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Cracking the case interview

Logo cliente o ESCP-EAP

25° March 2011


Tommaso De Benedetti, Pietro Luigi Ghigo

Questo documento è stato prodotto ad uso interno dell’ESCP Europe. Ne è pertanto vietata la circolazione, la citazione o la riproduzione con l’obiettivo di
diffonderlo all’esterno della scuola, senza approvazione scritta dell’ESCP Europe.
Copyright © ESCP- Europe Italia 2009
Workshop Target

• Give an overview of the possible types of interview, with


typical questions and common pitfalls

• Have a first mock case interview experience

• Train for the interviews

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Before we start... The business world “in a nutshell” NON EXHAUSTIVE

Major areas of activity Examples of main players

• Companies specialized in strategic and


Consultancy implementative consultancy (as well as legal
and fiscal consultancy)

• Companies specialized in verification and


Auditing certification audits

• Companies specialized in financial services of


Investment various kinds (M&A, Asset Management, Capital
Banking Market, Private Equity, Venture Capital, etc.)

• Industrial, commercial, service companies


Corporate and “classic” banks
Agenda

• Typical selection process and interview overview

• Introduction to the Business Case

• Interactive mock interview

3
NON EXHAUSTIVE
Typical selection process Focus of today’s meeting

Application CV/Cover Letter Numeric/Verbal


Interviews
Screening test

• CV screening based on: • Test measuring basic • Types of interview:


- Academic career knowledge of maths, A. Introductory/
- University/Business logic, grammar motivational interview
School • Problem solving B. Technical interview
abilities C. Case interview
- Professional
• Usually a multiple D. Group Interview
experiences choice test in one or
- Experiences abroad more parts:
- Foreign languages - verbal
- Extra curricular - analytical
/professional interests - problem solving
(business case)

4
A The introductory/motivational interview : overviewNON EXHAUSTIVE
Examples of Questions
• 30-45 minutes • Why would you like to
Duration work in investment
banking? Why here in
Goldman SA?

• Tell me 3 of your strong


• Analyse the candidate’s CV
Goal of the points and 3 of your
• Verify the candidate’s fit to the required profile weak points
interview
• Test the candidate’s motivation
• Tell me about a situation
in which you failed
• Human Resources
Who does it? • Top management • Tell me about a
professional/ academic
situation in which you
were a leader

• CV: academic background/work • What are your


Questions / topics experiences professional goals?
• Self knowledge and motivation
• Goals and expectations • ...
• Knowledge of the company you are Often the questions
applying to are similar: train
hard, race easy

5
A Good and bad answers
Wrong answers Comment and possible
Questions examples approach
• Why would you • ... Um ... • 100% guarantee that you will be asked this
like to work in • ... Well, it’s a well paid question
• There are no ready consultancy? job • Avoid abstract and emotional answers (e.g. I’ve
made answers that • The most important always wanted to work in consultancy)
are sure to be managers worked in • A possible approach is to convey that:
correct consultancy - you know the job you are applying for
• The messages to - you have the required core skills for top
pass on are: performance
- strong motivation - you are highly motivated
- energy and drive • Why would • ... Um ... • Avoid vague answers
- self knowledge you like to • Because you are one • Do your homework and study the main features
- you did your work in Bain? of the most important of the company(e.g. International visibility, team
homework consultancy orientation, recent operations, type of clients…)
• There are however companies
answers which are
definitely wrong • Tell me 3 of • I’m punctual, attentive • Difficult question, try not to:
your weak and I work a lot - avoid the question and not answer
points • I’m very lazy, as soon as - answer in a way that would put being hired at
I have a long term risk
contract I stop working • The message to convey is:
hard - I’m aware of the problem
- I already have a plan to deal with it

6
A How to prepare yourself

Get to know the Prepare answers Practice


Decision to
join a specific company to probable
company questions

• Research the company • Preparare answers to • Practice mock


on the website: a list of probable interviews or in front
- company activities questions (e.g. CV of the mirror
- company philosophy presentation,
strengths &
- differences from other weaknesses, reasons
companies in the same for the application...)
field
• Interview workers or
people who know the
company well

7
B Technical interview: overview NON EXHAUSTIVE

Examples of Questions
• 30-60 minutes
Duration
• How do you evaluate an
asset?

• Evaluate the candidate’s level of knowledge • How do you interpret


Goal of the and understanding of specific topics (e.g. P/E=40?
interview Corporate finance, management control,
accounting, marketing) • If the stock is higher at
the end of the year than
at the beginning of the
• Medium seniority roles with specific skills in year, is it a loss or a
Who does it? particular fields profit?

