Ace The Case Handout 2014-2015 v2 Cornell PDF

Ace the Case
Randy L. Allen

2014 -‐ 2015

Agenda
1) Successful Consultant Framework
2) Case Overview
•  What are case interviews
•  How are they administered
•  What is the interviewer looking for
3) Case Approach
•  Structure
•  Analysis
•  Conclusion
4) Case Structuring Tools
•  Minto pyramid
•  Frameworks
•  Case math
5) PracMce
•  Structure
•  Mock Case
© Randy Allen 2
Why Consulting for a Career Path?
Work with a
variety of
Like to do people in a
new things team
Like solving
and tackle environment
complex
new problems
problems
Like to ask
why
Challenging
© Randy Allen 3
Successful Consultant Framework
Successful Consultant

Consulting Attributes

which are
Core Capabilities

Foundation Capabilities

Self
People

Functional Knowledge
Industry Knowledge

Personal Attributes
Leadership Attributes

These form a Consultant

Capability Matrix

© Randy Allen 4
ConsulMng ANributes
Consulting Attributes

Self
People

Personal Attributes

Leadership Attributes

Consulting Capabilities

Intrinsic Values
Engagement Management
Client Management

and Thought Leadership

•  Integrity

•  People Development

•  Issue Identification

•  Relationship Management

•  Teamwork

•  People Leadership
•  Advising Skills

•  Intensity/Drive/Energy
•  Hypothesis Formation and •  Coaching/Feedback

Problem Structuring
•  Business Culture
•  Reliability

Sensitivity

•  Professionalism
•  Analytics

•  Respects Diversity
•  Synthesis and Creativity
Key Takeaways

•  Creativity/Innovation
•  Oral and written
communication
•  You can not be a successful consultant without
•  Flexibility

•  Attention to detail
these attributes

•  Initiative

•  Seeks Personal Growth
•  Willingness to see it to the •  The consulting capabilities and thought
end
leadership are being tested in case interviews

•  Perseverance

•  Behavioral interviews, covers letters, resumes
and networking test the rest

© Randy Allen 5
PuPng It All Together
People

Leadership
Attributes

Functional

Knowledge

Consulting Capabilities This is the

and Thought critical area for
Leadership
you to improve

You come
Knowledge and Intrinsic
experience base
values
to The
Johnson
School
with these

© Randy Allen 6
To be successful in a consulting career
search you will need to practice
• Authenticity
ü What do you want to do?
ü  What are you prepared to do?
• Initiative
ü Network
ü Use the resources
ü Hone your resume and cover letter
ü Practice interviews
§ Pitch
§ Par
§ Case
• Excellence throughout the process
© Randy Allen 7
Case Overview:
What is a case?
© Randy Allen 8
Case Overview
What is a case interview?
A case interview is a way for firms

to test your problem solving ability.
This is different than a case you do in

class.
© Randy Allen 9
Case Overview
Case interview set up

Oral or wriNen
Data, tables and graphs may be provided
Set up by the interviewer
You should lead the conversaMon through

structured thinking.
You should end with a recommendaMon.
© Randy Allen 10
Case Overview
Two general case interview types
Well defined with data and

Broad with liNle or no data
supplemental data if asked.
•  Can you logically structure a •  Can you logically structure?
problem at a high level and •  Can you do analysis
drill across and down? including numbers?
•  Are you comfortable with •  Can you do basic
ambiguity? mathemaMcal and financial
•  Are you creaMve and do you analysis?
have good insMncts? •  Are you focused on what is
•  Do you have good business important and key facts?
sense?
© Randy Allen 11
Case Overview
What are interviewers looking for?
Structured Thinking
•  Structured, logical approach
•  IntuiMve reasoning
•  Curiosity and creaMvity
•  Logical, probing quesMons
•  Synthesis and conclusions
•  Interest in solving complex problems
AnalyMcal Skills
•  Comfort with ambiguity/poise under pressure
•  Broad funcMonal skills
•  AnalyMcal rigor
•  QuanMtaMve, numerical agility
PracMcality
•  Judgment, common sense
•  Business acumen/insMnct
•  Clear, logical communicaMon
It is not about a 100% correct answer, but focusing on relevant points and doing
so in a logical manner
© Randy Allen 12
Case Approach:
How do I solve a case?
© Randy Allen 13
Case Approach
Approach to getting through a case interview
Structure Analysis Conclusion
•  Receiving the •  Collect data •  PresenMng your

