Consulting Case Preps

I would start this article with the purpose. Although whatever you read in this article has been incorporated into the ISB Co2010 Casebook, I thought I would put up all the Case Frameworks that I prepared during my interview preparations. The reason is simple - wider reach and my own archival. If this can help anyone not reachable by the ISB Casebook, the purpose is justified.

Will start with a disclaimer: I do not claim to be the author of all the items that will follow in this list of Case Frameworks. This is merely a compilation done by from varying sources. Of course, some of the work is original too. Also, a note of warning, following the frameworks blindly will lead you nowhere. This is supposed to act as a guide which should help you get going faster on developing your own frameworks. Believe me, the golden rule to solving cases on the D-day is to develop your own frameworks.

Also, the article is longish, so have patience.

Case Solving Basics

There are some basics that need to be followed while solving a case. I will try and list down things that I consider as basics while solving a case.

As you must already be aware by now there are four stages of solving a case:

Define – this is part where you scope the problem. The idea at this stage should be to identify the goal of the case and figure out what exactly you are required to do, as precisely as possible. Try to narrow down the problem as far as possible in this part by asking relevant questions and eliminating certain options. If the problem is very tightly defined by the interviewer (as it turned out for me in all cases on the D-day), then skip the phase. Do not just repeat what the interviewer has already mentioned.

Structure – this is the most important part of the case and the part where I struggled the most. Hence, most of what I write will address this issue. The structure is the approach you would follow to solve the case. Since the entire case may not be solved always, you are judged on your case solving abilities based on your case structure. It is important get your interviewer to agree with your structure before proceeding with the analysis. Wherever possible, write an equation for the problem and attack each parameter one by one.

Analyze – once you have got the structure, analyzing the case should be a cakewalk.

Synthesize – again, this is an important part of the case. Remember, Synthesis is not a Summary. Do not repeat whatever was discussed during the case. Just mention your key recommendations, which would basically be the answer to the Define part of the case. If applicable, you may wish to suggest a way forward, especially in cases when you could not finish the case. Many a times, cases would not be completed on time; hence I suggest you include a synthesis at the end of each of the four stages. This would let the interviewer know that you can synthesize well even if he hasn’t explicitly tested you on the same. In case you weren’t able to structure the case during the Structure phase, but could somehow solve the case, Synthesis could be an area where you can gain back lost ground. In the synthesis, behave as if the structure was always there in your head and use the structure to synthesize the case.

Now, as I have already mentioned, Structure is the most important part of the case. It is important that you look and sound structured in your approach. Hence, not only the questions you ask, but also the sequence of the questions becomes very important. All the right questions in a wrong sequence may project an unstructured approach. Always take your time before asking questions and decide on the sequence in which you will ask the questions.

Do not ignore estimation cases, many people in our batch did and many people were asked estimation cases during their interviews. It is difficult to do estimation cases unless you have practiced.

Another important tip. Always practice to finish the cases within 30 minutes, because you are not going to get more than that during the actual interview.

Let us go to the structures now.

Structuring the Case

There could be various different kinds of cases, some of which we will see in the following pages. However, the guideline starting point in all cases should be the Problem Landscaping diagram that I will show in the next section.

Problem Landscaping

Problem Landscaping is a method that can be used as a guideline to collect basic information about the case, and I particularly found it to be extremely useful. Not all parts of the diagram would be applicable to each case, hence use your discretion during asking questions. Keeping the diagram in the head will help a lot. Try to get answers to as many parts as possible and as may be required by the case during the define phase itself.

In the following sections I will cover few of the important case types and frameworks that can be used to solve the cases. I believe, these can form the base of any other case analysis as well.

Case Type: Profitability

The profitability case is the most important type of case that exists. Basically, most of the cases can be solved assuming them to be profitability cases, even though the interviewer doesn’t explicitly mention so. Hence, I would devote most of the time in elaborating how to solve the profitability case and how the sequence of questions should be.