• What are the 4Ps in the


marketing of services?
• CV: academic/professional background
Questions / topics • ...
• Technical questions that don’t just test
the general knowledge of a topic but
tests the real understanding of it

8
B How to prepare yourself

Know your enemy Prepare Challenge

• Research the job you • Study the identified • Are you sure you have
applied for. topics really understood
E.g.: if you apply for what you have
management control, studied? Did you
no one is likely to ask study superficially?
you the option pricing • The point is not to
model, but you memorise the
should, for example, formula, but to reach
know the balance a deep understanding
sheet of the topics : the
question will always
be asked from
different points of
view

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NON EXHAUSTIVE

C The case interview


Examples of Questions
• 30-45 minutes
Duration
• How many ping pong
balls can a 747 Boeing
contain?
• Evaluate the candidate’s
Goal of the ability to face new problems • My company produces
interview coffee pots, is it worth it
to enter the Spanish
market?

• Managers, medium seniority • How much is my service


Who does it? roles station worth?

• …

• Business case
Questions / topics • Guestimate More in depth
• Brainteaser considerations further
on...

10
Agenda

• Typical selection process and interview overview

• Introduction to the Business Case

• Interactive mock interview

11
Introduction to the case interview

• It’s the analysis of a problem, of a business question, of a brain


teaser
What is a
case? • It’s an interactive process
• It normally lasts 30-45 minutes

• The working world today requires effective solutions that


Why a case transform a problem into a goal. The cases are studied
to evaluate the candidate’s ability in this area.
interview

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What is being looked for in the solution given by the candidate?

• An eager and thorough mind


Ability to • Ability to formulate hypotheses, to structure a problem by
structure dividing it into smaller parts
problems • Clarity and logical reasoning
• There is no “correct” answer

• Common sense
Pragmatism
• Basic macro-economic/financial knowledge
and “business
acumen” • Achievable solutions
• Ability to summarise and communication skills

• Familiarity with quantitative problems and with calculation


(oral and written)
Familiarity with
numbers

13
3 kinds of case interview in depth later on

Description Variants Example

• The candidate is • Oral vs written • The Panoramix company sells


confronted with a business • Group case interview newspapers and is considering
Business scenario to analyse and • Loads of data vs reducing the price from 1€ to
case he/she is required to make hypothesis driven 0.8€ per newspaper, what do
recommendations you suggest?

• “Back-of-the-envelope” •- • How much does the


calculation Colosseum weigh?
Guestimate • Requires making • How much is the ski
hypotheses market worth in
• It’s often part of a Italy?
business case

• Riddles / brainteasers • Time limit • What’s the distance


• Under pressure vs between the minute
Brainteaser friendly hand and the hour
environment hand when it’s
3.15?

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There are different kinds of business case NON EXHAUSTIVE

Description Example
• The case requires: • We are an Italian bank ... We recently doubled
Profit drop - considering the possible causes of profit loss our branches but our profits have had a 5%
- giving a recommendation for a possible decrease, why? What can we do about it?
solution

• The case requires estimating the value of • How much is a cow worth?
something
Evaluation

• The case requires designing the introductory • I would like to sell coffee pots in Spain. Is it
New Product
strategy for a new product or entry onto a worth it? What should I do?
launch/ new
new market
market entry

• Case with a choice between two possible • I own 300K € and I’ll be living in Milan for the
Binomial solutions (e.g. Go vs Not go, Get a loan vs Pay next 10 years. Should I rent or buy a house?
case rent...)

• The case requires evaluating the synergies of • We are an Italian company that produces
a deal tennis rackets. The XY bank recommends
M & A Case buying the ROCA company which produces
skis. Do you think it’s worth it?

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The case interview: how to manage it (1/2)

• Listen to the interviewer and write down the main aspects of the problem
Take notes

Make sure you have • Rephrase the question before you begin
fully understood • If there’s anything you don’t understand, say so
the question
• It’s ok to have 30 seconds of silence in order to think out and structure the
problem, if you ask the interviewer first. 1 minute of complete silence is too
Take your time
much

• Explain your strategy for solving the case


Present your agenda • Try to refer to a concept pattern (e.g. Gains and losses tree, Porter’s five
and your strategy forces,...) without referring to it explicity

• Divide the problem into its main features and analyse them one by one
Analyse the problem

16
The case interview: how to manage it (2/2)

• The case is an interactive process: you need to ask the correct questions in
Ask questions (and order to put together an accurate picture of the case
listen to the answers) • Listen carefully to the answers
• Don’t ask questions if you don’t know exactly what you’re getting at

• Practise taking the logical steps without jumping to conclusions: the target is
Think aloud to show the interviewer how you think
• It requires practice!

