Practice question #1: Leaving on a Jet Plane
Following is a sampling of business case questions. Some are provided with suggested answers or lines of reasoning. Remember that there is no right answer to these questions, so what follows each question is a suggested outline or framework for working through your solution. You may use any line of reasoning you are comfortable with, but remember to be concise and confident, and to make NO assumptions. If you don't have enough facts to move forward, ask! Only if your interviewer refuses to give you information should you make sensible assumptions - while informing the interviewer that you're making them. Sketching out a few graphs may help clarify your analysis (and impress your interviewer, as graphs are the coin of the consulting trade). Increasingly, interviewers may ask you to interpret data or graphs as part of your case.
1. A major airline is considering the purchase of 24 new planes. They are unclear how this purchase will affect their business performance in the short term as well as the long term. You are the Senior Consultant meeting with the Operating Committee for the first time. I am the Chief Operating Officer of the company. What would you need to know from me in order to assess the situation?
Here is a good example of a directed question combined with a role-playing exercise. Not only will the interviewer be assessing your analysis and deductive abilities, but she will also be evaluating your poise and professionalism in front of a senior executive. In many cases, consultants find themselves in front of key client personnel who are older and more experienced in the industry, so your ability to cope with this type of situation is essential. How will you actually go about assessing the situation and finding information once you arrive at the client? (This case was given to an MBA-level candidate.)
You: What is the planned delivery cycle of the new aircraft? Will it be staggered, serial, or all at once?
Interviewer: Aircraft will be delivered as they are manufactured over the next five years, at approximately four per year.
You: How many planes are in the current fleet? Are there any plans to sell off older aircraft as the newer aircraft are delivered?
Interviewer: There are 120 planes in the current fleet. There are no plans to get rid of our older aircraft as the new ones arrive.
You: What is the current average cost per flight-hour of the fleet?
Interviewer: It varies by aircraft type. The range is anywhere from $1,000 to $5,000.
You: Do you have any frameworks in mind for assessing this situation?
Interviewer: No, what would you suggest? (This is a tough response because it asks you to put a stake in the ground.)
You: Well, in many cases I have used a company's cost of capital, relative to the average cost of capital in the industry, industry-specific metrics like the cost per flight-hour, as I already mentioned, and depreciation method choice. I would also want to assess the new efficiencies brought about by your purchase, as in fuel cost savings, increased passenger load, and so on. Do these sound reasonable to you?
Interviewer: Yes, as a beginning. How will you go about finding the information you need?
You: I would first need to know appropriate contact people in purchasing, finance, and accounting who could provide the quantitative facts I need to perform the assessment. With your introduction, I would like to meet with each of these people from two hours to a half-day in order to gather the information. I would need to circle back through each of them after the initial interviews simply to validate the information I have compiled, once I have assembled a draft.
Interviewer: That sounds like a workable plan.
Practice Question #2: Help! Our Profit Margins are Shrinking!
You are the consultant to a company that produces large household appliances. Over the past three years, profit margins have fallen 20 percent and market share has tumbled to 15 percent of the market from 25 percent. What is the source of the company's problems?
This is an example of the type of question an undergraduate student (or an MBA student in an early interview round) might receive. The interviewer has done you the favor of defining the problem - your client is in something of a slump! This dialogue illustrates how you, the perspicacious candidate, might drill down into the core of the woes besetting the firm.
You: How would you characterize the current marketplace for these products? Emerging? Mature?
Interviewer: The product line is considered mature.
You: How would you characterize your manufacturing process relative to your competition? (You're looking to see if the company has a strategic advantage.)
Interviewer: Can you be more specific?
You: Do you benefit from an advantage in technology, economies of scale, exchange rates, or other manufacturing element over your competition?
Interviewer: We have not updated our manufacturing process since 1988. We manufacture our products exclusively in the United States. As one of the oldest manufacturers of these products, we have a reliable customer base and a good reputation. As for price, we are one of the lower-priced in the market, though not the lowest.
You: Do any of your competitors manufacture overseas?
Interviewer: Our number one competitor produces all of its appliances in Indonesia. (Here's your clue - manufacturing outside the country significantly lowers costs.)
You: It probably suffices to say that some of your decline in profit can be attributed to the increased costs you are facing relative to older manufacturing techniques and higher costs associated with manufacturing domestically. This is especially toxic in a mature market where consumers are mostly aware of the product category and the product may be considered a commodity. (A commodity marketplace is one in which customers make their purchasing decisions largely on price. For example, toilet paper is largely a commodity market, where consumers buy whatever's on sale.)
Let's talk about market share now. Can you tell me about any recent market research you have regarding the strength of your brand, price, your products' position, and any promotional activity you have had?
