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Vault Case Interview Practice Guide 2: More Case Interviews

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Exhibit 3: Socioeconomic status of targeted population

Socioeonomic status of population within a two-hour radius of each location

	Eligible population willing to visit theme parks
	350,000 children*		320,000 visitors		360,000 visitors
	150,000 adults		180,000 adults		140,000 adults
Status* A	39		25		20
Status B	50		50		60
Status C
	20
			25
					20
	A		B		C

Non-ticket** spend per adult or child based on status ($)

Status A	10	8	10
Status B	8	6	6

population* eligible of %

Note:*Assume that the status is evenly distributed as % of addressable population across children and adults

** Non-ticket sales consist of average food and concessions spend by each individual (regardless of whether child or adult)

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Questions

Which area will you choose to set up the theme park? Please support your answers with the necessary calculations, using the calculator available to do so.

Cost calculation

	Locations		A	B	C
	Building the theme park
	Leasing Cost		$7.5M	$8.2M	$8.4M
	Construction costs	=	$200 * 100 workers	$195 * 100	$180*100
	Labor cost per day * No.		* 400 days = $8M	* 400 = $7.8M	* 400 = $7.2M
	of workers * No. of days
	of operation
	Annual operating cost of the park
	Operating costs = Cost		$26,000 * 190 +	$34,000	$32,000 * 200 +$38,000
	per day * days in respec-			*198+$40,000*80 =
			$34,000* 85 =$7.98M		* 95 = $8.145M
	tive season			$7.722M
	Revenue calculation
			Annual Revenue
	Number of Status A cus-		350,000*30% = 105,000	320,000*25% = 80,000	360,000*20% = 72,000
	tomers who visit	each	children	children	children
	year
			150,000*30% = 50,000	180,000*25%= 45,000	140,000*20% = 28,000
			adults	adults	adults
	Number of Status B cus-		350,000 * 50%*0.5 =	320,000*50%*0.5 =	360,000*60%*0.5 =
	tomers who visit	each	87,500 children	80,000 children	108,000 children
	year
			150,000 * 50%*0.5 =	180,000*50%*0.5 =	140,000*60%*0.5 =
			37,500 adults	45,000 adults	42,000 adults
	Ticket Sales		(105,000 +87,500)*$30	(80,000+80,000) * $30 +	(72,000+108,000) chil-
			+ (50,000+37,500)*$40	(45,000+45,000) * $40 =	dren *$30 +
			= $9.275M	$8.4M	(28,000+42,000) adults
					*$40 = $8.2M

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Final calculation

Total Building Cost =	$7.5M+$8M = $15.5M	$8.2M+$7.8M = $16M
			$8.4M+$7.2M =
Lease + Build			$15.6M
Total Profit = Revenue –	$12.775M-$7.98M =	$10.9M-$7.722M =	$10M-$8.145M =
Operating Cost	$4.795M	$3.178	$1.855

Based on the building cost and net profit, location C will be the most attractive option financially.

What do you think are the top drivers in the net profit of each location, excluding building cost?

Given that the number of adults and children do not differ significantly, one of the key drivers is the socioeconomic status of the population within the two-hour drive, as it determines both the frequency of visits and the amount of non-ticket spends.

The other key driver is the theme park’s daily operating costs in each specific location as it directly affects the bottom line.

These two drivers are important levers that affect the net profit for each location.

What are the top nonfinancial or noneconomic considerations to be taken into account when operating the theme park at the area you suggested?

It is critical to manage positive relationships with the surrounding residential clusters by working with local officials to determine how to best manage traffic and noise pollution. Thrilly may have to co-invest in some initiatives to reduce these negative effects. If residents are irritated, then the customer base may shrink, as some residents may boycott the theme park and encourage their neighbors to do so.

Another issue is to continually assure parents about the safety of rides, in the light of accidents in any other theme parks. A major accident in any theme park will adversely affect the number of customers, so it is critical to mitigate the adverse implication of these incidents.

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Bicycle Manufacturer Case

Case facts initially offered by the interviewer

•The client is a manufacturer of bicycles and has been in business for 25 years.

•It manufactures and sells three categories of bicycles:

•Racing bikes: High-end, high-performance bikes for sophisticated cyclists

•Mainstream bikes: Durable, but not overly complicated bikes for everyday riders

•Children’s bikes: Smaller, simpler versions of its mainstream bikes made for children

•The client profits have been eroding over the past five years.

Questions to be answered by candidate

•What is driving the decline in overall profits?

•What recommendations might correct the situation?

Suggested solutions

To determine what has caused overall profits to decrease the candidate must first understand what has transpired in each of the three product categories over the past five years, during which profitability has slipped. The following are questions and answers that would be provided in an interview scenario.

Interviewee: What is the market size of each of the three segments over the past five years?