• Frameworks help structure the problem


Use simple frameworks • Don’t abuse them

Look critically at the • Before getting to your final recommendation, look critically at the final result
solutions you come up (e.g. If the weight of the Colosseum works out to 1000 Kg, there are some
with, summarise and mistakes in your hypothesis)
recommend • Summarise your analyses and recommendation
• Remember you have to answer the original question

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Corollary to the interview

During the After the


Before the interview
interview interview

• Arrive on time • Make a good • Send a thank you note


• Dress properly connection with the • Don’t try to speed up the
• Bring with you: interviewer process
• Ask questions about • Capitalise on what you learnt!
- Copies of your his/her job at the end
cv - Solve the case again on
- 1 pen/pencil your own time (the
- 1 writing pad same cases are often
used by different
interviewers)
- Try to understand what
you did well and what
could be improved

18
Interactive business case: the taxi licence

Question: how much is a taxi licence worth?

Answer: it’s worth 1 Million Euro

This is a RAC!!

• Avoid an impulsive answer, even if you already know the answer


• You have to prove you can:

- Structure the problem


- Logically organise hypotheses, arguments, deductions

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Interactive business case: the taxi licence

Taxi licence in Torino


Take notes

Make sure “ So you are asking me to estimate the price of a taxi licence in
you have fully Torino”
understood
the
question
“ Do you mind if I take 30 seconds to think about it?”
Take your
time

“ The value of an asset is proportional to the future cash flow it can generate, so if you
agree, I’ll try to figure out:
Present
- “standard” profits
your
- “standard” costs
agenda and
your
Of a taxi in Torino.
strategy
The difference between these two numbers will give me the average annual cash flow.
By subtracting them I can evaluate the licence
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Taxi licence
“ First let’s talk about profits”
A taxi driver works 8 hours a day 8. Let’s suppose the taxi runs 60% of the time, so for about 5 hours a day.
An average 15 minute journey costs 15 €. So, a taxi driver earns 300 € a day, that is 46.000 € a year (220
working days).

“Let’s talk about costs”


A taxi driver has the following costs:
Analyse the
problem - Car amortization, a 20K € car produces 4K € annual costs for 5 years
- Petrol; assuming that in an average 15 minute journey you cover about 10 Km, you cover 200 Km per
day, that is about 44.000 km per year.
- With a kilometer cost (that includes maintenance, insurance, petrol, etc.) of 0,5 €/km, the taxi driver
spend 22.000 € per year
- Let’s suppose the car was paid with your own money without making debts
- Let’s suppose we add 2.000 € per year for hazards (e.g. fines)
- So, the total cost is about 24.000 €

• “ Which tasso di attualizzazione should be used for a taxi? Is 10% ok?”


Ask • “Does a taxi license expire?”
questions

Look critically “Tha annual cash flow is about 22.000 €, che attualizzato al 10% come una rendita costante dà circa
at the 220.000€”
solutions and
summarise
the question

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Some useful frames of reference

Reference Application

• Cost and revenue tree • Profitability/general


• Analyse the 5 forces • Analysis/appeal of the sector
• The 4 Ps • Marketing
• The 3 Cs • Company position
• Supply and demand • Economics

These frames of reference are to help you structure your reasoning and isolate the
crucial aspects of the examined cases. Never force a problem into a particular
framework.
On the other hand, referring perfunctorily to the frames is a losing strategy. Use the
framework to encourage your creativity.

Source: McKinsey&Company, interviews in consultancy, students material

22
Cost and revenue tree

Price

Revenue
To external clients
Quantity
To new clients
Profit

Fixed cost Example of fixed costs


• Real estate
• Prodution plants
Cost • Large machinery

Variable Example of variable costs


cost • Workforce
• Raw material
• Advertising

Source: McKinsey&Company, interviews in consultancy, students material

23
5 forces analysis

Threat of alternative products Threat of potential competition


and services
• Other products • Fixed/high capital costs
meeting functional • Scale economies
needs Sector appeal • Adjustment costs
• Brand vs. generic • Access to the distribution channel
• Product differentiation

Level of competition Bargaining power of


in the sector purchasers
• Concentration in the sector • Concentration of purchases
• Price competition • Over or under capacity of the sector
• Exit barriers Bargaining power of
• Growth rate of sector suppliers
• Excluding suppliers
• Number of potential suppliers
• Lack or excess of supply

Source: McKinsey&Company, interviews in consultancy, students material

24
The 4 Ps of marketing

Product
• In which way is the product different form
that of the competition?
• What’s the value proposition of the product/service?