Interviewer: Our market research department has told us that consumers are confused about the product category, that they do not understand the differences between our brand and our competitors' brands. We sell to all major appliance retailers in the U.S. We promote aggressively twice a year, and have smaller promotions once a quarter. (This is consistent with the description of a commodity product. The ways of breaking out of commodity markets include promotions and making value-added differences in the brand - like, in the case of toilet paper, introducing new designer colors and specially quilted cotton-blend paper.)
You: What form does your promotional activity take?
Interviewer: We offer a price discount to consumers twice a year. We regularly advertise in major magazines targeted to our consumer, and we have an active outdoor campaign underway.
You: It would appear you are competing in an undifferentiated marketplace and there may be an opportunity to capture additional share through an aggressive brand differentiation effort. I believe it would also be worth investigating the efficacy of your current promotional programs, relative to your competition. The consumer may be responsive to other types of promotions that haven't been utilized by the company as of yet.
Practice Question #3: Banking on Savings
A bank is trying to increase its operating efficiency. Your consulting team has been asked to look at the non-interest, non-personnel expense base in order to cut costs. How would you determine the potential size of the opportunity for operating efficiency? What issues might arise in such a study?
This is an exercise in full-value procurement (FVP). FVP is a rationalization across business units of common purchases and services. The measure of an FVP is the amount of "spend" reduced, defined as the cost savings realized by reducing the number of sources from which common products/services are purchased. (This question, and questions like it that require advanced frameworks, are much more likely to be received by business school candidates and case interviewees with significant business experience than by undergraduates with no business experience.)
In this case interview, your interviewer will impersonate the client. Case interviews often take this kind of role-playing form (which can be fun!).
You: What is your revenue level on an annual basis like?
Interviewer: In 1998 our revenues were $1.2 billion. (These seem to be the revenues of a prosperous regional bank, not a bulge bracket.)
You: What are the common items and services that all business units use? Do you have common office suppliers or housekeeping services?
Interviewer: Well, obviously we have most common office products shared across all our functions. We also have cleaning services for our corporate headquarters, our printing center, and our retail locations.
You: How many vendors provide similar products and services to the bank?
Interviewer: We buy office products from OfficeMax's corporate services in Indiana, Avery Dennison corporate services in California, and someone else, the name of which escapes me right now, for the retail banks. Also, I believe we contract regionally for housekeeping services.
You: Is consolidating branch offices or reducing ATM counts a possibility?
Interviewer: Not at this time. In fact, we're planning to expand in three different states.
You: Are your cost concerns the result of an impending merger? (Perhaps the interviewer has deliberately left out an important piece of information - the bank has undergone, or is planning, a merger or acquisition of another bank that might drive up costs.)
Interviewer: No, our growth is organic, not through acquisition. (Looks like this is a dead end. Time to move on to other considerations.)
You: Have you considered outsourcing non-critical business tasks?
Interviewer: What kind do you suggest? (Your interviewer is probing to see if you can name the kind of services a bank might successfully outsource.)
You: Well, what about information systems, call centers and customers service, bill collection, document handling, those kind of things?
Interviewer: Oh, no. That's not possible. (Remember that this is a role play. This seems a bit uncommunicative for a reasonable suggestion; you should probe a bit further. Businesses aren't always entirely reasonable in their actions!)
You: Can you explain your objections?
Interviewer: Don't you think outsourcing those processes is extreme? We're a bank, and we have a lot of confidential information on both paper and electronic media. Our integrity would be put at risk if we let others manage our internal functions.
You: Well, sir, I understand your objections. However, many major corporations use organizations that centralize activities like copy centers and conference planning, all of which also have trade secrets and confidential information.
Interviewer: That sounds interesting, and I'd like more information. (Your interviewer graciously acknowledges the wisdom of your suggestions.) But can you give me a concrete suggestion my supervisor will like?
You: (Time to return to a less controversial aspect.) What would you estimate your spending to be for things like office products?
Interviewer: I estimate about $100 million on office products, corporation wide, in 1998, though you'd have to talk to our operations people, of course.
You: I think, based on your information, that there are ample opportunities for cost savings that I can identify right now. Reducing your vendors down to one or two will allow you to use economies of scale to extract cost savings. Outsourcing promises even greater savings.
Practice Question #4: Paper on Air
A restaurant owner is currently setting up a new restaurant and making some basic decisions on how to fit it out. He is today making a decision on the facilities to place in the restrooms for customers to dry their hands. Initial research suggests that he has three options - paper towels, roller towels and hot air dryers. What should he consider in his decision-making process?
In the initial analysis, you might ask a number of questions, which will influence your decision.
• What type of restaurant is it going to be - luxurious, budget, middle-market?
• How many customers does he expect? (How many tables? Is it open during the day? In the evening?)
• Has he done any customer research to see what customers would prefer?