Before going into the questions, I will first show the diagrammatic representation of the case structure. I will follow this up with the sequence of questions – coming directly from the structure.

Product Related Problem

- Poor product quality

- Problematic product mix

- Inadequate breadth of product line

- Depth of product line

- Network effects with other products/ Complementary products

Service Related Problem

- Poor service quality

- High cost of service

- Training Adequacy

- Curriculum

- Frequency of training

- Depth and Breadth

Distribution Related Problem

- Penetration (no. of stores)

- Percent Shelf Space (no. of facings)

- Trade Mix (retail segment targeting – do customer segments buy from these retail outlets)

- Service Level (no. of days of stock-out – is the product available when customer wants it)

- Lead Time

Promotion Related Problem

- Inadequate promotion

- Improper targeting

For declining profits types of cases, it might be worthwhile to create an income statement in your mind and analyze each item in the income statement one by one for anomalies/ recent changes.

Revenues

- Price

- Volume

Costs

- Direct Material

- Direct Labor

- Overhead Costs

- Other Fixed Costs

- Interest Expenses

We have the framework required for solving the profitability case. But as I have already mentioned, if the sequence of the questions that you ask is incorrect, you will still look unstructured and fishing for answers. Hence, in the next section, we will see how the sequence of questions should be in each of the phases.

Define Questions

1. What is the magnitude of loss/ profit? Over what revenue base?

2. Trend? Since what time?

3. Product Mix Questions

---- What is the business model?

---- Share of Revenue/ Profit/ Loss – across products

---- Same trend in all products?

4. Geographies of operation – Revenue/ Profit/ Loss spread across geographies

5. Channels - Revenue/ Profit/ Loss spread across channels

6. Client Mix

---- Domestic/ Abroad?

---- Segmentation?

---- Price Elasticity?

---- Customers of Product vs. Customers of Service

---- Losing old customers or not getting new customers

7. Industry wide trend or company specific?

---- Competitive scenario and context

---- Any recent competitive activity?

8. Sales force model/ incentive schemes?

9. Objective of the case? Time frame?

Ask as many of these questions as you think relevant during the define phase itself. This will help you tighten the problem definition. To appear structured, ask all question related to a particular subject at one go. Do not jump between topics. E.g. never ask one question on client mix, then ask some questions on channels and then again come back ask about clients. This would give an impression that you are unstructured. When you start asking questions on clients, finish whatever you can think of in one go.

Let us now write some equations which will help us solve the case:

Profits = (Price – Variable Cost)*Volume – Fixed Cost

Volume = Market Size*Market Share

Profit = Population * Segment% * Penetration% * Usage Rate * Price * Margin%

Now we have a tight problem definition and it’s time to structure the problem, which we have already done. Show the interviewer the structure and get his agreement.

Analyze Questions

1. Ask whether to analyze the cost side first or the revenue side first – never start off analyzing the without asking this question to the interviewer. Time is limited and a wrong direction is something you certainly do not want.

2. Revenue Side

---- Sources of Revenue

---- Trends

---- Competitive Context

3. Declining Prices

    a. Why price reduced? Competitive activity? Elasticity of Demand?

    b. Product Offering – low cost player or differentiated player?

    c. Has the product mix changed?

4. Declining Volume

    a. Overall market declining or market share declining?

    b. Overall Market Declining

        i. Industry declining or cyclical trend?

        ii. Chances of revival?

        iii. Substitute products? Rate of substitution?

        iv. POP and POD of substitutes – do a 4P analysis of our product vs. the substitute

        v. Change in preferences?

        vi. End of lifecycle for the product?

    c. Market Share Declining

        i. What is the current market share? Market size?

        ii. Rate of decline?

        iii. Problem of perception?