Price
• What’s the product’s price range
(compared to the competition and to alternative Develop/
products)? understand
a marketing
Promotion strategy
• Where is the product advertised
(newspapers, radio, TV, trade)?
• Does the product require a marketing push
or pull approach?

Distribution (Path)
• How the product gets to the market (direct sale,
distributor, retail etc.)

Source: McKinsey&Company, interviews in consultancy, students material

25
The 3 Cs

Clients
• Who are they?
• Why do they buy?
• Which are the client segments?
• Other

Competitors
• Who are they?
• What are their similarities and differences?
What is the
• What are their strengths and weaknesses?
position of
• Other
company X?

Costs
• What are the key components of Company X’s
costs?
• And the competition’s ?
• What trends can be detected?
• Other

Source: McKinsey&Company, interviews in consultancy, students material

26
Different kinds of interview

What should I expect?

From one extreme... ...to the other

• Detailed introduction • Brief introduction


• Specific problems to solve • Broad description of the problem
• A little information to start off with (e.g. Inadequate performance)
• A lot more available, just • Little or no information
ask • “What do you think?” is the answer to
• Chatty and relaxed tone during the almost every question
interview

Why? Why?

• Make the candidate feel at ease • Test problem structuring and hypothesising skills,
• Test analytical skills, ability to detect key creativity, business intuition and ability to feel at ease
elements and keep focused in ambiguous situations

Source: McKinsey&Company, interviews in consultancy, students material

27
Common Pitfalls

• Misunderstanding the question or answering the wrong question

• Proceed randomly, instead of identifying the main issues that need


to be examined, or skipping from one question to the other

• Ask a lot of questions without explaining why

• Unnecessarily apply some familiar frame of reference to every


answer whether it’s applicable or not just because it’s familiar (or
use the correct frame in the wrong way because it’s not too clear),
instead of using common sense
• Being unable to sum up a point of view on the basis of
information provided by the interviewer

Source: McKinsey&Company, interviews in consultancy, students material

28
Reference material
www.wetfeet.com www.vault.com

• The Wharton MBA Case Interview Study Guide • Vault.com Guide to the Case Interview
• Mckinsey & Company: The WetFeet.com Insider • The Vault.com Career Guide to Consulting
Guide
• Ace your Case TM The Essential Management
Consulting Case Workbook
• 15 Questions: More Practice to Help You Ace Other websites
Your Consulting Industry
• Killer Consulting Resumés
• The WhartonMBA Case Interview Study Guide: • consultingcentral.com
Volume I
•The WhartonMBA Case Interview Study Guide:
Volume II
• Harvard Business School Management
Consulting Career Guide 2000 Other publications
• Student Recruitment Report 1999:
Understanding the Student Perspective • Competitive Strategy: Techniques for Analyzing
Industries
and Competitors, Michael Porter
• True Professionalism, David H. Maister
• The Mckinsey Way, Ethan M. Rasiel

Source: McKinsey&Company, interviews in consultancy, students material

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Agenda

•Typical selection process and interview overview

•Introduction to the Business Case

•Interactive mock interview

30
2 activities

• A volunteer is interviewed by a teacher

Mock interview • The other students observe but can be called to participate
aquarium
• A feedback session follows

• Student vs student interview, in pairs

Mock interview • Students divided into 2 groups prepare 2 different cases


in pairs
• A feedback session follows

31
Appendix – Other examples of business cases

32
The barrel producer (1/4)

Our client is a company that produces a very simple product: metal containers for chemicals, barrels.

The production process is:

• purchase steel coils


• cut
• roll the steel into a cylinder
• weld the bottom
• weld the top, different from the bottom because it has a hole
• put in the cap, bought externally
• paint
• oven dry
• store

This company is the Italian branch of a multinational company; the parent company noticed an unsatisfactory profitability:
what do we do about it?

What’s the market like in terms of maturity, trend and competition?

The market is mature and stable, there are 6-7 companies, including us, with comparable market shares.