Fairly soon in the process, you should start asking questions about the economics of the three options - in which case the interviewer will give you some more information:
In the initial research, the restaurant owner has found out the following information from the suppliers of the drying facilities:
• Dryers have an initial cost of $500 each (but you'll need two - one for each restroom) and monthly service charge of $100 per month. The supplier estimates that the lifetime of a dryer is four years.
• Paper towels cost 5 cents each and the number of paper towels that you will need (varies directly) with the number of customers. So if you expect 50 customers a night, they will use 50 towels.
• If you use toweling rolls, they will cost $5 per roll (and again you'll need two - one for each restroom). The rolls will be changed daily if the restaurant has more than 2,000 customers per month or every other day if there are less than 2,000 customers per month.
At this point, it's obvious that from an economic standpoint, the option you select will vary with the number of customers. Therefore, it makes sense to look at a break-even calculation.
First of all, take the dryers. They cost $100 per month, plus an upfront charge of $1,000 that you should depreciate over their lifetime (i.e. an additional $1,000/(4 x 12) per month = $21 per month). Therefore their total cost is approximately $120 per month - and this does not vary with the number of customers coming into the restaurant.
Secondly, look at the paper towels option. These vary directly with the number of customers in the restaurant, at a cost of $0.05 per customer. Therefore with a low number of customers per month, paper towels will be cheaper than dryers will. How many customers would have to come to the restaurant each month to make the dryers more cost effective? The cost of towels would have to exceed $120 per month, equating to $120/$0.05 = 2,400 customers per month.
Is this break-even affected by the rolls option? At less than 2,000 customers per month, the rolls would cost $10 every other day or $10 x 15 days = $150 per month. This in itself is more costly than both the dryer and the towels option, and with more than 2,000 customers, it will only look more unfavorable.
Therefore the real economic decision is between towels and dryers. At less than 2,400 customers per month (or 2,400/30 = 80 customers per night) you would prefer the towels. Once the number of customers increases above this, you'd switch to the dryers' option.
Following the economic analysis, you might mention a few more non-economic points that might sway the balance:
• Are there additional staff costs of cleaning up paper towel waste?
• How many suppliers of each option are there? If there is a single supplier, might he have the capacity to raise prices in the future?
Hints on quantitative cases:
• Make the numbers easy - round up or down when possible to make further calculations easier.
• When you're jotting down numbers, make sure you keep a track of what is what, so when you pull together your recommendations at the end of the analysis, you can make comparisons between the options.
• In break-even cases, it is sometimes effective to draw a graph to illustrate the break-even decision (in this case, number of customers per month along the x-axis vs. cost of drying option along the y-axis).
Practice Question #5: Making a Case out of Lemons
Your niece approaches you and says "Since you're a management consultant, maybe you can help me. I want to buy my mother a present for her birthday, and I was thinking of opening a lemonade stand to earn the money. Tell me what you think of my plan."
Isn't she cute? Yet this is a serious case (from Bain, no less). The interviewer is trying to see if you can set up a value chain for your niece. Get out your notepad.
You: What kind of present do you want to get for your mother?
Interviewer: I want to get her a pair of gold earrings.
You: That's a very nice idea. I'm going to assume that you want to buy a pair of earrings that cost $50.
Interviewer: Actually, the earrings I want cost $100. (The interviewer is trying to raise the bar a bit.)
You: Okay. When is your mom's birthday? What's your time-frame?
Interviewer: My mother's birthday is in three months.
You: What kind of time commitment can you make to the lemonade stand? How many days a week do you plan to run the stand?
Interviewer: I have to go to school during the week, so I think just on weekends.
You: Here are some of the considerations you need to make if you want to earn $100 in three months from your lemonade stand.
What are your expenses? Let's say that you need to buy the pitcher, which is $2. Every 100 plastic cups will cost you $1 in direct costs. Those are your base expenses.
You then have to make several cost decisions. What size cups will you use? Eight-ounce cups will mean that you can serve more cups of lemonade per pitcher. (If it's a gallon jug, with 64 ounces, then you can serve eight cups per pitcher. Sixteen-ounce cups, which may be perceived as a better value, means that you can serve only four per pitcher.)
You must also decide what kind of lemonade to serve. Lemonade made from powdered concentrate is probably the cheapest - perhaps $1 a gallon. Lemonade made from fresh squeezed lemons has a definite quality advantage, but it's more expensive. At $0.25 a lemon and eight lemons to a gallon, it would cost $2 for each gallon. And you might be able to get prepackaged lemonade sold at the store for $1.50 a gallon.
Interviewer: So how long will it take me to get enough money for the earrings?