        ---- Perception map, ideal location, your location, competition location

        ---- FGDs to identify attributes and ratings on attributes

        ---- Change perception by promotion – change theme of advertisement based on perception map results

        iv. M.S. = SOV*SOM* SOD

        ---- SOV = Share of Voice/ Advertisement = [Ad. Us/ Ad. (Us+Them)]

        ---- SOM = our brand perception vs. competitors = Purchase Intension

        ---- Perceptions about 4Ps – Remember this is perception and not actual product attributes.

        ---- SOM = [(Ad. Us/Distance)/(Ad.(Us+Them)/Distance)]

        ---- SOD = Sales force (Us)/ Sales force (Us+Them)

5. Increasing Costs

    a. What is the company’s cost structure?

    b. Percent Fixed Cost vs. percent Variable Cost?

    c. Trends?

    d. Comparison with competitors? Benchmark?

    e. Performance vs. Target?

    f. Appropriateness of Targets?

    g. Variable Costs – COGS, RM, Labor, Overheads. Find percent composition and prioritize

    h. Operating Costs – Sales and Distribution, Marketing, General and Admin, R&D

    i. Interest costs – Cut working capital/ refinance debt if this is the issue

    j. Reduce RM Costs – have made a separate framework for this. Included later in this casebook.

    k. Value Chain – benchmark costs in each part of the value chain

    l. Fixed Costs

    ---- Look at Capacity Utilization

    ---- Look at increasing scale

    ---- Is the product too complex because of which costs are higher (smaller production runs)

Possible Solutions

1. Differentiation – command a price premium by giving value added services. Target a niche market

2. Bundling of products and services (cross-selling)

3. Increasing Volume (Increase Usage)

4. Provide complementary products (for customer acquisition)

5. Seasonal Schemes (if seasonality in demand)

6. Bulk Discounts – E.g. yearly memberships

7. Cut Price – if P*V goes up as a result of this. Depends on the elasticity of demand.

8. Consolidation – for commodity products. Consolidated players can charge a premium in a commodity market. Channel becomes loyal to you and pushes your product.

9. Increase overall market size

    a. Market = P * I * T * A

       Where P = Population,

                  I = incidence, E.g. drink Pepsi when thirsty/party/games etc,

                 T = Times of purchase,

                 A = Amount of purchase every time

    b. Do things in collaboration with industry

    c. Approach the government

    d. Look at new customer segments

    e. New Geographies

    f. Alternate uses of the product

    g. More/ increased Usage?

Case Type: Reduce Raw Material Costs

Reduce RM costs through:

1. Better sourcing/negotiation

    - Can you provide something in return for a better price

2. Efficiency of utilization

    - If efficiency is improved, less RM would be required and hence reduced costs

3. Time of sourcing

    - Opportunistic buying/ buying when prices are low

4. Scale of sourcing

5. EOQ (Economic Order Quantity)

6. Backward-Integration

7. Substitution

    - Try a different raw material

8. Value Engineering

    - Replace RM B with RM A, when both A and B are being ordered currently

9. Increase scale by combining A and B

    - Supplier rationalization

10. Standardization of parts

11. Currency hedging

    - In case sourcing done from more than one country

Case Type: New Industry Analysis / Investment Analysis/ Market Entry

New Industry Analysis/ Investment Analysis/ Market Entry cases are very similar and very important and commonly asked as well. I believe that if you have mastered the Profitability cases and the New Industry Analysis cases, you should be able to solve any case using the principles used in these types of cases.

Define Questions

1. Motivation behind entry?

    a. Why into new industry?

    b. Why into this particular industry?

    c. Anything other than profits a motivation?

2. Target for Profitability? Timelines?

    a. Cost of Capital? Target Rate of Return?

    b. Target market Share?

    c. Target Revenues and Target Profits?

3. Any constraints on investment and scope of thinking?

    a. Levels of investment

    b. Geographies of interest

4. Understand the company, line of businesses and the existing business model

    a. Will help from the Synergies point of view

    b. Corporate structure/ Organization Structure

Structure

The structure for solving the case has four parts:

        1. Industry Attractiveness

        2. Resources to succeed

        3. How to build sustainable competitive advantage

        4. How to enter

We will see each of them in detail now.