Source: McKinsey&Company, interviews in consultancy, students material

33
The barrel producer (2/4)

Who are our clients?

Chemical companies and big industrial companies; there are about 50 of them.

When you mentioned unsatisfactory profitability, what did you mean exaclty?

Profitability needs to be improved in the sense that the RO level is lower than in the other European branches.

Let’s analyse the various elements of RO , that is: RO = (Pu – CVu) x Q – CF

The Q quantity depends on the market, on market share, on the productivon capability and on its saturation. We know that
the market is stable and that our market share can be compared to the competitors’ ; what information do we have
regarding the production capability?

We are at full productive capability and we can’t expand it.

Therefore Q is not a problem; let’s look at the price: in a relatively concentrated sector for an undifferentiated product, we
can say that the price is basically a market price.

Source: McKinsey&Company, interviews in consultancy, students material

34
The barrel producer (3/4)

Let’s look at the costs: purchase of raw materials, workforce, consumption, transportation costs, amortization, general and
administration costs. It would be interesting to know in what proportion they each weigh upon the company.

This is the cost distribution:

Raw materials 50%


Painting 20%
Transportation 10%
Workforce10%
Amortization 5%
General/Administration. 5%

The revenue is 62 mln € and the costs are 52 mln €

In order to improve profitability let’s start from the greatest cost: raw materials.

Steel has a price fixed by the market, I can have a discount for large orders, therefore I can only work on quality.

Let’s suppose that by choosing a lower quality the price decreases by 5%. What do we do then?

We need to verify if a lower quality raw material will have a negative effect on the production costs in terms of waste and machinery
stops/breakdowns.

Source: McKinsey&Company, interviews in consultancy, students material

35
The barrel producer (4/4)

Let’s assume that waste goes from 1% to 2% and that machinery stops /breakdowns, as well as flawed coils, go from 2% to 3%.
We know that we use 10.000 coils per year and that a machinery stop/ breakdown costs 26.000 €

Therefore:

Raw material: +5% x 26 mln € = +1,3 mln €

Waste: -1% x 26 mln € = -0,26 mln €

Machinery stops /breakdowns : -1% x 10.000 x 26.000 € = -2,6 mln €

We would lose 1,56 mln € : it’s not therefore worth it to buy lower quality steel.

Let’s talk about transportation costs, what would you take into consideration?

I would consider where we are compared to our clients and the efficiency of the distribution network.

Our company is in Northern Italy where our clients are. We don’t have midway warehouses. We deliver using our own means of
transportation. How can I improve efficency?

Transport can be optimised by loading trucks to their maximum capacity. By taking into consideration the client’s turnover, if few
clients generated the greater part of my income I could take into consideration assembling the barrel directly on the client’s
premises.

Source: McKinsey&Company, interviews in consultancy, students material

36
The petrol station (1/2)

We are in Milan, the petrol market is 10 million litres/year, there are 20 petrol stations that all apply the same price and have an
equal share of the market .

3 new petrol stations have opened out of town; they apply a 10% lower price; the market in town decreases by 9 million litres/year.

If you had a petrol station in Milan, what would you do?

In order to make a decision, I first need to know the elasticity of the petrol demand in Milan: what would happen if prices decreased
by 10%?

If prices decreased by 10%, you would sell the same amount of petrol you sold before the opening of the 3 petrol stations out of
town.

Now I have to think consider the first gross margin. In the 2 following cases:

• I make a 10% price reduction and bring the quantities back to the orignal level
• I don’t change the price and I accept the quantity reduction

What does my cost structure look like?

Source: McKinsey&Company, interviews in consultancy, students material

37
The petrol station (2/2)

Let’s assume that the price of petrol is 1,20/litre and that it costs 0,90/litre.

If I make a 10% price reduction, and bring the quantities to their orginal level, we have:

Invoice: -500.000 litre x 1,20 €/litre x 10% = -60.000 €

Variable costs: unchanged =0

First gross margin: = -60.000 €

If I don’t change the price and I accept the quantity reduction we have:

Invoice: -500.000 litre x 1,20 € /litre x 10% = -60.000 €

Variable costs: +500.000 litre x 0,90 € /litre x 10% = +45.000 €

First gross margin : = -15.000 €

I will therefore choose the second option which gives me a lower loss.

Source: McKinsey&Company, interviews in consultancy, students material

38
The risky loan (1/2)

You are the manager of the loan department of an Italian bank.