You: Assume $10 in sunk costs - $2 for the pitcher and $8 for 800 cups. You then need to decide what to charge. If you charge 50 cents a cup of lemonade - which I believe is the upward end of lemonade stand prices - and it costs you $1 to make the cheapest gallon of lemonade, then you'd earn $3 on each gallon of lemonade sold. In four weekends in three months, you would need to sell 37 gallons of lemonade. Then you'd earn $111 dollars - enough to pay off the pitcher and cups. That's three gallons a weekend, or 24 cups of lemonade each weekend.
Interviewer: Does this sound reasonable to you?
You: So far, yes. But this is just the cost-structure. You must consider other factors as well. Who are your competitors? Are there other kids trying to sell lemonade at the same time? Are you located near delis and restaurants and street vendors who might sell competing beverages?
What is the demand for your product? Is it summertime, when people drink a lot of lemonade and are spending time outdoors, generating foot traffic? If not, you may have difficulty moving your lemonade. In cold weather, you might want to consider selling hot cider instead.
Where are you located? How many potential customers will pass your lemonade stand? Can you set up your lemonade stand at a sporting event, supermarket parking lot, or flea market, where many more people will pass your stand? If you just set up on the sidewalk, you may not attract the foot traffic to make those numbers. Indoor or sheltered locations are also preferable if the weather turns bad.
You have a competitive advantage - you're young and cute. You may get business from people who approve of your young entrepreneurial actions. At the same time, lemonade stands have a reputation for relatively poor lemonade, which may hurt your overall sales if you have competition.
Do you have any subsidies? That is, would your dad be willing to cover your start-up costs - the pitcher, the cups, and perhaps the cost of the lemonade. This would perhaps permit you to offer better-quality lemonade.
Consider your advertising. You'll need a big sign to call attention to your stand. You can rely on your parents for free - I assume - word of mouth.
You should also consider offering another product besides lemonade. Perhaps selling cookies or brownies, in addition to the lemonade, might increase your profits.
You should consider other revenue-generating activities as well. If you are 14, a paper route is a possibility. You may also be old enough to babysit.
It's also possible that you might be able to choose another pair of earrings, or find the ones you want on sale. This would lower your income requirements.
Practice Question #6: Phoning in a Case
You are advising a credit card company that wants to market a prepaid phone card to its customers. Is this a good idea?
Whoa! Better find out more about this prepaid phone card first before you even begin to think about recommending the phone card.
You: What is the role of our company? Do we simply market the card or must we create them ourselves? Are we expected to provide the telephone services?
Interviewer: This card will be co-marketed with an outside phone company. We do not need to perform telecommunications functions.
You: What are our expenses connected with the card?
Interviewer: We must pay 15 cents for every minute we sell. We also have to pay $1.00 as a start-up cost for the card and card systems.
You: What are our marketing expenses?
Interviewer: We normally use slips of paper that are attached to the backs of our credit card payment envelopes. We sometimes also send customers a direct mailing - in a separate envelope. Or we can have telemarketers call selected customers.
You: What's the cost of each of these marketing techniques, and what is their response rate?
Interviewer: Telemarketers have a 2 percent response rate and cost $1.00 per call. Direct mailings cost us 40 cents per mailing and have a 0.50 percent rate of response. Our payment attachments have a 0.25 percent rate of response, but only cost us 5 cents each.
You: I'm going to assume we will sell one-hour phone cards. That will cost us $9.00 for the minutes and a dollar per card - so each card costs us $10.
Interviewer: Okay, that sounds reasonable.
You: And what is our expected revenue on a one-hour phone card? What is the current market rate for a 60-minute phone card?
Interviewer: Assume it's 50 cents a minute.
You: So if we sell the cards for $30, we have a $20 profit, minus our expenditures on marketing.
Interviewer: What's our cost structure look like?
You: Okay, let's figure this out. To sell 1,000 cards through telemarketing, we would need to contact 50,000 people. That would cost us $50,000. To use direct mail, we would have to contact 200,000 thousand people, which, at 40 cents per mailing, costs us $80,000. Since the envelope inserts aren't very reliable, we will need to contact 800,000 people using that method. But at 5 cents each, it costs only $20,000 to sell 1,000 cards.
We make $20 profit on each card. But even using the cheapest promotional vehicle, at $20 profit, we would only break even, because our profits on 1,000 cards would be $20,000. We shouldn't market this card, unless we can further cut our marketing costs or increase the price of the card. If we could slice the cost of the envelope attachments a penny or so, or sell the card for $35, or convince our co-marketer to reduce our costs, it might be worth selling.
Interviewer: What are some other issues you might want to consider? (Notice how the interviewer is nudging you to add to your analysis.)
You: We should also consider the competitive landscape for this business. Is the per-minute rate for calling card minutes expected to fall? If so, and our costs are held constant, we may lose money. Of course, we can learn more from marketing these cards. It could be that the people likely to buy these cards might be frequent travelers and could be targeted for other promotions.
