Case 2 - Strategy Case: Corporate Strategy for a Film Studio Department Strategy Business Situation Our client is a leading film and television studio. They have an in-house postproduction division which performs several services in support of their production of movies and television programs. This division has been consistently unprofitable for several quarters. The Chief Financial Officer (CFO) has hired us to determine their strategic options for the division. ‘Some key information to consider includes: + Postproduction is a part of the industry which is often outsourced, and our client is one of the few studios that retains this function in-house. + The postproduction division performs the following services: Service: Dailies Description: The facility matches the audio and video daily, roughly cuts the scenes together, and provides either DVD or online copies to the producers Customer: Active movie productions Critical Issues for Customers: Speed Current Trend: Stable Service: Mastering Description: After the completion of a movie, the facility cleans up the images, corrects the color to make sure it is consistent throughout, and formats the movie for multiple media, particularly DVDs Customer: New Production and Home Entertainment Department Critical Issues for Customers: Quality and Price Current Trend: Decreasing Service: Restoration Description: Films are reconstructed from their original negatives for release on DVD and other media Customer: Home Entertainment Critical Issues for Customers: Quality Current Trend: Stable Question 1 ‘What information and data must be considered in evaluating the studio’s options? Our recommended Answers A strong answer would include the following itis important to consider whether the function could cost-effectively displace outsourcers for our own in-studio movies and whether excess capacity could be used to drive new revenue sources. We would need to evaluate performance, profitability and volume by segment, Your Answer Question 2 Given the limited data provided (see charts on last page), what can you determine regarding the relative profitability of each service? Our recommended Answers We are looking for a response similar to the one below. + The decrease in revenue is primarily due to a drop-off in Home Entertainment Mastering — the largest, yet least profitable, segment of their business. + Restoration, while a small part of the business, is much more profitable than other services. + The services vary in the revenue generated by each job and their profitability. + The revenue and profitability of each segment are as follows in the accompanying chart on last page.Your Answer Question 3 ‘What approach would you take to evaluate the postproduction services? Our recommended Answers A strong response would include the following ‘A good approach would be to identify profitable growth areas for the division and then assess the opportunities and challenges of shifting the focus of the business. Because the division is known for the quality of its work, this may allow it to successfully differentiate their services in the highly profitable Restoration segment. However, growing the segment, especially through new customer acquisition, will require additional costs and must be ‘weighed against the benefits. Another option would be to divest the business, but the client would need a method for valuing the division and identifying and vetting potential buyers. Your Answer Question 4 What additional factors should be considered in a turnaround deci jon? A divest decision? (Our recommended Answers Although there are a number of factors that could be presented, a strong answer would include the following Turnaround and grow the postproduction business. 1. Identify the reasons for the drop off in Home Entertainment mastering. It is possible that the DVD market has been fiat industry wide, but there may be other factors within the group’s control that have contributed to the deciine. 2. Pursue new customers outside of the studio. + They may be able to compete with 3rd party vendors for other studios’ work as well + Focus on growing the Restoration business. This is the most profitable segment and plays to the group's strength in quality work. Based on the current revenue and profit margins, the group could return to profitability with an additional two Restoration jobs. + Develop a television business. Currently, the group focuses just on movies. They could perform the same services for TV shows as well + The implications of these growth schemes must also be considered. It would be important to assess if the group has the necessary people, processes and technology in place to enable such growth. 3. Cut costs. The client could examine both fixed and variable costs in an effort to restore the group to profitability Divest the business The olient must identify an appropriate method for valuing the business. Options could include: * Discounted cash flow — we could produce pro-forma financial statements and then apply an appropriate discount rate to value the business today. * Multiples ~ sales of similar businesses could be examined and the corresponding EBITDA multiples could be applied to the client's business. The client must also determine what constitutes an appropriate buyer and what implications a divestiture would have on the studio. Considerations may include’ + Would selling to another film studio give a strategic advantage to a competitor? What companies arehave on the studio. Considerations may include: + Would selling to another film studio give a strategic advantage to a competitor? What companies are considered competitors and how may a sale affect their position in the marketplace? + What impact would a divestiture have on the operations of the studio? Would exclusive use of outside vendors have any negative impact on the quality or speed of the studio's postproduction activities? Would costs for these services rise as a result of the divestiture? Your Answer Case Debrief This is a standard corporate strategy case that tests the candidate's ability to analyze data, draw practical, meaningful conclusions from the data and formulate recommendations based on the analyses. It is important to demonstrate strong quantitative skills and quickly crunch the numbers, but the candidate must also connect that analysis to a clear set of options for the client to pursue A strong candidate wilt: + Identify the types of data and analyses that are necessary to support the case. * Quickly perform the basic analyses needed. + Translate the results into a specific set of options for the client. + Understand how those recommendations may impact the clients business as a whole. Case 2 tips Tip: Listen carefully The interviewer will often disclose important details about the case during the initial description of the business situation. Make sure to pay close attention to the details described during the case introduction Tip: Know what to ask for This question tests a candidate's ability to formulate strategic options for a client and identify the data that must be analyzed in order to assess these options. Consultants must be able to quickly identify the types of data that will be most useful in evaluating their clients’ alternatives. Tip: Read between the lines During a case interview candidates will frequently be asked to review several pieces of data and provide some high-level analysis of the figures. The ability to analyze data and glean some practical insight from it is essential to success in virtually any client situation. Tip: Think structure Questions like this evaluate a candidate's skill in identifying and assessing strategic options available to a client. In a client situation, simply providing options is not enough. We must also provide a framework for evaluating those options and help the client make the decisions that are best for their business. The interviewer will specifically be looking for the candidate to develop a logical approach to structuring the problem and its solution Tip: Think big picture As was the case with the previous question, this question tests a candidate's ability to logically assess the client's options. In this case, the question requires that the candidate consider a broad set of implications and think about how each option may affect the client's business as a whole and the broader market. A successful consultant must be able to see beyond the individual department, business unit or company he or she is serving and understand how other stakeholders may be impacted. Consultants must also have a basic understanding of the additional considerations involved in common business decisions (e.g., a divestiture).