USC Consulting Club

Case Workshop Program – Workshop 3

Meeting Recap Math Workshop Case Practice Debrief Looking Forward
by Leland Char, Wilson Kyi, Shen-Shen Wu, Ashley Luo, Zhenni Liu, and Steven Boiko
Agenda
1. Debriefs of McKinsey Market Sizing Case (10 minutes)
1. Debrief of the last case including the rule of 72
2. Strategy on attacking general analytical sections of the case
2. Math Workshop (30 minutes)
1. O-Natura and Refresh Soda Case Calculation (10 and 5 minutes)
2. Pharma R&D Case Calculation (10 and 5 minutes)
3. Bain 1-on-1 Case (35 minutes)
4. Group Debrief (20 minutes)
5. Looking Ahead – survey and deliverables (10 min)

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Try This Case

Problem statement: You are thinking

about either opening a coffee shop in
the downstairs of the CAA building or
working as a consultant at McKinsey.
Which one would you choose to do?

Open a Coffee Shop Become a Consultant

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Relevant Information
• There are some food shops downstairs but no other coffee shops
• The CAA building has two towers connected by an over bridge
• The building is about 12 floors high
• Each floor on an individual side holds about 100 employees
• McKinsey is only on the 8th floor of the left side and are in the office only on Friday
• The CAA staff occupies the entire right side of the building
• CAA is a talent agency that has regular clients visiting the agents in the building
• McKinsey consultants make ~$70,000 in year 1, ~80,000 in year 2, 0 in year 3 and 4 (due
to business school), ~120,000 in year 5 as an associate, and this will grow at a rate of 15%
• All other information should be based on reasonable assumptions

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

McKinsey vs. Coffee Shop

Analysis Tips
General Recap
&
Rule of 72

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Math Workshop – Case 1
After reviewing the key factors RefreshNow! should consider in
deciding whether to launch O-Natura, your team wants to understand
the beverage market and consumer preferences to gauge potential
success of O-Natura.

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Math Workshop – Case 1 (Cont’d)
The bottled water market splits into non-sparkling, sparkling, and imports. Flavored
water falls under the non-sparkling category. Your team has gathered the following
information on the U.S. bottled water market. The information shows an estimate
for the share of flavored water, as well as the current share for the two main
products: Cool and O2Flavor.

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Math Workshop – Case 1 (Cont’d)
Based on the target price and upfront fixed costs, what share of the
flavored non-sparkling bottled water market would O-Natura need to
capture in order to break even?

Some additional information for you to consider:

– O-Natura would launch in a 16 oz. presentation (1/8 of a gallon) with a price
of $2.00 to retailers
– In order to launch O-Natura, RefreshNow! would need to incur $40 million
as total fixed costs, including marketing expenses as well as increased costs
across the production and distribution network
– The VP of Operations estimates that each bottle would cost $1.90 to
produce and deliver in the newly established process

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Math Workshop – Case 1 (Ans.)
• A very good answer would include the following:
• O-Natura would need to capture a 12.5% market share of flavored non-sparkling bottled
water in order to break even. Therefore, O-Natura would need to be the Number 2
product in the market:
• O-Natura would need to sell 400 million units in order to break even:
– Variable profit per unit = $2.00 - $1.90 = $0.10
– Break even units = Total fixed costs / Variable profit per unit = $40 million / $0.10 per unit = 400
million units
• O-Natura would need to capture a 12.5% market share:
– Non-sparkling flavored bottled water market = 5% * 8,000 million gallons = 400 million gallons
– O-Natura sales in millions of gallons = 400 million units / 8 units per gallon = 50 million gallons
– Market share = 50 million gallons / 400 million gallons = 12.5%

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Math Workshop – Case 2
Below is a description of expected probability of success, by stage, in
the Pharma R&D pipeline.

Note: Filing is the process of submitting all of the clinical and safety
evidence from Phase I –III trials, and asking for regulatory approval to
actually sell the drug.

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Math Workshop – Case 2 (Cont’d)
OldPharma believes that the likelihood of success of BioFuture’s
primary drug candidate can be improved by investing an additional
USD 150 million in a larger Phase II trial. The hope is that this
investment would raise the success rate in Phase II, meaning that
more candidate drugs successfully make it to Phase III and beyond. By
how much would the Phase II success rate need to increase in order
for this investment to break even?

