What broader insights would you want to explore first to answer the CEO s questions?

Transcription

1 Setup The CEO f a majr client has requested a shrt-term study examining a small part f the client s prduct prtfli. The cmpany has a small divisin that manufactures autmatic drip cffeemakers fr the US and Canadian market. The divisin has been steadily prducing cffeemakers fr 20 years, and has made few changes t the business ver its histry. The client has always enjyed healthy margins fr the cffeemaker divisin, and annual vlumes have been steady. Recently, hwever, the cffeemaker divisin's prfits have been declining. The CEO understands what is ging n. Structure Althugh this lks and feels like a prfitability case (which it ultimately is), the pint here is t develp a framewrk beynd the standard prfitability setup. Additinal infrmatin Regarding changes in fixed r variable csts: the prductin lines and facilities are mature, the business has been steady, verall prductin is rather efficient given the advantages f a lngterm steady state. N majr changes t fixed r variable cst inputs have ccurred recently. Prductin: All prductin ccurs at a facility in Michigan. The plant is perating at abut 90-95% capacity. Vlume: Relatively cnstant. Prduct Mix: The divisin prduces 4-cup, 10-cup, and 12-cup cffeemakers. The verall mix between these categries has been cnsistent. Issue 1 Questin What brader insights wuld yu want t explre first t answer the CEO s questins? Issue 1 Answer Market - Hw are the cmpetitrs perfrming? - Have new cmpetitrs entered? - Have new substitutes emerge? - Are we missing new technlgical develpment? - Where are ur prices relative t ur cmpetitrs? Custmer - Are custmers preferences changing? - Has prduct mix changed? - Are custmers mre r less price sensitive than befre? - Have custmers becme mre cncentrated? - Are custmers shpping in new channels? 1 f 5

2 Channel - Hw d we reach ur custmers? - Has distributin changed? - Are retail utlets changing? - Hw are sales prices established? - Are channels cnslidating? Market - There have been sme new entrants, primarily fr very lw priced cffeemakers. The client s cffeemakers are mid-price range and there are several ther cmpetitrs at this price pint. New technlgy and substitutes are minimal. Custmer - Vlumes by cffeemaker size have been relatively steady, indicating that custmer preferences have nt undergne dramatic changes. Channel - Channel is the real issue. Lk at exhibit 1 Exhibit 1 Issue 2 Questin What cnclusins can yu make frm the data in exhibit 1? Issue 2 Answer - Identify that Natinal chains increasingly make up a greater share f the client s sales - Nte that ne retailer, Wal-mart, buys 25% f their cffeemakers 2 f 5

3 Issue 3 Questin What are the implicatins fr this shift twards Natinal retailers? Issue 3 Answer - Larger chains have mre bargaining pwer, and are putting mre ressure n the divisin t prvide discunts Issue 4 Questin What percent f the market d yu think the client has? Issue 4 Answer - Estimate the number f cffeemakers sld in the US and Canada annually Any lgical apprach is acceptable. A recmmended apprach is t start with the ppulatin f husehlds in the US and Canada (there are apprximately 100k husehlds in the US, 10k in Canada), estimate the percent that have electric cffeemakers (it s abut 65%), and that cffeemakers are replaced abut every 5-10 years (can use 7 as an average). Als cnsider ther places with cffeemakers (ffices, hstels, etc.). Estimate a range f millin cffeemakers sld annually in the US and Canada Therefre, the client has abut 5-8% market share, and is a relatively small player, s the cmpany has little bargaining leverage with retailers. Issue 5 Questin During a brief meeting with the CEO, yu share yur early insight that natinal retailers are squeezing the cmpany s margins. He states that the dishwashers and cking appliances divisin recently launched a website t sell its prducts. He wants t knw if a website wuld als wrk fr cffeemakers. D yu think it will wrk? Issue 5 Answer Any answer is here acceptable if the candidate can create a lgically structured argument t supprt his r her answer, althugh the candidate shuld at minimum identify a cuple f risks. Additinally, the candidate shuld want t knw mre abut the pssible prfitability f a website 3 f 5

4 Issue 6 Questin Given the fllwing infrmatin we have cllected, what percent f the cmpany s sales wuld the client need t achieve fr the website t break-even? Annual website csts: $500k Additinal marketing csts: $300k Average retail price f cffee maker: $60 An additinal $4 per cffee maker will be required fr handling sales thrugh the website The custmer pays fr the cst f the shipping The interviewer shuld nly prvide the fllwing when asked: - The margin n the cffee makers is 40% Issue 6 Answer With a margin f 40%, the cst f prducing the cffee maker is $36 ( 40% = ($60 COGS)/$60) Therefre the prfit per cffee maker is $24 befre the $4 extra handling cst, and $20 after the extra cst is included. - The ttal cst f the website is $800k - Break-even vlume = $800,000/$20 = 40,000 cffee makers - The client sells apprximately 800k cffee makers annually, s abut 5% f the clients vlume Cnclusin Questin The CEO really appreciates all the wrk yu have dne s far n identifying the issue with natinal retailers squeezing margins and the breakeven analysis n the website. He wuld als like yur insight n ther pssible ideas. What ther slutins might yu suggest? Cnclusin Answer - Investigate selling the divisin t anther cffemaker - Mve prductin verseas t increase margins - Investigate purchasing ther cffeemaker manufacturer t gain leverage with retailers - Cnsider exclusive retailing rights t ne distributr - Increase marketing effrts t create a pull-strategy frm custmers t increase leverage with suppliers - Seek ther channels - Cnsider internatinal expansin - Increase fcus and attentin n small t medium retailers - Cnsider raising prices t ffset margin lss 4 f 5

5 Recmmendatin Recmmend website r list ne f the slutins frm the cnclusin. Risks In the cnclusin, the candidate shuld mentin risks such as cmpetitin frm ther websites, retaliatin by retailers, risk f mving prductin verseas, etc. 5 f 5