Following is a sampling of business case questions. Some are provided with suggested answers or lines of reasoning. Remember that there is no right answer to these questions, so what follows each question is a suggested outline or framework for working through your solution. You may use any line of reasoning you are comfortable with, but remember to be concise and confident, and to make NO assumptions. If you don't have enough facts to move forward, ask! Only if your interviewer refuses to give you information should you make sensible assumptions - while informing the interviewer that you're making them. Sketching out a few graphs may help clarify your analysis (and impress your interviewer, as graphs are the coin of the consulting trade). Increasingly, interviewers may ask you to interpret data or graphs as part of your case.
1. A major airline is considering the purchase of 24 new planes. They are unclear how this purchase will affect their business performance in the short term as well as the long term. You are the Senior Consultant meeting with the Operating Committee for the first time. I am the Chief Operating Officer of the company. What would you need to know from me in order to assess the situation?
Here is a good example of a directed question combined with a role-playing exercise. Not only will the interviewer be assessing your analysis and deductive abilities, but she will also be evaluating your poise and professionalism in front of a senior executive. In many cases, consultants find themselves in front of key client personnel who are older and more experienced in the industry, so your ability to cope with this type of situation is essential. How will you actually go about assessing the situation and finding information once you arrive at the client? (This case was given to an MBA-level candidate.)
You: What is the planned delivery cycle of the new aircraft? Will it be staggered, serial, or all at once?
Interviewer: Aircraft will be delivered as they are manufactured over the next five years, at approximately four per year.
You: How many planes are in the current fleet? Are there any plans to sell off older aircraft as the newer aircraft are delivered?
Interviewer: There are 120 planes in the current fleet. There are no plans to get rid of our older aircraft as the new ones arrive.
You: What is the current average cost per flight-hour of the fleet?
Interviewer: It varies by aircraft type. The range is anywhere from $1,000 to $5,000.
You: Do you have any frameworks in mind for assessing this situation?
Interviewer: No, what would you suggest? (This is a tough response because it asks you to put a stake in the ground.)
You: Well, in many cases I have used a company's cost of capital, relative to the average cost of capital in the industry, industry-specific metrics like the cost per flight-hour, as I already mentioned, and depreciation method choice. I would also want to assess the new efficiencies brought about by your purchase, as in fuel cost savings, increased passenger load, and so on. Do these sound reasonable to you?
Interviewer: Yes, as a beginning. How will you go about finding the information you need?
You: I would first need to know appropriate contact people in purchasing, finance, and accounting who could provide the quantitative facts I need to perform the assessment. With your introduction, I would like to meet with each of these people from two hours to a half-day in order to gather the information. I would need to circle back through each of them after the initial interviews simply to validate the information I have compiled, once I have assembled a draft.
Interviewer: That sounds like a workable plan.
Practice Question #2: Help! Our Profit Margins are Shrinking!
You are the consultant to a company that produces large household appliances. Over the past three years, profit margins have fallen 20 percent and market share has tumbled to 15 percent of the market from 25 percent. What is the source of the company's problems?
This is an example of the type of question an undergraduate student (or an MBA student in an early interview round) might receive. The interviewer has done you the favor of defining the problem - your client is in something of a slump! This dialogue illustrates how you, the perspicacious candidate, might drill down into the core of the woes besetting the firm.
You: How would you characterize the current marketplace for these products? Emerging? Mature?
Interviewer: The product line is considered mature.
You: How would you characterize your manufacturing process relative to your competition? (You're looking to see if the company has a strategic advantage.)
Interviewer: Can you be more specific?
You: Do you benefit from an advantage in technology, economies of scale, exchange rates, or other manufacturing element over your competition?
Interviewer: We have not updated our manufacturing process since 1988. We manufacture our products exclusively in the United States. As one of the oldest manufacturers of these products, we have a reliable customer base and a good reputation. As for price, we are one of the lower-priced in the market, though not the lowest.
You: Do any of your competitors manufacture overseas?
Interviewer: Our number one competitor produces all of its appliances in Indonesia. (Here's your clue - manufacturing outside the country significantly lowers costs.)
You: It probably suffices to say that some of your decline in profit can be attributed to the increased costs you are facing relative to older manufacturing techniques and higher costs associated with manufacturing domestically. This is especially toxic in a mature market where consumers are mostly aware of the product category and the product may be considered a commodity. (A commodity marketplace is one in which customers make their purchasing decisions largely on price. For example, toilet paper is largely a commodity market, where consumers buy whatever's on sale.)
Let's talk about market share now. Can you tell me about any recent market research you have regarding the strength of your brand, price, your products' position, and any promotional activity you have had?