Assume that if the drug is successfully marketed and sold, it would be

worth USD 1.2 billion (i.e. the present value of all future profits from
selling the drug is USD 1.2 billion)

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Math Workshop – Case 2 (Ans.)
A very good answer would include the following.
• Investment would need to increase probability of success in Phase II from 40% to 80%
(increase of 40 percentage points). There are multiple ways to approach this calculation.
One method is shown here:
• If a candidate drug passes Phase II, then it has a 50% x 90% = 45% chance of being
successfully marketed and sold. Since a successful candidate drug is worth $1.2 billion, a
candidate drug that passes Phase II is worth 45% x $1.2 billion = $540 million
• To break even, i.e. to make the $150 million investment worth while, value of the
candidate drug that passes Phase II would need to increase to $540 million + $150 million
= $690 million. This means, the probability of combined success in Phase I and II would
need to increase by (150/540) = 28 percentage points
• So the current probability of Phase I and II, i.e., 70% x 40% = 28% would have to increase
by 28 percentage points, i.e., to 56%. In order to come up to 56%, Phase II probability
would have to increase from 40% to 80% (70% x 80% = 56%)
• This seems like a very big challenge as an increase by 40 percentage points means that
the current probability of 40% needs to double

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Bain – Office Supply Co. Case

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Office Products Co.

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Office Products Co. Sales Performance

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Market Sales and Growth Rate

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Margin Performance

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Market Size by Product Segment

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Use of Direct Channel by Customer Size

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Answer Key (1/2)
• Candidate should see that market growth has remained steady, and that client’s
growth has stalled
• There are two reasons for this:
– Our client has not entered the internet channel aggressively enough
– Catalog sales have stalled, driven by lower prospecting catalog circulation
• The candidate should then identify two options:
– Grow internet business
– Grow catalog business
• Three slides on competitor margins, market size by segment and use of direct
channel by customer size are not directly relevant
– Although the slide showing customer size has relevance for step 3

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Two Available Investment Options

For both options, assume:

• Data shown is for first full year of operations
• Investment spend attract new customer responses in 1st year
• To attract additional “new” customers beyond those acquired in
year 1, additional investment is required
• Retention rate is expressed in annual terms

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Catalog Business – Year 1

Net Profit = Revenue – All Expenses

Investment Cost = 4,000,000 x $4.00 = $16,000,000

# new customers = 4% x 4,000,000 = 160,000

Revenue = 160,000 x $1,000 = $160,000,000

Operating Profit = Revenue x Operating Margin
= $160,000,000 x 10% = $16,000,000

Net Profit = Operating Profit – Investment Cost

Net Profit = $16,000,000 - $16,000,000 = $0

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Internet Business – Year 1

Net Profit = Revenue – All Expenses

Investment Cost = $10,000,000

Revenue = 250,000 x $200 = $50,000,000

Operating Profit = Revenue x Operating Margin

= $50,000,000 x 10% = $5,000,000

Net Profit = Operating Profit – Investment Cost

= $5,000,000 - $10,000,000 = -$5,000,000

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Catalog Business – Year 2

Year 2 # customers = 160,000 x 66% ≈ 100,000

Revenue = 100,000 x $1,000 = $100,000,000

Operating Profit = Revenue x Operating Margin

= $100,000,000 x 10% = $10,000,000

Year 2 Net Profit = Operating Profit + Year 1 Net Profit

= $10,000,000 + $0 = $10,000,000

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Internet Business – Year 2

Year 2 # customers = 250,000 x 33% ≈ 80,000

Revenue = 80,000 x $200 = $16,000,000

Operating Profit = Revenue x Operating Margin

= $16,000,000 x 10% = $1,600,000

Year 2 Net Profit = Operating Profit + Year 1 Net Profit

= $1,600,000 + (-$5,000,000) = -$3,400,000

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Answer Key (2/2)
• Work through the math to determine profit generated per response, and compare
against acquisition cost
• Additional details for best answer: recognize the need to do a lifetime value analysis,
factoring in retention rate, and identify that the catalog option is positive NPV, while the
internet option is negative NPV
– Pursue the catalog growth option, do not pursue the internet option
• Even more details: question why the internet is not positive NPV, and identify that this is
driven by low spend per customer and low retention rates
• These are driven by the characteristics of the customers who currently use the client’s
internet channel – retail customers, v. small and medium size business customers who
use the catalog channel
• The client needs to attract small and medium size business customers to it’s website
– Price higher for people who do not have a business ID established with client
– Revise catalog mailing list to target small and medium size business customers
– Stop advertising on consumer-based websites such as Amazon.com

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Rocket Blocks Math Service

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Rocket Blocks Math Service

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Feedback?
• What has been the most useful?
• Would you be open to extending our meetings to
start at 2 or 2:30?
– Consultant guest speakers
– Two practice cases
• Any other comments or improvements?

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

Looking Forward
• Ernst & Young application due on OCR next
Sunday, February 5th, 2012
• Cornerstone application due on OCR next
Monday, February 6th, 2012
• Dinner next week February 10th at the Lab at 5pm

Meeting Recap Math Workshop Case Practice Debrief Looking Forward

 USC Consulting Club

Case Workshop Program – Workshop 3

Meeting Recap Math Workshop Case Practice Debrief Looking Forward
by Leland Char, Wilson Kyi, Shen-Shen Wu, Ashley Luo, Zhenni Liu, and Steven Boiko