Firm: Racing has remained constant at its present size of $300 million. Mainstream has increased at 2 percent growth rate per year to its present size of $1 billion. Children’s has increased at 3 percent growth rate per year to its present size of $400 million.

Interviewee: Was there any change in market share in each of these segments over the past five years?

Firm:

Racing market share has decreased from 60 percent to 30 percent. Mainstream market share has increased from 0 percent to 5 percent. Children’s market share has increased from 0 percent to 3 percent.

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Interviewee: Who are the client’s major competitors in each market segment? What has happened to their market share in each segment over the past five years?

Firm: In racing, there is one main competitor and a host of small firms. The main competitor has increased market share from 30 percent to 50 percent. In mainstream, there are many large competitors, none of which holds more than 10 percent of the market. In children’s, there are many competitors, none with more than 10 percent of the market.

Interviewee: Can I have the details of your client’s margins for a bicycle in each of the three segments?

Firm:

Racing: Cost = $600/unit, Profit = $300/unit

Mainstream: Cost = $250/unit, Profit = $75/unit

Children’s: Cost = $200/unit, Profit = $50/unit

Interviewee: What is the client’s costing policy?

Firm: The client has a single manufacturing and assembly plant. It has separate lines in this facility to produce racing, mainstream and children’s products. The costs are divided into three categories: labor, material and overhead.

Interviewee: Do we have the current breakdown of costs along these categories for each product segment?

Firm:

Racing: Labor = 30 percent, Material = 40 percent, Overhead = 30 percent Mainstream: Labor = 25 percent, Material = 40 percent, Overhead = 35 percent Children’s: Labor = 25 percent, Material = 40 percent, Overhead = 35 percent

Interviewee: Has there been any increase in costs over the year? Has the mix of expenses changed over the past five years?

Firm: Overall costs have been increasing at a fairly hefty rate of 10 percent per year. In all segments, labor is an increasing percentage of the costs.

The above information should be used by the candidate to analyze the following scenario:

•The client, with a commanding position in a flat market segment (racing), expanded into new segments (mainstream and children’s). This move has seemingly created an unfavorable mix, thus decreasing the market share in the most lucrative segment (racing).

•The decline in profits can be deduced as follows:

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Profits five years ago = $60 million (=60 percent x $300 million x 33 percent racing margin)

Profits today = $44 million (=(30 percent x $300 million x 33 percent racing margin) + (5 percent x $1 billion x 23 percent mainstream margin) + (3 percent x $400 million x 20 percent children’s margin).

To understand the dramatic decrease in market share in the racing segment, the following questions can be asked for further probing:

Interviewee: Have there been any major changes in product quality or price in your client’s racing product? Or in its main competitor’s racing product?

Firm: No.

Interviewee: What is the current distribution network for the client’s products?

Firm:

Racing: Small specialty dealers, mass distributors and discount stores Mainstream: Mass distributors and discount stores

Children’s: Mass distributors and discount stores

Interviewee: Have any significant changes taken place in the distribution network for your client’s racing product? Or for its main competitor’s racing product?

Firm: Yes. Previously the client and its main competitor in the racing segment sold exclusively through small, specialty dealers. This remains unchanged for the competition. However, the client also began to use the distribution network of mainstream and children’s bikes for its racing bikes.

Interviewee: Is the pricing policy of the mass distributors and discount stores different from the specialty stores for racing bikes?

Firm: Prices at these stores tend to be 15 to 20 percent less.

Interviewee: After the change in distribution network, what percent of the client’s racing sales occurs in mass distributors and discount stores?

Firm: Effectively none. The attempt to sell through these distributors seems to have failed.

Interviewee: Has there been any recent study on brand image of the client’s racing product, especially after it altered its distribution network?

Firm: No studies have been done.

Interviewee: Any significant change in the client’s relationship with the specialty outlets after the new distribution network was adopted?

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Firm: Again, no formal analysis has been performed.

The next step

Although some analysis and/or survey should be performed to answer the last two questions more conclusively, a possible analysis can be derived.

•There has been no significant change in either quality or price (or any other tangible factor) of the client’s racing product relative to its competition. It is not the product that is the problem, but rather its image.

•As your client introduced lower end (mainstream and children’s) products and began to push its racing bike segment sales through mass distributors and discount outlets, its reputation seemed to have been compromised.

•In addition, the presence of the racing products in the discount outlets has put your historic racing distributor (the specialty shops) in a precarious position. The specialty shops need to now lower the price to compete with the other networks of the racing segment, thereby cutting their own profits. Instead, they might be tempted to push the competition’s product. Especially since the client has no direct sales force at the retail outlets and the specialty shops essentially serve as the client’s sales force.

It is also known from the initial discussion that labor costs have been increasing over the years. Further questions to uncover cost issues would include:

Interviewee: Is the workforce unionized?

Firm: Yes.

Interviewee: What is the average age of the workforce?

Firm: Fifty-two and climbing. There is very little turnover in the workforce.