case •  Common recommendaMon
•  Structuring your analysis/ •  Explaining your
thinking calculaMons problem solving
•  Develop a •  Combining approach
hypothesis quanMtaMve and •  Addressing
qualitaMve rebuNals/
concerns
© Randy Allen 14
Case Approach
Approach: 5 steps
Structure Analysis Conclusion
Determine
Define the Structure Conduct
the key Conclusion
problem the analysis Analysis
issues
•  Interviewer •  Break the •  Eliminate any •  Dive down into •  Use a pyramid or
presents the problem into non-key issues each area decision tree to
question parts – create a that you find synthesize
•  Collect data, if
problem tree/ before diving into findings
•  Ask questions to available
pyramid details
clarify if needed •  Make your
•  Use your data to
1-3 questions •  Create your •  Explain why you recommendations
conduct analysis
issues/sub- are eliminating using your
•  Paraphrase to
issues and •  Make pyramid or
make sure you •  Focus on what’s
hypotheses assumptions decision tree
have it right important but
•  Talk through make sure you •  Combine •  Support with facts
•  Compose your
your structure haven’t missed quantitative and
thoughts (take a •  Be confident
anything qualitative
minute or so) •  Be sure you
information •  Address rebuttals/
have an
concerns
hypothesis •  Be hypothesis
and end product
focused
What about Frameworks? Frameworks are just tools to help analyze the problem.
Combine frameworks and your structure to present the case to the interviewer
© Randy Allen 15
Case Approach
Structure: Receiving the case
AcMve listen and note taking

•  No need to write down everything word for word
•  Be aware of handouts
•  Note any follow up quesMons
Re-‐staMng the case

•  Confirm all the details of the issue
Confirm objecMves
•  Make sure there are no other objecMves
•  Clarify what’s the most important objecMve
© Randy Allen 16
Case Approach
Structure: Structuring your thinking

Set up structure
• Don’t just apply a framework
• It should be MECE
• Make sure it’s applicable to the problem
You can ask a few high-‐level quesMons

• Helps clarify your structured thinking
• Learn about the industry
• Do not fish for hints
© Randy Allen 17
Case Approach
Structure: Develop hypothesis
State the hypothesis that you’re

trying to prove or disprove
• Provide short explanaMon/details that
guided you to this hypothesis
© Randy Allen 18
Case Approach
Analysis: Collect data
Progress through structure
• Go systemaMcally “bucket by bucket”

• Physically show the interviewer your structure
• Adjust as more informaMon is revealed, if needed
Show the interviewer the data you would like

to know
• Explain how this data will help you prove/disprove
hypothesis
© Randy Allen 19
Case Approach
Analysis: Common analysis/
calculations
Write down data clearly, as stated
• Ask clarifying quesMons, if needed
Talk through the calculaMons/analysis

• CalculaMons in your head is best
• BeNer to write it out, rather than get it wrong
Answer the quesMon with numbers

• Do a reality check
© Randy Allen 20
Case Approach
Analysis: Combining quantitative
and qualitative
Elaborate on the numbers

• Explain how the numbers
prove/disprove the hypothesis
or recommendaMon
© Randy Allen 21
CriMcal Analysis
Do’s Don’ts
•  Be hypothesis-‐driven and end •  Do not just “run the numbers”– ask
products-‐oriented yourself “what quesMon am I trying
•  “Porpoise” frequently between to answer?”
hypothesis and data
•  Do not chase your tail
•  Keep the analyses as simple as
you can. Be suspicious of huge •  Do you really need to calculate the
complicated analysis/math. WACC?
•  Do order of magnitude esMmates •  Don’t miss the forest for the trees
before you start detailed analyses
•  Beware of “polishing dirt”
•  Use 80/20 and back-‐of-‐envelope
thinking •  Look for breakthrough thinking
•  Do not be afraid to be creaMve
© Randy Allen 22
Case Approach
Conclusion
Recap the problem

•  Restate the sub-‐issues that were explored
State the recommendaMon(s)

•  Support with facts and numbers
© Randy Allen 23
Case Structuring Tools
© Randy Allen 24
Tools you can use during a case

Minto Pyramid These drive your
•  Helps lay out the case approach structure and recommendaMon thinking and logic
and support
Problem DefiniMon Map structuring your
recommendaMon
•  Creates a logic structure of issues, sub-‐issues and quesMons for
analysis and developing hypothesis leading to recommendaMons
Frameworks
Frameworks and
•  Help idenMfy sub-‐issues in the case approach structure Math Formulas
are support to
Math formulas the analysis
•  Help with calculaMons/analysis
© Randy Allen 25
The Pyramid Structure