One day an entrepreneur asks you for a 5.200.000 € loan in order to open a business in the travel sector. The entrepreneur says
that if the business is successful he will be able to return the loan and the interest within a year; if the business should prove to be
unsuccessful he won’t be able to return the loan.

You have to decide the interest rate to apply considering that a risk-free investment yields 8% and that in 20% of cases that type of
business goes bankrupt within a year.

In order to decide the interest rate first I have to consider what rate will make the risk-free investment and the travel business
investment which has a 20% bankrupcy probability indifferent.

Source: McKinsey&Company, interviews in consultancy, students material

39
The risky loan (2/2)

I take into consideration the following decision tree:

5.200.000 €
Risk-free investment
Travel business investment

5.616.000 € The pay-off of the event is:


Event
0 x 20% + 5.200.000 x (1 + t) x 80%
20% bankruptcy
80% success

0€ 5.200.000 € x (1+t)

Development: 5.616.000 = 5.200.000 x ( 1+t) x 80%


The choice is the same when t = 35%
Source: McKinsey&Company, interviews in consultancy, students material

40
Rana tortellini

Giovanni Rana calls you and asks you to invest 0,05 € in promotion or advertising.

What do you say (considering that Rana is the leading fresh pasta brand in Italy with over 50% of the market share and that its
major competitor is Buitoni with 5%) ?

Advertising is a fixed cost while promotion is a variable cost. A fixed cost is both an entrance barrier and a way to weaken
competitors.

If Rana invested 0,05 € in advertising Buitoni should do the same and this would have a relevant effect on the RO since Buitoni’s
sales correspond to one tenth of Rana’s sales.

On the other hand, if Rana invested 0,05 € in promotion, Buitoni should invest only 0,005 €, since promotion costs are a variable
cost which is proportional to sales.

In order to weaken the competitor Rana should, therefore, invest in advertising

Source: McKinsey&Company, interviews in consultancy, students material

41
M&A in the food sector (1/2)

Company A is a leader in 3 food categories: spirits, spices and infusions (teas and camomile teas).

Company A is considering whether or not to buy Company B. Company B is a leader in sweeteners and in sugar free sweets.

Does this acquisition make sense?

Can we assume that the 3 sectors that Company A is working in are mature and that Company B’s sectors are expanding?

Yes, we can.

We can therefore assume that Company A needs to expand by using its income in the most profitable way. From this point of view
Company B seems interesting.

What would you take into consideration in evaluating the acquisition of a company?

We have to consider the value that is created , that is:

> +

and therefore the possible synergies.

Source: McKinsey&Company, interviews in consultancy, students material

42
M&A in the food sector (2/2)

Synergies can be, for example, supply, production and distribution.

Considering the categories involved it seems difficult to obtain supply and production synergies so I will concentrate on distribution.

How is distribution structured in terms of channels and location?

Company A is operative on a national level in the supermarket channel (spirits and spices) and in the centre-north of the country in the
café channel (infusions).

Company B is operative on a national level in supermarkets with sweets and and in the centre-south of the country in cafés with
sweeteners.

We can hypothesise the following procedure:

• rationalise the distribution in supermarkets, both in terms of agent networks and logistics;

• expand the geographic coverage in cafés in the south with infusions and in the north with sweeteners;

• rationalise the sales network and logistics for cafés in central Italy

Source: McKinsey&Company, interviews in consultancy, students material

43
The Newspaper

The management of a renowned national newspaper is considering reducing the cover price from 0,80 € to 0,60€.
What do you suggest?

In order to decide what to do, whether or not to reduce the cover price, I need to know:
• current circulation
• elasticity of demand
• the product profit and loss up to the first gross margin

Currently the circulation is 700.000 issues per day and we can assume that these are all sold.

From market research we find out that the probable volume of sales corresponding to 0,60 € is equal to 800.000
issues per day.

The variable unit cost of the newspaper is 0,40€.

At this point I need to consider the first gross margin and take note of the fact that the turnover doesn’t only
depend on the cover price but also on the income from the sale of advertising space.

Source: McKinsey&Company, interviews in consultancy, students material

44
The Newspaper (Cont.)

Moreover, the price of those spaces should increase in the event of a higher circulation because the value of
advertising is usually proportional to the number of contacts.

More precisely, let’s conservatively assume that the price of advertising space doesn’t vary after a circulation
increase and that it’s 0,05 € per page, for a total of 10 pages per day.