Interviewee: What is the present throughput rating? How has it changed over the past five years?

Firm: Presently the plant is producing at about 80 percent of capacity. This has been decreasing steadily over the last several years.

Interviewee: Are there many instances of equipment shutdowns?

Firm: Yes.

Interviewee: What is the typical reason for equipment shutdown?

Firm: Emergency repair.

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Interviewee: Describe the preventive maintenance program in effect at the client’s facility?

Firm: Preventive maintenance is performed informally based on the knowledge of senior technicians.

Interviewee: How often has equipment been replaced? Is this consistent with the original equipment manufacturer’s recommendations?

Firm: The client feels that most OEM recommendations are very conservative. It has followed a philosophy of maximizing the life of its equipment and has generally doubled OEM recommendations.

Interviewee: Does the basic approach to manufacturing (i.e., the mix of labor and technology) reflect that of its competition?

Firm: The client tells you that there is a continuing movement to automate and utilize technology to improve efficiency throughout the industry, but it is his/her opinion that his/her approach, maintaining the “human touch,” is what differentiates them from the competition. (Unfortunately, he or she is right!)

Possible approaches

The above information is sufficient to add some understanding to the cost side of the equation and why labor costs have been on the rise.

•The client has an aging workforce and the plant lags behind in terms of technology and innovation. This has contributed to excessive breakdowns, decreased throughput, increased labor rates (wages increase with seniority) and greater labor hours (overtime to fix broken machines).

In proposing recommendations to improve the client’s situation, there is no single correct approach. There are a number of approaches that might be explored and recommended. The following are some possibilities:

•Abandon the mainstream and children’s segment to recover leadership in the lucrative and more profitable racing segment.

Issues to consider in this approach:

•How much of the racing segment is recoverable?

•What are the expected growth rates of each segment?

•How badly damaged is the relationship with the specialty outlets?

•Are there alternative outlets to the specialty shops, such as Internet sales?

•How will this move affect overall utilization of the operating facilities?

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•Maintain the mainstream and children’s segments, but sell these under a different name. This will maintain the brand image of the racing segment. Revert to the specialty outlets for racing segment.

Issues to consider in this approach:

•Is there demand among the mass and discount distributors for bicycles under the client’s name?

•What is the relationship status with the specialty outlets?

•What additional advertising and promotional costs might be incurred?

•What are the expected growth rates for each segment?

•What is driving the buying habits of the mainstream and children’s market?

•Reduce costs through automation and innovation.

Issues to be considered:

•What technological improvements are to be made?

•What are the required investments?

•What are the expected returns on those investments?

•How will these investments affect throughput?

•To which lines are these investments appropriate?

•Are the mainstream and children’s segments potentially “over-engineered?”

•What impact will this have on the required workforce levels?

•If layoffs are required to achieve the benefits, what impact will this have on labor relations?

•Reduce costs through establishing a formal preventive maintenance program. Issues to be considered:

•What organizational changes will be required?

•What analysis will be performed to determine the appropriate amount of PM?

•What training is required of the workforce?

•What technical or system changes are required?

•How will the unionized workforce respond?

Key takeaways

This case can be lengthy and very involved. It is not expected that a candidate would cover all of the above topics, but rather work through selected topics in a logical fashion. It is important that the candidate pursue a solution that considers both revenue and cost issues and how these impact profit. Additionally, a candidate’s ability to work comfortably with the quantitative side of this case

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is important. The above recommendations for improving profitability are just a few among many. The candidate may come up with his or her own ideas.

B2B Fertilizer Manufacturer Case

A large farm equipment manufacturer and distributor is our client. It is considering whether or not it should buy a B2B fertilizer company. This case has two main questions: 1) Should our client buy the company?, and 2) How would you value how much that fertilizer company is worth to our client?

Additional information provided during questioning

•The client is a large farm equipment manufacturer and distributor based in the U.S., but it has operations overseas as well.

•The client serves both the B2B market and B2C market, but the B2C market has been dwindling in terms of farm equipment, as mom-and-pop farming in the U.S. has declined significantly over the last few decades. However, the B2C market has grown in terms of home gardening equipment, which our client has exploited for its lighter equipment and product lines.

•The acquisition target company is a midsized fertilizer company, which markets its products in the B2B market. It has a 35 percent market share in the farming industry, which it achieved because that industry has consolidated over the last few decades. It sells its products only in the U.S.This is a standard acquisition case that requires structuring and analysis of two main parts in order to complete:

1)A standard three Cs analysis of whether or not this is a smart acquisition for the client given market conditions.

2)Valuation of the fertilizer company, both as a stand-alone unit and with the revenue and cost synergies that could be achieved with the client.

Breakdown of solution

Interviewee: Let me just make sure I understand the case.

Firm: Sure.

Interviewee: So, the client is a large farm equipment manufacturer and distributor, and it’s thinking of buying a fertilizer company. It’s hired us to tell it

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