The pyramid structure is NOT a framework –
it facilitates problem solving through a logical and hierarchical
approach
Governing Thought
States the answer to the question
raised in the readers mind
Key Line
Major points which, taken
together prove the answer
Support
Data and facts which
support the key line
Source: Minto, Barbara: The Minto Pyramid Principle Logic in Writing, Thinking and Problem Solving (Minto International, Inc., 1996)
© Randy Allen 26
The Pyramid Structure: Introduction

The introduction establishes the context of the problem or issue and its
solution for the reader
• Contains the three elements of a story: the situation,
•  Situation: A statement about the subject
complication and solution implicitly answering a question
with which you know the reader
• Sets up the relevant question that will be answered in the will agree
document as well as the context with which it will be addressed
•  Complication: The complicating event that
• Reminds the reader of the issues rather than informing
creates the tension in the story
•  Question: The implicit question that results
Governing Thought Answer
from the complication
Key Line
Support
© Randy Allen 27
The Pyramid Structure: Applying Logic
In structuring the solution to a problem, logic should be
applied both vertically and horizontally
Governing Thought
Vertical Logic
§ Creates a question
and answer dialogue
Key Line that responds to the
governing thought
§ Continues raising
and answering
questions until there
Support are no more logical
questions to ask
Horizontal Logic
§ Relies on inductive and deductive logic to answer the questions at each level
© Randy Allen 28
The Problem Definition Map
Sub-Issues Questions to answer
Sub-Issue one? Question one?
Question two?
Sub-Issue two? Question three?
Situation Problem Major Issues
Sub-Issue three?
Sub-Issue four?
© Randy Allen 29
A laundry list (maybe from brainstorming)….
© Randy Allen 30
Issue mapping tip: MECE
• Mutually
• Exclusive Or… nothing le2
out and nothing
• Collectively overlaps
• Exhaustive
© Randy Allen 31
Turned into an issue tree
© Randy Allen 32
Example with Acme: Defining the Project
Problem
•  At the initial meeting with Acme Company,

management described the cost issues that
the business is continually facing
•  The business is a medium size widget
manufacturer in a highly competitive market
with limited opportunities for differentiation
•  Management believes there are opportunities
to reduce costs while retaining quality in the
direct materials area of the business
© Randy Allen 33
Acme Example: Defining the Problem
Situation Problem Major Issue
(Complication)
Mid-size widget Given the cost Are there cost savings

manufacturer in a pressure, profits are that can be achieved
highly competitive under pressure. in direct materials?
market. Buys a Management is
variety of raw looking at areas to
materials. Cost reduce costs
pressure has
increased in the
last year.
© Randy Allen 34
Acme Example: IdenMfying Related Sub-‐Issues
Situation Problem Major Issues Sub-Issues
Potential
competitive
disadvantage in
Mid-size widget Given the cost direct material
manufacturer in a pressure, profits Are there cost purchasing?
highly competitive savings that can
are under
market. Buys a be achieved in High SKU count?
pressure.
variety of raw direct materials?
materials. Cost Management is Multitude of vendors
pressure has looking at areas supply the same or
increased in the to reduce costs similar parts?
last year.
There is no system
to manage order
placement or
frequency?
© Randy Allen 35
Acme Example: Divide Sub-‐Issues Into QuesMons
Major Issues Sub-issues Questions à Drive Analyses

Are there cost Potential competitive How is purchasing done today?
savings that can disadvantage in direct
be achieved in material purchasing? How does our process compare to
direct materials? competition?
How does it compare to best practices in
general?
High SKU count? How many SKUs does the company have?
What is the distribution of parts usage?
Are there opportunities to use the same

part in place of another one to have fewer
parts?

