Capital requirements

Access to distribution channels

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

PROFITS AND MARGINS

REVENUE

GROSS PROFITS = REVENUES - COSTS

REVENUES = PRICE x QUANTITY

Identify root causes of decline in profitability (e.g., margins vs. quantity)

Break down factors which influence Price (see PRICING card):

Break down Revenue component (see REVENUE card):

Price
Quantity
Break down Cost component (see COST card):
Fixed Costs vs. Variable Costs
Direct Labor, Direct Material, Allocated Overhead (including SG&A and Depreciation),
Distribution Costs, Financing Costs -- all as a % of Total Costs and Total Sales
Analyze product profitability and product mix (I.e., look at volume shifts)
Identify mix of customer segments and associated segment profitability
Explore trends in overall industry profitability (competitors profitability?)
Examine the impact of any unusual charges (e.g., one-time capital outlays, contingent liabilities,
litigation charges, environmental charges, etc.)
Consider changing market factors (demographics, tastes, economy, changes in technology, regulatory
actions)

Analyze customers willingness to pay for companys product / service

Target customer segment(s)
Price elasticity
Price of substitute products / services
Value-added of companys product / service (either real or perceived)
Evaluate product mix and ability to differentiate product (based on dimensions of quality, design,
location, service, advertising, price)
Consider competitors pricing strategies and relative market pricing power
Break down factors which influence Quantity (see MARKET SHARE card):
Consider market share vs. market demand (and growth patterns)
Explore inability to meet market demand based on capacity constraints (demand vs. capacity
utilization vs. throughput)
Analyze types of customers gained / lost (protect most profitable customers)
Evaluate impact of product substitutes vs. complements
Consider the cyclical or seasonal nature of the business, if applicable

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.

Understand regulatory issues

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)

Analyze cost - benefit to the company

costs of monitoring the contractor and contract specifications may outweigh lower unit costs

Assess implications of vertical vs. horizontal consolidation

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

Throughput rate: compare actual production rate to maximum potential rate

Analyze supplier power -- greatest when:

Identify causes of loss (e.g., calibration, labor performance, poor maintenance, other plant

dominated by a few suppliers

functions)

product is differentiated (high switching costs, few substitutes)

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!

supplier poses credible threat of forward integration

Examine ways to lower overall supply costs:
consolidation of suppliers increases capacity utilization of suppliers which lowers suppliers
costs and thereby could lower the companys costs and prices (however, be careful of
supplier concentration)
economies of scope among suppliers
inventory vs. JIT

ALLIANCES & JOINT VENTURES

Assess benefits of such a strategy:

DIVESTITURES & SPIN-OFFS

Evaluate reasons for a divestiture:

Ability to exploit critical internal resources and gain access to resources of partner quicker, at lower
cost, and with less uncertainty

Poor strategic fit and/or poor performance of a division

Gain access to markets and technology in much shorter time than would result from firm going at it
alone

Capital market factors (greater access to capital markets post-divestiture)

Share management responsibility

Assess potential problems and costs:
Agreement on the value of each partners contribution to the JV / alliance
Ability to achieve cooperation between firms that are also competitors
Conflicting objectives / divergent management styles
Disputes over quality and labor practices
Potential lack of control
Recognize that the sharing of benefits will depend on:
Strategic intent of the partners
Ability of each partner to capture and appropriate the skills of the other
Companys receptiveness to the partnership
Identify alternative strategies (e.g., outsourcing, M&A, etc.) -- explore as needed

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

Consider competition and likely competitor response (e.g., impact on pricing)

Ties up capital and may result in excess capacity

Conduct cost - benefit analysis of diversification strategy

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