Reasoning differentially we therefore have :

• Revenue from newspaper sales -0,20€ x 700.000 issues= -140.000€


+0,60€ x 100.000 issues= +60.000€

• Revenue from advertisement sales


+0,50€ x 100.000 issues = +50.000€

• Variable costs -0,40€ x 100.000 issues = -40.000€

• First gross margin -70.000€

It’s not worth it, I would lose 70.000 a day (calculated on the first gross margin)

Source: McKinsey&Company, interviews in consultancy, students material

45
On-line trading (1/4)

A bank is interested in selling an on-line trading service. Let’s evaluate this opportunity considering only the
revenue.

It is important to understand what kind of bank we are talking about, both in terms of the type of customer and of
services offered.

The bank currently serves “retail” customers to whom it mainly offers current accounts and mediation of securities.

At this point it is important to understand the size of the bank in its various areas of business, comparing them to
the competition. How many clients does the bank have and how are they distributed among types of products?

The bank has 2.000.000 customers spread out as follows: all of them have a current account, 10% make use of the
securities mediation service.

What is the market share of the bank and of its competitors for the two products sold?

The bank holds in both segments (current accounts and mediation of securities) 10% of the market, whereas its
three main competitors have 30%.

Source: McKinsey&Company, interviews in consultancy, students material

46
On-line trading (2/4)

Now I would like to better understand the banking sector with regard to the activities we’re interested in.

What are the growth rate and the current value in millions of the current accounts and securities mediation market? Regarding the
last one I’m interested both in the traditional channel and in the on-line channel.

The current accounts market is worth 5 mln, while the traditional mediation market is worth about 1.000 billion; no growth rate is
expected in either sector. The on-line mediation sector is now worth 1 billion with an expected growth rate of 25% per year.

Let’s suppose that the bank sells the on-line trading service only to the “captive” customers.

To estimate the number of bank customers who will use the on-line trading service I need to know:
• the number of customers, among those who don’t use the mediation service – there are about 1.800.000 of them - who have a
extra money to invest.
This number must then be reduced depending on internet penetration;

• the percentage of the 200.000 customers who will pass from the off-line trading to the on-line one, which also depends on the
available capital and of internet penetration.

Source: McKinsey&Company, interviews in consultancy, students material

47
On-line trading (3/4)

Let’s assume that 50% of the clients who don’t use the securities mediation service have extra money to invest and
that 80% of those who already use this service are willing to switch to the on-line channel. The internet penetration
is 5%.

We therefore have the following number of customers who will use the on-line service:

• customers who didn’t use the mediation service:


1.800.000 clients x 50% x 5% penetration = 45.000 clients

• clients using the traditional mediation service and are willing to switch to the on-line channel:
200.000 clients x 80% x 5% penetration = 8.000 clients

Assuming that the transactions are worth 5.000€ on-line and 10.000€ off-line, that commissions are, respectively,
0.2% and 0.7% and that 2 transactions per day are made in each channel, we can estimate the following revenue:

+45.000 x 5.000 x 2 x 0,2% = +900.000€ /day

+8.000 x (5.000 x 2 x 0,2% - 10.000 x 2 x 0,7%) = -960.000€ /day

Total = -60.000€ /day

Source: McKinsey&Company, interviews in consultancy, students material

48
On-line trading (4/4)

We have a forecast of –0,06 mln € per year, considering 220 days a year suitable for on-line trading.

Why then should the bank enter the on-line trading business?

If the bank didn’t offer an on-line trading service it would risk losing a large part of its customers to the advantage
of the banks offering this service, since this service requires opening a current account.

Source: McKinsey&Company, interviews in consultancy, students material

49
The bank (1/4)

You receive a phone call from the CEO of an Italian bank whose branches have gone from 300 to 600 in the last five
years.

The bank’s market share hasn’t changed over the years, and has remained at about 3%. The CEO asks you to
decide whether or not to close the new branches .

In order to decide if and which branches to close, we must identify the reasons that have lead to a constant market
share throughout the years, even though the number of the branches has doubled.

Considering the typical services offered by a bank, that is collection and loans, I consider it reasonable to consider
two market shares; I’d therefore like to know if this 3% we mentioned includes both collection and loan, or if it
refers only to one of the two sectors.

Let’s assume that the value of the market share that has remained constant refers to collection.