© Randy Allen 36
Eliminate all Non-‐Key issues
Issue 1 Why
•  First step in constant, interactive
refinement process
•  Focuses your effort on what is

Issue 2 most important
Problem Do’s & Don’ts
statement
•  Always ask yourself “so what” . . .
Issue 3 but also ask yourself what you
might have missed
•  Tell the interviewer what you are
cutting and why
Issue 4
© Randy Allen 37
Let’s Apply to Acme
How is purchasing done
today?
PotenMal compeMMve
How does our process
disadvantage in direct material compare to compeMMon?
purchasing?
How does it compare to

best pracMces in general?
How many SKUs does

the company have?
Are there cost savings that
can be achieved in direct
materials?
What is the distribution

High SKU count? of parts usage?
Are there opportunities

MulMtude of vendors supply the to use the same part in
same or similar parts? place of another one to
have fewer parts?
There is no system to manage

order placement or frequency?
© Randy Allen 38
Let’s Apply to Acme
As you go through the
How is purchasing done
today? case you learn that
we use a system and
process that is solid,
PotenMal compeMMve
How does our process fits with what
disadvantage in direct material compare to compeMMon?
purchasing? compeMMon and best
pracMces are doing
How does it compare to

best pracMces in general?
How many SKUs does

As you go through the
Are there cost savings that the company have? case you learn that
can be achieved in direct we have an
materials? abundance of SKU’s,
What is the distribution many are only used in
High SKU count? of parts usage?
one widget,
engineering has
Are there opportunities confirmed that some
MulMtude of vendors supply the to use the same part in parts could be
same or similar parts? place of another one to
have fewer parts? replaced by others
There is no system to manage

order placement or frequency?
© Randy Allen 39
Use Minto to deliver recommendation
Situation:
Mid-size widget
Acme can reduce their manufacturer in a
direct material costs highly competitive
by market. Buys a
variety of raw
materials. Cost
pressure has
Reducing the total
increased in the last
number of SKUs ImplemenMng a new
ConsolidaMng Vendors year.
through more purchasing system
common parts Complication:
Given the cost
pressure, profits are
under pressure.
Acme is They can get Management is
missing volume looking at areas to
beNer terms reduce costs
discounts
Question:
Are there cost
savings that can be
achieved in direct
materials?
© Randy Allen 40
Case Interviews Do’s and Don’ts
What to Do What Not to Do

•  Before practice, practice, practice •  Play 20 questions
•  Read the papers •  Frameworks
•  Know the industry, the firm and your story –  Avoid simply throwing frameworks at
problems!
•  Bring pencil and paper
–  Assume 1 framework fits all
•  Listen
–  Don't get bogged down by frameworks
•  Take a few minutes to compose your thoughts
–  A framework is a tool, much like a
•  Ask clarifying questions and think out loud hammer is a tool, not the solution...
•  Structure and communicate it –  A framework is not the answer in and
•  Pick one branch to probe, develop of itself
hypotheses, ask for a few relevant facts, –  Never explicitly state that you are using
defend/refine hypotheses based on new a framework
information, probe further, and describe •  Cover one issue without mentioning and
implications you see prioritizing all key issues
•  Prioritize •  Dig your heels in
•  Check your progress •  Hide from the details (or the numbers)
•  Be careful how you answer •  Get frustrated
•  Conduct a postmortem in the interview
© Randy Allen 41
PRACTICE
© Randy Allen 42
Case Practice
Example:
•  You have 200,000 repair calls a year
•  You estimate with changes in software you will
save 5% of the calls in the first year and an
additional 2% in the second year.
•  Each call costs $200
How much will you save over two years?
© Randy Allen 43
Case Practice
•  Year One
–  5% of 200,000 = 10,000 fewer calls
–  Savings is $2 million
•  Year Two
–  Additional savings is 2% of 190,000 = 3,800
fewer calls
–  Incremental savings is $760,000
–  Total year two savings = $2,760,000
•  Total savings for two years is $4,760,000
© Randy Allen 44
Case Practice
Structure Practice
•  What should you do on winter break
•  Where should go to dinner tonight
45
Case Practice
Sunscreen Market Entry
Your client manufactures hair products.

It’s thinking about entering the
sunscreen market. Is this a good idea?
1.  Structure the case
2.  Conduct analysis
3.  Conclusion and recommendation
© Randy Allen 46
Case Practice
One Possible Way to Think About the Problem:

•  Step 1: Investigate the market to determine whether entering the
market makes sense for the company – Key Questions Include:
–  What is the potential market size? Growth?
–  Who is our competition and what is their market share?
–  How do their products compare to ours?
–  Are there barriers to entry?
–  Does the company have the capabilities to compete in the
market?
•  Step 2: If we decide to enter the market, we need to figure out the
best way to become a player. There are numerous ways to enter a
market, and the company could investigate:
–  Starting from scratch
–  Acquisition
–  Joint venture/strategic alliance
•  Step 3: Think about a cost-benefit analysis to decide on an
appropriate recommendation
© Randy Allen 47
Case Practice
•  You have a client that manufactures, among other