Interviewer: Our market research department has told us that consumers are confused about the product category, that they do not understand the differences between our brand and our competitors' brands. We sell to all major appliance retailers in the U.S. We promote aggressively twice a year, and have smaller promotions once a quarter. (This is consistent with the description of a commodity product. The ways of breaking out of commodity markets include promotions and making value-added differences in the brand - like, in the case of toilet paper, introducing new designer colors and specially quilted cotton-blend paper.)
You: What form does your promotional activity take?
Interviewer: We offer a price discount to consumers twice a year. We regularly advertise in major magazines targeted to our consumer, and we have an active outdoor campaign underway.
You: It would appear you are competing in an undifferentiated marketplace and there may be an opportunity to capture additional share through an aggressive brand differentiation effort. I believe it would also be worth investigating the efficacy of your current promotional programs, relative to your competition. The consumer may be responsive to other types of promotions that haven't been utilized by the company as of yet.
Practice Question #3: Banking on Savings
A bank is trying to increase its operating efficiency. Your consulting team has been asked to look at the non-interest, non-personnel expense base in order to cut costs. How would you determine the potential size of the opportunity for operating efficiency? What issues might arise in such a study?
This is an exercise in full-value procurement (FVP). FVP is a rationalization across business units of common purchases and services. The measure of an FVP is the amount of "spend" reduced, defined as the cost savings realized by reducing the number of sources from which common products/services are purchased. (This question, and questions like it that require advanced frameworks, are much more likely to be received by business school candidates and case interviewees with significant business experience than by undergraduates with no business experience.)
In this case interview, your interviewer will impersonate the client. Case interviews often take this kind of role-playing form (which can be fun!).
You: What is your revenue level on an annual basis like?
Interviewer: In 1998 our revenues were $1.2 billion. (These seem to be the revenues of a prosperous regional bank, not a bulge bracket.)
You: What are the common items and services that all business units use? Do you have common office suppliers or housekeeping services?
Interviewer: Well, obviously we have most common office products shared across all our functions. We also have cleaning services for our corporate headquarters, our printing center, and our retail locations.
You: How many vendors provide similar products and services to the bank?
Interviewer: We buy office products from OfficeMax's corporate services in Indiana, Avery Dennison corporate services in California, and someone else, the name of which escapes me right now, for the retail banks. Also, I believe we contract regionally for housekeeping services.
You: Is consolidating branch offices or reducing ATM counts a possibility?
Interviewer: Not at this time. In fact, we're planning to expand in three different states.
You: Are your cost concerns the result of an impending merger? (Perhaps the interviewer has deliberately left out an important piece of information - the bank has undergone, or is planning, a merger or acquisition of another bank that might drive up costs.)
Interviewer: No, our growth is organic, not through acquisition. (Looks like this is a dead end. Time to move on to other considerations.)
You: Have you considered outsourcing non-critical business tasks?
Interviewer: What kind do you suggest? (Your interviewer is probing to see if you can name the kind of services a bank might successfully outsource.)
You: Well, what about information systems, call centers and customers service, bill collection, document handling, those kind of things?
Interviewer: Oh, no. That's not possible. (Remember that this is a role play. This seems a bit uncommunicative for a reasonable suggestion; you should probe a bit further. Businesses aren't always entirely reasonable in their actions!)
You: Can you explain your objections?
Interviewer: Don't you think outsourcing those processes is extreme? We're a bank, and we have a lot of confidential information on both paper and electronic media. Our integrity would be put at risk if we let others manage our internal functions.
You: Well, sir, I understand your objections. However, many major corporations use organizations that centralize activities like copy centers and conference planning, all of which also have trade secrets and confidential information.
Interviewer: That sounds interesting, and I'd like more information. (Your interviewer graciously acknowledges the wisdom of your suggestions.) But can you give me a concrete suggestion my supervisor will like?
You: (Time to return to a less controversial aspect.) What would you estimate your spending to be for things like office products?
Interviewer: I estimate about $100 million on office products, corporation wide, in 1998, though you'd have to talk to our operations people, of course.
You: I think, based on your information, that there are ample opportunities for cost savings that I can identify right now. Reducing your vendors down to one or two will allow you to use economies of scale to extract cost savings. Outsourcing promises even greater savings.
Practice Question #4: Paper on Air
A restaurant owner is currently setting up a new restaurant and making some basic decisions on how to fit it out. He is today making a decision on the facilities to place in the restrooms for customers to dry their hands. Initial research suggests that he has three options - paper towels, roller towels and hot air dryers. What should he consider in his decision-making process?
In the initial analysis, you might ask a number of questions, which will influence your decision.
• What type of restaurant is it going to be - luxurious, budget, middle-market?
• How many customers does he expect? (How many tables? Is it open during the day? In the evening?)
• Has he done any customer research to see what customers would prefer?