Industry Attractiveness

This part of the structure tries to determine how attractive the industry is. Sometimes you may be asked to evaluate/ compare more than one option. At other times, you might be required to generate the options and the case opening can be vague. In such cases, the best option is to draw the value chain (with the help of the interviewer), and identify which part of the value chain the company should enter. A short-listing criterion like top decile of return and bottom decile of risk can be used. Whenever you have to make a choice, remember you need to develop a choice rule or mathematical metric of evaluation. The choice cannot be made entirely based on qualitative analysis and quantitative metrics need to be developed in order to exercise the choice. The metrics of evaluation could be:

    -- Investment (Upfront, CAPEX, Change in Working Capital)

    -- ROCE / IRR/ ROI/ Payback Period

    -- NPV/ Profit

    -- Opportunity Cost of Investment

    -- Real Option

    -- Projected Cash Flows

    -- Terminal Value

    -- Risk

A best case/ worst case/ average case analysis can be performed if required.

Now let us get back to the case structure. Evaluating Industry Attractiveness has two parts:

1. Fundamental Attractiveness – whether the industry is attractive for anyone to enter or not?

    -- Market Size

    -- Market Growth rate

    -- Pricing Power (Demand Supply Gap, Profit Margins)

    -- Competition (consolidated or fragmented, relative sizes, projected market share)

    -- Organized or Unorganized

    -- Regulation

    -- Control over key resources (supply side constraints)

    -- Substitute to targeted products

    -- Barriers to Entry

    -- Amount of Investment

    -- Risk

2. Relative Competitive Positioning – whether it is profitable for our client to enter the industry or not, considering the Synergies it might have with existing businesses

    -- Brand Equity

    -- Economies of Scale

    -- Supply Chain/ Distribution Synergies

    -- Market Share gains

    -- Patent/ Proprietary Technologies

Based on the above analysis, a graph can be drawn with Fundamental Attractiveness on Y-Axis and Relative Competitive Position on the X-Axis. All the available options can be plotted on this graph and a decision can be taken based on where the points lie.

Remember:

1. Strategic decisions are not hard choice decisions like Choice A or Choice B. It is definitely not one correct answer multiple choice question. It could also be

      -- Choice A followed by Choice B

      -- Choice A and Choice B both

      -- Backward Integration

2. Actual decision depends very much on your/ your clients risk profile

Resources to Succeed

Key resources that need to controlled for success in this industry:

    -- Technology (how to acquire)

    -- Cost leadership/ Product differentiation

    -- HR/ Talent – Organization Structure

    -- Incentive Structure

    -- Distribution Network

    -- Capital (excess capital or debt/equity)

How to build sustainable competitive advantage

What strategies need to be implemented to create sustainable competitive advantage, by implementing inimitable strategies in the industry you want to enter. This is important because your fundamental attractiveness analysis shows that this industry is profitable and hence you want to enter the industry. Similar analysis can be performed by anyone else as well, and he may also decide to enter. If many people enter the industry, the industry may not be profitable. Hence, sustainable competitive advantage needs to be created.

    -- Create Barriers to Entry/ Exit

    -- Create Customer Lock-Ins

How to enter

    -- Organic Growth

    -- Joint Venture

    -- Merger & Acquisitions

    -- License / Franchise

Case Type: Mergers & Acquisitions – how to price an acquisition?

Define Questions

1. Decision taken or not?

2. Understand the business model of Acquirer and Target

    -- To understand synergies

    -- Ask what assets (tangible and intangible) the target firm owns?

3. Motivation of the acquisition?

Structure

Stakeholders – Acquirer Shareholders and Target Shareholders

It has to be decided during the case that whether the target shareholders would continue to exist after acquisition or not. The next job is to evaluate the Synergies, and how the Synergies would be split between Acquirer Shareholders and Target Shareholders.