things, baNeries for use in cameras and watches.
•  The baNeries are sold as original equipment and as
replacement parts.
•  The baNery division has been struggling for a
number of years and the client has asked you to
help turn things around.
•  What would you want to analyze in an effort to
improve profitability? What is your hypothesis?
48
Case Practice
Additional Information
•  Industry is price conscious
•  Competition is moving manufacturing overseas
•  Other competitors are profitable
•  Raw materials used in batteries are commodities
•  Cost structure
–  Direct materials = 20%
–  Direct labor = 40%
–  Material handling overhead = 15%
–  Tooling surcharge = 25%
© Randy Allen 49
Inventory Reduction
•  Your client is a multi-billion dollar retailer
•  You have been hired to reduce their
inventory by $ 1 billion and put actions in
place to keep it from returning
•  How would you approach the problem?
•  Create your hypotheses and structure
50
Case Practice
Structure
•  Solid structure of cases is critical to solving
them
•  Go back to the Minto Pyramid
–  Create situation, complication and question
–  Create pyramid
•  Create a problem definition map
–  Situation
–  Problem
–  Major issue
–  Sub-issues
–  Hypotheses
© Randy Allen 51
Call Center Case
• Situation – Our call-center has limited capacity
• Complication – Significant volume will be added to

the call center soon
• Question – What should we do in order to assure

the service provided by our call center will not
decrease in terms of quality?
© Randy Allen 52
Call Center Case
Structure
How will we determine what we
need to do in order to handle the
addiMonal volume of calls
Understand the Understand our Understand the drivers of

combined total call staffing and their calls and can anything be
volume and its producMvity done to reduce the volume
characterisMcs
•  Ship schedule of call handling

•  Total Call volume staff
•  Time of day and day of week •  Level of automaMon in use and
volume the funcMons performed
•  Cause of the top ten calls
•  Volume by call type •  Match of staffing to Mme of day
•  Can those calls be reduced by any
•  Projected changes in call volume call volume changes to product, service,
•  EsMmate call Mme by type of call •  Flexibility of the staff to handle
documentaMon etc.
•  EsMmate non-‐call related Mme different types of calls
•  If changes can be made to reduce
•  Call type which consume the •  ProducMvity distribuMon and best
volume how quickly could they be made
highest percentage of total Mme pracMces
•  IncenMves in place
© Randy Allen 53
Sun Tan Lotion Case
• Situation – The company is a start-up who markets a
tanning lotion to beach-goers in south California
• Complication – Sales volume is large but not at

anticipated levels
• Question – What should the start-up do in order to

increase sales volume to expected levels or beyond?
© Randy Allen 54
Sun Tan LoMon Case
Structure
How does the start-
up increase sales
volume?
Understand whether Identify if customer Identify issues with

price is influencing demands are being met product availability
purchasing behavior
Do you have evidence that Are the current Is there another How does the How is the product How is the
customers will buy more if customers satisfied customer segment product sell? replenished (at the product restocked
the price is changed? with the product? we should consider? store)? (on the shelf)?
Are you pricing your What do customer What are What is the How frequently is the How frequently is
product at a premium or a satisfaction surveys competitors competitive product replenished? the product
discount? suggest we can supplying? impact on sales? restocking?
improve? What is the communication
What are competitors What do market Is there a mechanism and frequency Who is responsible
pricing their products at? Explore data that research results promotional between the store and for restocking the
indicates suggest that impact on sales? manufacturer? product?
Would competitors respond “anticipated levels” potential customers
if you changed your price? want (different age How does Who is the distributor and How is the product
Are customers group, gender, seasonality who manages the positioned/ displayed
What is the customers’ comfortable with geography)? impact sales? relationship with the on the shelf, i.e. end,
price sensitivity? the price and distributor? high/low, # of rows.
availability of the Where do you
product? sell your Are there outsourcing
product? options for distribution?
© Randy Allen 55
Cool Whip Case
• Situation – Cool Whip is Kraft’s cash cow, it has an 80%
market share, low production costs and extremely high
margins
• Complication – Sales of Cool Whip stagnated for three years

despite aggressive sales efforts
• Question
1. What are the opportunities to increase sales in the US?
2. Are there opportunities to enter a foreign market?
© Randy Allen 56
Cool Whip Case
Structure
What should we do in order
to increase revenues?
International US
Consumer Manufacturing Distribution Competition Can we improve revenues Can we create new
behavior from current product products
What offer new flavors