Fairly soon in the process, you should start asking questions about the economics of the three options - in which case the interviewer will give you some more information:
In the initial research, the restaurant owner has found out the following information from the suppliers of the drying facilities:
• Dryers have an initial cost of $500 each (but you'll need two - one for each restroom) and monthly service charge of $100 per month. The supplier estimates that the lifetime of a dryer is four years.
• Paper towels cost 5 cents each and the number of paper towels that you will need (varies directly) with the number of customers. So if you expect 50 customers a night, they will use 50 towels.
• If you use toweling rolls, they will cost $5 per roll (and again you'll need two - one for each restroom). The rolls will be changed daily if the restaurant has more than 2,000 customers per month or every other day if there are less than 2,000 customers per month.
At this point, it's obvious that from an economic standpoint, the option you select will vary with the number of customers. Therefore, it makes sense to look at a break-even calculation.
First of all, take the dryers. They cost $100 per month, plus an upfront charge of $1,000 that you should depreciate over their lifetime (i.e. an additional $1,000/(4 x 12) per month = $21 per month). Therefore their total cost is approximately $120 per month - and this does not vary with the number of customers coming into the restaurant.
Secondly, look at the paper towels option. These vary directly with the number of customers in the restaurant, at a cost of $0.05 per customer. Therefore with a low number of customers per month, paper towels will be cheaper than dryers will. How many customers would have to come to the restaurant each month to make the dryers more cost effective? The cost of towels would have to exceed $120 per month, equating to $120/$0.05 = 2,400 customers per month.
Is this break-even affected by the rolls option? At less than 2,000 customers per month, the rolls would cost $10 every other day or $10 x 15 days = $150 per month. This in itself is more costly than both the dryer and the towels option, and with more than 2,000 customers, it will only look more unfavorable.
Therefore the real economic decision is between towels and dryers. At less than 2,400 customers per month (or 2,400/30 = 80 customers per night) you would prefer the towels. Once the number of customers increases above this, you'd switch to the dryers' option.
Following the economic analysis, you might mention a few more non-economic points that might sway the balance:
• Are there additional staff costs of cleaning up paper towel waste?
• How many suppliers of each option are there? If there is a single supplier, might he have the capacity to raise prices in the future?
Hints on quantitative cases:
• Make the numbers easy - round up or down when possible to make further calculations easier.
• When you're jotting down numbers, make sure you keep a track of what is what, so when you pull together your recommendations at the end of the analysis, you can make comparisons between the options.
• In break-even cases, it is sometimes effective to draw a graph to illustrate the break-even decision (in this case, number of customers per month along the x-axis vs. cost of drying option along the y-axis).
Practice Question #5: Making a Case out of Lemons
Your niece approaches you and says "Since you're a management consultant, maybe you can help me. I want to buy my mother a present for her birthday, and I was thinking of opening a lemonade stand to earn the money. Tell me what you think of my plan."
Isn't she cute? Yet this is a serious case (from Bain, no less). The interviewer is trying to see if you can set up a value chain for your niece. Get out your notepad.
You: What kind of present do you want to get for your mother?
Interviewer: I want to get her a pair of gold earrings.
You: That's a very nice idea. I'm going to assume that you want to buy a pair of earrings that cost $50.
Interviewer: Actually, the earrings I want cost $100. (The interviewer is trying to raise the bar a bit.)
You: Okay. When is your mom's birthday? What's your time-frame?
Interviewer: My mother's birthday is in three months.
You: What kind of time commitment can you make to the lemonade stand? How many days a week do you plan to run the stand?
Interviewer: I have to go to school during the week, so I think just on weekends.
You: Here are some of the considerations you need to make if you want to earn $100 in three months from your lemonade stand.
What are your expenses? Let's say that you need to buy the pitcher, which is $2. Every 100 plastic cups will cost you $1 in direct costs. Those are your base expenses.
You then have to make several cost decisions. What size cups will you use? Eight-ounce cups will mean that you can serve more cups of lemonade per pitcher. (If it's a gallon jug, with 64 ounces, then you can serve eight cups per pitcher. Sixteen-ounce cups, which may be perceived as a better value, means that you can serve only four per pitcher.)
You must also decide what kind of lemonade to serve. Lemonade made from powdered concentrate is probably the cheapest - perhaps $1 a gallon. Lemonade made from fresh squeezed lemons has a definite quality advantage, but it's more expensive. At $0.25 a lemon and eight lemons to a gallon, it would cost $2 for each gallon. And you might be able to get prepackaged lemonade sold at the store for $1.50 a gallon.
Interviewer: So how long will it take me to get enough money for the earrings?