Doubling the branches, while maintaining the same market share for collection, can be basically due to two factors:

• poor commercial effectiveness from the new branches


• customer loss from old branches

Source: McKinsey&Company, interviews in consultancy, students material

50
The Bank (2/4)

Let’s suppose that:


•The branches are evenly spread across the national territory
•The old branches are situated mainly in the centre of big cities
•The new branches are situated on the outskirts of and in small towns
• The bank has the same product system for all the branches

The market share for collection, therefore, can be divided geographically into big and small towns.

The fact that the whole market share has remained constant probably hides the fact that one of them has increased
while the other has diminished:
This could tell us whether the new branches have been ineffective or if the old ones have lost customers.

Let’s make some hypotheses regarding the level of competition of the two segments.

The competitors of the old counters are big commercial banks traditionally situated only in large urban areas and in
the centre of big cities; post offices and small local banks are the newly opened branches’ main competitors.

We can therefore hypothesise that the competitive pressure is higher in large urban areas.

Source: McKinsey&Company, interviews in consultancy, students material

51
The Bank (3/4)

Considering the fact that the evolution of the financial market has lead savers towards more sophisticated forms of
investment, we can conclude that the customers of the old branches have gradually moved towards the bank’s
competitors, who can offer products that better suit their changed needs.

This migration was balanced by the new customers acquired by the suburban branches, where the bank’s products
outclass traditional products offered by post offices and local savings banks: government securities, savings
accounts, certificati di deposito.

The disappointing growth of our bank could be explained by an out of date product system, which can attract only
marginal savings areas not served by competitors. I thus deduce that closing the new branches wouldn’t be a good
idea.

Ok, but how can we improve the situation?

We should probably configure a differentiated product system on a geographic basis.


We would divide it into three segments: traditional collection, common funds and funds management.

Source: McKinsey&Company, interviews in consultancy, students material

52
The Bank (4/4)

The challenge in big cities, where I am less competitive, is mainly between the last two elements; I could therefore:

• Change our funds manager and financial manager.

• Get external help for funds management, and close internal activities.

• Increase the service level to avoid losing important customers, for example adding internet services.

Source: McKinsey&Company, interviews in consultancy, students material

53
The Insurance Market

Your client is a bank interested in entering the insurance market.


What do you suggest?

The insurance market can be divided into: the car field, the life insurance field (additional pension) and other risks
field (theft, fire, …).
The car field isn’t particularly interesting because it’s fully penetrated by highly specialised operators. Entering that
field would mean taking clients away from competitors thus generating more or less aggressive reactions.

Assuming that the turnover in the life field is currently 6,2 billion €, do you find it an interesting/ attractive field?

Let’s evaluate the life insurance potential market.

• Let’s assume that the Italian population is about 60 mln and that the average life span is 75 years with an even
distribution in the different age groups
• Assuming that all those between 30 and 60 years of age are interested in this type of product, that is 2/5 of the
population, the number of potential customers is: 60 mln x 2/5 = 24 million
• Considering the fiscal limit in terms of deductibility we can assume that the highest cost for life insurance is 1.300€
per year

So, the potential market is 31,2 billion €; the field has a 20% penetration and it can therefore be considered interesting/
attractive.

Source: McKinsey&Company, interviews in consultancy, students material

54
The Sanitary Fittings Company

The CEO of a big company producing a wide range of products for different segments of customers has asked for
our help to examine operations in his division. The products include, among others, bath tubs, toilets and urinals. In
particular, the CEO would like to know whether he should approve a $200 million expense for new production
structures.

The company is one the seven leading sanitary fittings producers in the US; the number one company has a 20%
share; our client is in third position with a 15% share.

• Our client’s prices have remained unchanged for awhile


• As far we know, the two major competitors have a very small margin; our client breaks even
• The major competitor has just announced the decision to build a large technologically advanced plant

Question:
What elements should we take into consideration?

Source: McKinsey&Company, interviews in consultancy, students material

55
The Sanitary Fittings Company: data gathering

Let’s clarify the problem:

• Will the investment reduce costs? (Yes, but not substantially, mainly because the new process will help create a
better finish)
• Does the company have a limited quantity of raw materials? (No, raw materials can be easily found.)

Domande che porterebbero a risposte di livello “minimo”:

• Market size/expansion:
- What was the field growth like per number of units?
- Is this growth related to the new housing projects?

• Competitive position:
- What’s the excess capacity like?
- What are the prices of the various competitors (are their production costs higher or lower than our client’s?)

• Market segmentation:
- How is the market divided (e.g. Residential, industrial, commercial)?
- Do prices change depending on the different kinds of customers? According to the market?

Source: McKinsey&Company, interviews in consultancy, students material

56