What countries What countries
have similar have a countries
have less Offer new uses
consumer manufacturing
behavior to the environment is compeMMon
ones Cool Whip is similar to the US. and
already marketed subsMtutes.
at. Where can Use technology Improve product’s sales
manufacturing can in different ways
What countries be launched cost
have consumer effecMvely. Can we license InvesMgate Can we
preference (in technology to compeMMve adverMse
terms of this kind Tradeoff between using US companies who landscape more.
of food) i closer factories and shipping are not

to the US. oversees compeMng with InvesMgate new InvesMgate
us subsMtutes new
channels
Can we use extra Test consumer’s
capacity for price sensiMvity
serving other
companies Bundle with other
products
© Randy Allen 57
Paper or Air Case
• Situation – A restaurant owner is opening a new
restaurant and is looking to equip the restrooms with
hand drying facilities
• Complication – Initial research narrowed the options into

three options
–  Paper towels
–  Air dryer
–  Cloth towel(s)
• Question – How should the restaurant owner go about

deciding between the three options
© Randy Allen 58
Paper or Air Case
Structure
Which one of the three

options the owner should
choose?
Financial Non-financial
considerations considerations
Set-up Variable Maintenance Customer Number of Peak times

costs costs costs segment and customers
preference
© Randy Allen 59
Some Resources
•  Consulting Case Interview Guidebook – Do it, don’t just read it
•  CQInteractive through the management library
•  CaseInterview.com offers users a free 6-hour case interview
video tutorial. The website also has a large number of articles
and Q&A related to consulting.
•  The Vault Guide to Case Interviewing
•  The Big Red Case Book
•  Our Case Videos prepared for you by your classmates
(Consulting Students, Class of 2014)
–  http://jconnect.johnson.cornell.edu/CurrentStudents/
CareerManagementCenter/Consultinginterviewvideos.aspx
•  Math - Secrets of Mental Math, Benjamin and Shermer (2006)
on reserve in the library
•  Mental Math Apps (mental math is free on Google Play)
•  Each other
•  Recent 2014 alums
© Randy Allen 60
Questions?
© Randy Allen 61
APPENDIX - FRAMEWORKS
© Randy Allen 62
Why Use Frameworks?
•  Provide Structure and Logic

•  Eliminate Analytical “Blind Spots”
•  Save Time and Energy
•  Spur Creative Thought
Use frameworks to analyze a case
Combine frameworks and the Minto pyramid

to present a case
© Randy Allen 63
Frameworks
These are some of the frameworks that can help structure thinking.
You can make your own frameworks depending on the case.
•  Profit Equation
•  Porters 5 Forces
•  ValueNet: The 6th force of complementors
•  Seven S
•  Four P’s
•  Product Life Cycle
•  Four C’s
•  Five C’s
•  Value Chain Analysis
•  The 2x2 Matrix
•  Value Drivers (M&A) Framework
© Randy Allen 64
Profit Equation
Profit
Revenue Costs
Price Quantity Variable Fixed
© Randy Allen 65
Profit Equation: Revenues

Price QuanBty
•  Target customer segments
• Market size
•  Product mix and ability to
differenMate product • Growth rate
•  Prices of subsMtutes/ • Market share vs.
complements market demand
•  ElasMcity of demand (%ΔQ/ % ΔP) • Capacity constraints
•  If >1 implies elasMc
• CannibalizaMon
•  If <1 implies inelasMc
•  CompeMtors pricing strategies • Seasonality of
and relaMve market power product
© Randy Allen 66
Profit Equation: Costs

Analyze main cost components as a % of total costs and % of total
sales:
•  Direct labor (union vs. non-‐union)
•  Direct material
•  Allocated Overhead
•  Distribu>on Costs
•  Financing Costs
Consider potenMal flaws in the company’s cost accounMng method
Break down costs into variable and fixed components
© Randy Allen 67
Profit Equation: Costs

Fixed Costs
Variable Costs
•  Capacity uMlizaMon
• SG&A •  Avg output rate/Maximum
capacity
• COGS •  B/E Volume (& Price)
• Taxes •  Fixed cost/unit contribuMon
• Suppliers (consolidate?) •  Economies of scope and scale
• Cost control mechanisms •  Marginal costs < Average costs
implies economies of scale
• IncenMves
•  Marginal costs = Average costs
• Outsourcing alternaMves implies constant returns of
• Impact of backward/ scale
forward integraMon •  NPV of cost investment with
sensiMvity analysis
© Randy Allen 68
Porter’s 5 Forces
Suppliers Customers
Competitive
Regulatory
Dynamics Issues
Potential
Entrants Substitutes
•  Analyzes level of competition