EV (Enterprise Value) = Market Capitalization + Market Value of Debt – Cash

Valuing Synergy:

1. Calculate standalone values of target [1a] and acquirer [1b]. Use FCFs discounted by WACC to get the value of the firm (Valuation done using FCF)

2. Calculate Value of target when optimally managed

3. Calculate value of the combined entity, with synergies accounted for [Acquirer + Target]

Synergy = 3 – [1a+ab]

             = Value of “Acquirer + Target” taken together – Value of “Acquirer + Target” taken separately

If there are two acquirers: A1 and A2

Synergy = Value of “A1 + T” taken together – [Value of T + A1 (given A2 acquires T) taken separately]

Here, calculate

    -- Standalone A1 (given A2 acquires T)

    -- Standalone A2 (given A1 acquires T)

This accounts for the opportunity cost of not acquiring the target as well.

Price of Acquisition = Value of Target + Percentage of Synergy

Sources of Synergy

Cash vs. Stock deal in M&A

    -- If stock of Acquirer is over-valued => Use Stock

    -- If Expected Cost of Financial Distress (ECOFD) is high, the debt financing is costlier => Use Stock

    -- If Acquirer is very large and has excess Cash => Use Cash

    -- If Size of Acquirer ~ Size of Target, then large ECOFD => Use Stock

    -- If D/E ratio of Acquirer is very high => Use Stock

Pecking Order

1. Retained Earnings

2. Debt

3. Stock

Case Type: Pricing

Define Questions

    -- What is the product/service to be priced? What is the industry?

    -- Who are the target customers? Target Market – ‘geographies’?

    -- Is it an innovative product or are there comparables in the market?

    -- What needs of the target market is this product servicing?

    -- (In case of no comparables) In what way is the customer servicing this need presently (substitute)?

Structure

Analysis

Price > VC (=DM+DL+VOH)

For a given break-even period, calculate the Profit (or NPV of Profit) discounted based on WACC.

Highest Price that can be charged depends on whether the pricing is Comparable based or value based:

a) Comparable based:

    (i) Existing product with similar features – Market Price charged or ask for markup over cost of manufacturing

    (ii) Existing product with superior features – Market Price of the existing product + Value of the additional feature to the target customer

    (iii) Existing similar product does not exist, but alternative/substitute exists for the product. In such a case, pricing should be done such that – NPV to customer for the substitute = NPV for the product

b) Value Based:

    (i) Value to customer – will be function of

                - Target Customer’s Pocket Size (Income levels)

                - Opportunity cost of not getting this service

                - Aspiration Value => Compare aspiration value of similar products (E.g. – Monalisa painting)

Case Type: Divestiture

“Businesses needs to divest either due to a wrong acquisition, or due to external changes in the market, or if the product/service being sold does not make sense”

Define Questions

    -- What is the product/service that the client wants to divest from? Is it high/low margin business?

    -- Since when are they in this business? Was it organically developed or acquired? Or is it a JV?

    -- Why does the company want to divest from this business?

    -- Is it based out of any metrics, such as ROI, ROA, and Profit Margin?

        ---- If yes, what has been the trend of this metric/profitability for the company?

    -- Is the market shrinking?

    -- Who are his key customers for this product?

    -- Who are the main competitors? What is the company’s standing in this competitive landscape?

    -- Has something changed in the business landscape? Technology? Government Regulations?