You: Assume $10 in sunk costs - $2 for the pitcher and $8 for 800 cups. You then need to decide what to charge. If you charge 50 cents a cup of lemonade - which I believe is the upward end of lemonade stand prices - and it costs you $1 to make the cheapest gallon of lemonade, then you'd earn $3 on each gallon of lemonade sold. In four weekends in three months, you would need to sell 37 gallons of lemonade. Then you'd earn $111 dollars - enough to pay off the pitcher and cups. That's three gallons a weekend, or 24 cups of lemonade each weekend.
Interviewer: Does this sound reasonable to you?
You: So far, yes. But this is just the cost-structure. You must consider other factors as well. Who are your competitors? Are there other kids trying to sell lemonade at the same time? Are you located near delis and restaurants and street vendors who might sell competing beverages?
What is the demand for your product? Is it summertime, when people drink a lot of lemonade and are spending time outdoors, generating foot traffic? If not, you may have difficulty moving your lemonade. In cold weather, you might want to consider selling hot cider instead.
Where are you located? How many potential customers will pass your lemonade stand? Can you set up your lemonade stand at a sporting event, supermarket parking lot, or flea market, where many more people will pass your stand? If you just set up on the sidewalk, you may not attract the foot traffic to make those numbers. Indoor or sheltered locations are also preferable if the weather turns bad.
You have a competitive advantage - you're young and cute. You may get business from people who approve of your young entrepreneurial actions. At the same time, lemonade stands have a reputation for relatively poor lemonade, which may hurt your overall sales if you have competition.
Do you have any subsidies? That is, would your dad be willing to cover your start-up costs - the pitcher, the cups, and perhaps the cost of the lemonade. This would perhaps permit you to offer better-quality lemonade.
Consider your advertising. You'll need a big sign to call attention to your stand. You can rely on your parents for free - I assume - word of mouth.
You should also consider offering another product besides lemonade. Perhaps selling cookies or brownies, in addition to the lemonade, might increase your profits.
You should consider other revenue-generating activities as well. If you are 14, a paper route is a possibility. You may also be old enough to babysit.
It's also possible that you might be able to choose another pair of earrings, or find the ones you want on sale. This would lower your income requirements.
Practice Question #6: Phoning in a Case
You are advising a credit card company that wants to market a prepaid phone card to its customers. Is this a good idea?
Whoa! Better find out more about this prepaid phone card first before you even begin to think about recommending the phone card.
You: What is the role of our company? Do we simply market the card or must we create them ourselves? Are we expected to provide the telephone services?
Interviewer: This card will be co-marketed with an outside phone company. We do not need to perform telecommunications functions.
You: What are our expenses connected with the card?
Interviewer: We must pay 15 cents for every minute we sell. We also have to pay $1.00 as a start-up cost for the card and card systems.
You: What are our marketing expenses?
Interviewer: We normally use slips of paper that are attached to the backs of our credit card payment envelopes. We sometimes also send customers a direct mailing - in a separate envelope. Or we can have telemarketers call selected customers.
You: What's the cost of each of these marketing techniques, and what is their response rate?
Interviewer: Telemarketers have a 2 percent response rate and cost $1.00 per call. Direct mailings cost us 40 cents per mailing and have a 0.50 percent rate of response. Our payment attachments have a 0.25 percent rate of response, but only cost us 5 cents each.
You: I'm going to assume we will sell one-hour phone cards. That will cost us $9.00 for the minutes and a dollar per card - so each card costs us $10.
Interviewer: Okay, that sounds reasonable.
You: And what is our expected revenue on a one-hour phone card? What is the current market rate for a 60-minute phone card?
Interviewer: Assume it's 50 cents a minute.
You: So if we sell the cards for $30, we have a $20 profit, minus our expenditures on marketing.
Interviewer: What's our cost structure look like?
You: Okay, let's figure this out. To sell 1,000 cards through telemarketing, we would need to contact 50,000 people. That would cost us $50,000. To use direct mail, we would have to contact 200,000 thousand people, which, at 40 cents per mailing, costs us $80,000. Since the envelope inserts aren't very reliable, we will need to contact 800,000 people using that method. But at 5 cents each, it costs only $20,000 to sell 1,000 cards.
We make $20 profit on each card. But even using the cheapest promotional vehicle, at $20 profit, we would only break even, because our profits on 1,000 cards would be $20,000. We shouldn't market this card, unless we can further cut our marketing costs or increase the price of the card. If we could slice the cost of the envelope attachments a penny or so, or sell the card for $35, or convince our co-marketer to reduce our costs, it might be worth selling.
Interviewer: What are some other issues you might want to consider? (Notice how the interviewer is nudging you to add to your analysis.)
You: We should also consider the competitive landscape for this business. Is the per-minute rate for calling card minutes expected to fall? If so, and our costs are held constant, we may lose money. Of course, we can learn more from marketing these cards. It could be that the people likely to buy these cards might be frequent travelers and could be targeted for other promotions.