•  Determines industry attractiveness
•  Shows 3 sources of horizontal competitive pressure: substitutes,
entrants, and current rivals
•  Shows 2 sources of vertical competitive pressure: bargaining
power of buyers and suppliers
© Randy Allen 69
5 Forces + Complementors
Govt. Buyers Macro
forces.
Substitutors Firm Complementors

(Rivalry, entry)
Suppliers Value:
• Creation
• Capture
•  Analyzes level of competition, just like 5 forces •  Prevent destruction
•  Is firm-centric- literally true too!
•  Allows you to see multiple roles that players might play
•  Complementors are critical in many industries
•  Value create/capture/preserve is important to remember
© Randy Allen 70
Four P’s
Product PromoBon
•  Product mix and features • Analyze segments
•  Profit margins • EsMmate potenMal/segment
•  SubsMtutes • Consider adverMsing/
•  Cross-‐elasMcity promoMons issues
Price Place (DistribuBon)

•  Demand • Structure
•  Customer willingness to pay • Suitability given objecMves
•  Fit with strategy • Tradeoffs
•  CompeMtor pricing • eg JIT vs. Inventory
© Randy Allen 71
Product Life Cycle Strategies

Stage of the Product Life Cycle
Introduction Growth Maturity Decline
Revenue
or Profit
Total Industry
Revenues
+ Total Industry Profit

0
–
Marketing Gain Stress Maintain Harvest, Exit

Objective Awareness Differences Brand
Reduced
Competition None Growing Many Reduced
© Randy Allen 72
Product Life Cycle Strategies

Stage of the Product Life Cycle
Introduction Growth Maturity Decline
Revenue
or Profit
Total Industry
Revenues
+ Total Industry Profit

0
–
Product One More Full product Best sellers

versions line
Price Skim or Gain share Defend Stay

penetrate share profitable
Promotion Inform, Stress Reminder Minimal

Educate differences oriented promotion
Place Limited More outlets Max outlets Fewer

outlets
© Randy Allen 73
Four C’s
Customers Cost
• Market segmentaMon • Economies of scale
• Purchase criteria • Experience curve
• Will increased producMon
lower cost?
CompeBBon CapabiliBes
•  Market share • Resources available
•  Market posiMon • OrganizaMonal structure
•  Strategy • ProducMon system
•  Cost posiMon
•  CompeMtor market advantages
© Randy Allen 74
Value Chain Analysis
Raw Materials R&D/ Manufacturing Inventory Sales & Distribution
& Supplies Engineering & Assembly & QC Marketing & Service
Infrastructure, IT, Human Resources, Procurement
•  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
•  Identify sources of differentiation and elaborate
•  Rate relative importance of each activity
•  Analyze cost drivers and cost interactions
•  Identify possible outsourcing or integration 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
© Randy Allen 75
2x2 Matrix
High price Worst case

Price high = high margin? for me?
My action
Best case
Price low for me? Price war
Price high Price low
Competitor action
•  Used when 2 factors combine to yield different outcomes
© Randy Allen 76
Value Drivers (M&A) Framework
3 Primary Value Drivers
•  Will volumes/prices increase or Revenues
decrease?
•  Will costs rise faster or slower Cost levels/ Future

than sales? Margins Cash Flow
Value
•  What investments in plant and

working capital are required? Investments
© Randy Allen 77
Business
Value Drivers Unit Value
(M&A) Framework
cont. Cash Flow Getting from
from cash to value
Operations
Cash Profit Investment Discount Rate

Required
Revenues Operating Taxes Working Capital Cost of

Margins Capital Expenditure Capital
• Market size • Retail prices • Effective tax • Debtors • Plant life • Cost of
• Market share • Staffing structure • Creditors • Replacement equity
• Sales mix levels • Contract equipment • Cost of debt
• Wage rates terms • Maintenance • Gearing
• Raw material • Scale of
prices operations
© Randy Allen 78
Seven S Framework
Hardware So2ware
• Strategy • Staff
• Structure • Skills
• Systems • Style
• Shared Values
•  All seven “S’s” are needed to form a network that

reinforces and sustains competitive advantage
•  Competitors may find it possible to duplicate any
one of the “S” attributes, but it will be nearly
impossible to copy the complex web or
interrelationships between them
© Randy Allen 79
Picking a Framework
Firm SituaBon/Decision Factors:
External Issues Internal Issues