Structure (More generic, should be customized based on the answers to the definition questions)

The cause for divesting can be

    -- Lack of Profitability

    -- Need for Capital

    -- Identification and hence getting rid of the non strategic unit

Based, on the reason identified do a cost benefit analysis of the divestiture

Process of Divestiture:

    -- Potential Buyers

    -- Valuation of the company

    -- Reservation price

Risk Analysis:

    -- Loss of strategic business entity

    -- Loss in Economies of Scale / Scope

    -- Change in Cost structure

    -- Loss of Vertical Integration

    -- Long term growth being sold out

Analysis

Why are you divesting?

a) If due to declining Performance:

     -- Profitability analysis: As-Is vs. without the divested unit

b) If for capital raising:

    -- Analyze if the returns from the new investments made with the capital gives a higher return when compared to the present scenario

c) If selling off a non-strategic business unit:

    -- Cost incurred presently Vs Cost from outsourced operations

Case Type: Logistics & Supply Chain

PERC Framework

P: Product and Value Chain
1. Product Strategy
    - Product Mix
    - Multi-product Strategy (different products, may require different supply chains)

2. Draw the Supply Chain
    - Reverse supply chain may also exist, Check!
    - Supplier
         ---- Quality
         ---- Inventory Levels
         ---- Labor Quality
         ---- Make vs. Buy
    - Distributor
         ---- Exclusive distributor vs. multi-brand distributor
         ---- Distributor margins
    - Customer
         ---- Customer Service Levels

E: Economic Integration to Supply Chain
    - Customer Economic Profile
    - Economic conditions and regulations where the company operates
    - Political Risk/ Stability/ Appropriation Risks

R: Resource Management
1. RM Sourcing
    - Cost
    - Availability
    - Ease of procurement
    - Fit to the manufacturing process

2. Transportation
    - Lead Times
    - Variability in lead times
    - Cost

3. Information Technology
    - ERP
    - SCM
    - CRM

4. Human Resources
    - Skill Levels
    - Training
    - Incentives
    - Attrition

5. Working Capital
    - Loan/ Debt
    - Equity

C: Connecting Technologies
IT / Logistics Initiatives
    - Identify the purpose of the initiatives
        ---- Reduce Cost
        ---- Increase brand awareness
        ---- Operational Efficiency
        ---- Service Improvement for customers
        ---- Improved forecasting/ planning
        ---- Inventory/Warehouse Management/ Order Tracking
    - If any of these is not getting done, then the initiative is just adding cost


Case Type: General Problem Identification Case

Hypothesis
    - Make an exhaustive list of problems
    - Product = Product + Services
    - Use 4 P’s to formulate hypothesis
    - Consider the Subject in the case as the product – E.g. Church could be a product

Test Hypothesis
    - Collect data
        ---- Primary Data
        ---- Secondary Data
    - Identify top causes – Pareto Analysis
    - Selected samples must be representative and statistically significant

Action Plan
    - Analyze top causes and formulate action plans

 
Case Type: Market Size Estimation
1. Identify the drivers for growth in the market – identify sub-segments into which the problem can be treated as a separate problem. E.g. Market Size for Cement – identify uses of cement, Office, Residential, Infrastructure etc.
2. For each sub-segment, identify the drivers of growth once again. E.g. in the Cement case, for Offices, the driver of growth could be GDP. Also, try to identify the fundamental drivers and also things for which data is readily available. A driver for which data is not available is of practically no use.
3. Always choose appropriate variables. E.g. Square Feet of construction for the Cement case.
4. Wherever possible, write an equation for the problem and attack each parameter one by one.


Case Type: Revenue Stream Identification
The following 2 X 2 matrix could be useful:

Case Type: Infrastructure/ Land Valuation

Ending Note: I know that this has been a really long post, but I hope it is some help to you if you are reading this. I must also caution that these frameworks would be useful only if you have done some groundwork for Consulting Case Preps. These frameworks are best suited in the hands of a slightly prepared consulting aspirant. This is certainly not a starters kit, and starting with this may give you a false impression on the amount of preparation required. I also understand that since these frameworks are made by me, certain things might appear apparent to me when they might not be. Hence, if any of you need any clarifcations on any of the frameworks, I will try my best to help. Also, if you need a soft copy of this - drop me a line.