•  5 forces + complementors to •  Valuechain to understand innards
understand landscape i.e and capabilities: sourcing, R&R, mfg,
Customers, Suppliers, Substitutors inventory, sales/marketing,
(entrants, subsitutes, rivals), distribution.
Complementors •  Note critically that the external is
connected to the internal. E.g.
•  4Ps (price, promotion, place, •  Supplier power might affect cost
product) if case is on reaching of sourcing
customers/channel decisions •  If you’re changing pricing,
inventory will be affected
•  Product lifecycle to understand •  Early in the product lifecyle, you
landscape might have fewer choices in
valuechain
© Randy Allen 80
Math formulas
•  NPV
•  Growth rates
•  Breakeven Point
•  Retail Math
© Randy Allen 81
NPV
•  NPV is the present value of all incremental
future cash flow streams minus the initial
incremental investment.
•  Calculated by discounting the future cash
flows by an appropriate rate (r), called the
cost of capital.
•  NPV value of will help make a go/no go
decision
•  NPV = C0 + C1/(1+r)1 + C1/(1+r)2 +...+ Ct/
(1+r)t
© Randy Allen 82
Growth Rates
•  Simple Growth Rate
=(AmountEnd – AmountBeginning)/
AmountBeginning
•  Compound Annual Growth Rate

(CAGR)
=(AmountEnd / AmountBeginning)1/n -1
© Randy Allen 83
Breakeven Point
•  Unit Contribution Margin = (Unit Selling
Price –Variable Costs)
•  Breakeven Point = Fixed Costs/ (Unit
Selling Price – Variable Costs)
© Randy Allen 84
Retail Math
•  Markup = Retail Price – Cost
•  Markup % = Markup/Retail Price
•  Margin % = (Retail Price – Cost)/ Retail
Price
© Randy Allen 85

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Ace the Case

Randy L. Allen

These form a Consultant

Consulting Capabilities This is the

What is a case interview?

A case interview is a way for ﬁrms

This is diﬀerent than a case you do in

Case interview set up

Data, tables and graphs may be provided

Set up by the interviewer

You should lead the conversaMon through

You should end with a recommendaMon.

Two general case interview types

Well deﬁned with data and

Approach to getting through a case interview

Structure Analysis Conclusion

• Receiving the • Collect data • PresenMng your

Structure: Receiving the case

AcMve listen and note taking

Re-­‐staMng the case

Structure: Structuring your thinking

You can ask a few high-­‐level quesMons

Structure: Develop hypothesis

State the hypothesis that you’re

Analysis: Collect data

Progress through structure

• Go systemaMcally “bucket by bucket”

Show the interviewer the data you would like

Talk through the calculaMons/analysis

Answer the quesMon with numbers

Elaborate on the numbers

Recap the problem

State the recommendaMon(s)

Tools you can use during a case

• Help with calculaMons/analysis

The Pyramid Structure

The Pyramid Structure: Introduction

The Problem Definition Map

Sub-Issues Questions to answer

Sub-Issue one? Question one?

Sub-Issue two? Question three?

Situation Problem Major Issues

• At the initial meeting with Acme Company,

Mid-size widget Given the cost Are there cost savings

Situation Problem Major Issues Sub-Issues

Major Issues Sub-issues Questions à Drive Analyses

What is the distribution of parts usage?

Are there opportunities to use the same

• Focuses your effort on what is

How does it compare to

How many SKUs does

What is the distribution

Are there opportunities

There is no system to manage

How does it compare to

How many SKUs does

There is no system to manage

What to Do What Not to Do

How much will you save over two years?

Sunscreen Market Entry

Your client manufactures hair products.

One Possible Way to Think About the Problem:

• You have a client that manufactures, among other

•  Receiving the •  Collect data •  PresenMng your

Re-‐staMng the case

You can ask a few high-‐level quesMons

• Go systemaMcally “bucket by bucket”

•  Help with calculaMons/analysis

•  At the initial meeting with Acme Company,

•  Focuses your effort on what is

•  You have a client that manufactures, among other

•  Ship schedule of call handling

•  Provide Structure and Logic

•  Analyzes level of competition

•  Compare value chain to that of competitors and identify sources of differentiation

•  Will costs rise faster or slower Cost levels/ Future

•  What investments in plant and

•  All seven “S’s” are needed to form a network that

•  Compound Annual Growth Rate