Case Number
Case setup (facts offered by interviewer)
q Your client is a manufacturer of bicycles
q They have been in business for 25 years
q They manufacturer and sell three categories of bicycles
Ø Racing bikes High end high performance bikes for sophisticated cyclists
Ø Mainstream bikes Durable but not overly complicated bikes for everyday riders
Ø Children’s bikes Smaller simpler versions of their mainstream bikes for children
q Profits at your client have decreased over the past five years
Question
q What is driving the decline in overall profits
q What recommendations might correct the situation
Suggested solutions
The first question is to determine what has caused overall profits to decrease To accomplish this 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
q What are the client’s margins for a bicycle in each of the three segments
Racing Cost 600unit Profit300unit
Mainstream Cost 250unit Profit 75unit
Children’s Cost 200unit Profit 50unit
q What has happened to the market size of each of the three segments over the past five years
Racing Has remained constant at its present size of 300MM
Mainstream Has increased at 2 growth rate per year to its present size of 10B
Children’s Has increased at 3 growth rate per year to its present size of 400MM
q What has happened to our client’s market share in each of these segments
Racing Market share has decreased from 60 to 30
Mainstream Market share has increased from 0 to 5
Children’s Market share has increased from 0 to 3
q Who are the client’s major competitor’s in each market segment What has happened to their market share in each segment over the past five years
Racing There is one main competitor and a host of small firms Your main competitor has increased market share from 30 to 50
Mainstream There exist many large competitors none of which holds more than 10 of the market
Children’s As in the mainstream segment there are many competitors none with more than 10 of the market
The above information provides enough information to put together a picture of why profits have decreased over the past five years Your client with a commanding position in a flat market segment (racing) expanded into new segments (mainstream and children’s) As this occurred market share decreased dramatically in the most lucrative segment (racing) creating an unfavorable mix
The extent to which profits have decreased can be deduced from some quick math profits have slipped from 60MM five years ago (60 x 300MM x 33 racing margin) to 44MM today ( (30 x 300MM x 33 racing margin) + (5 x 1B x 23 mainstream margin) + (3 x 400MM x 20 children’s margin))
The dramatic decrease in market share in the racing segment is at this point still unexplained Questions that would help formulate an explanation include
q Have there been any major changes in product quality in your client’s racing product Or in its main competitor’s racing product
No
q Have there been any major price changes in your client’s racing product Or in its main competitor’s racing product
No
q Have there been any major changes in distribution outlets for your client’s racing product Or for its main competitor’s racing product
Yes Previously your client and its main competitor in the racing segment sold exclusively through small specialty dealers This remains unchanged for the competition Your client however began to sell its racing bikes through mass distributors and discount stores (the distribution outlets for mainstream and children’s bikes) as it entered the mainstream and children’s segment
q How do the mass distributors and discount stores price the racing bikes relative to the specialty stores
Prices at these stores tend to be 15 to 20 less
q What percent of your client’s racing sales occur in mass distributors and discount stores
Effectively none This attempt to sell through these distributors has failed
q How has the decision to sell through mass distributor’s and discount stores affected the image of the client’s racing product
No studies have been done
q How has the decision to sell through mass distributor’s and discount stores affected your client’s relationship with the specialty outlets
Again no formal analysis has been performed
Although some analysis andor survey should be performed to answer more conclusively the last two questions a possible story can be put together There has been no appreciable change in either quality or price (or any other tangible factor) of your client’s racing product relative to its competition It is not the product that is the problem but rather its image As your client came out with lower end mainstream and children’s products and began to push their racing segment through mass distributors and discount outlets their reputation was compromised Additionally 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 must now lower price to compete thereby cutting their own profits Instead they are likely to push the competition’s product Remember your client has no direct salesforce at the retail outlets The specialty shops essentially serve as your client’s sales force
The above analysis offers an explanation of what has affected the top side of the profitability problem Still to be examined is the cost or bottom side of the profitability issue Questions to uncover cost issues would include
q How does the client account for its costs
The client has a single manufacturing and assembly plant They have separate lines in this facility to produce racing mainstream and children’s products They divide their costs into the following categories labor material and overhead Overall costs have been increasing at a fairly hefty rate of 10 per year
q What is the current breakdown of costs along these categories for each product segment
Racing Labor 30 Material 40 Overhead 30
Mainstream Labor 25 Material 40 Overhead 35
Children’s Labor 25 Material 40 Overhead 35
q How has this mix of expenses changed over the past five years
In all segments labor is an increasing percentage of the costs
q Does the basic approach to manufacturing (ie the mix of labor and technology) reflect that of its competition
Your client tells you that there is a continuing movement to automate and utilize technology to improve efficiency throughout the industry but it is hisher opinion that their approach maintaining the human touch is what differentiates them from the competition (Unfortunately he’s right)
q Is the workforce unionized
Yes
q What is the average age of the workforce
52 and climbing There is very little turnover in the workforce
q What is the present throughput rating How has it changed over the past five years
Presently the plant is producing at about 80 of capacity This has been decreasing steadily over the last several years
q What is the typical reason for equipment shutdown
Emergency repair
q Describe the preventive maintenance program in effect at the client’s facility
Preventive maintenance is performed informally based on the knowledge of senior technicians
q How often has equipment been replaced Is this consistent with the original equipment manufacturer’s recommendations
The client feels that most OEM recommendations are very conservative They have followed a philosophy of maximizing the life of their equipment and have generally doubled OEM recommendations
The above information is sufficient to add some understanding to the cost side of the equation Your client has an aging workforce and plant that is behind the times 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
q Abandon the mainstream and children’s segment to recover leadership in the racing segment
Issues to consider in this approach
Ø How much of the racing segment is recoverable
Ø What are the expected growth rates of each segment
Ø How badly damaged is the relationship with the specialty outlets
Ø Are there alternative outlets to the specialty shops such as internet sales
Ø How will this move affect overall utilization of the operating facilities
q Maintain the mainstream and children’s segment but sell under a different name
Issues to consider in this approach
Ø Is there demand among the mass and discount distributors for bicycles under their name
Ø What additional advertising and promotions costs might be incurred
Ø What are the expected growth rates of each segment
Ø What is driving the buying habits of the mainstream and children’s market
q Reduce costs through automation and innovation
Issues to be considered
Ø What technological improvements are to be made
Ø What are the required investments
Ø What are the expected returns on those investments
Ø How will these investments affect throughput
Ø To which lines are these investments appropriate
Ø Are the mainstream and children’s segments potentially overengineered
Ø What impact will this have on the required workforce levels
Ø If layoffs are required to achieve the benefits what impact will this have on labor relations
q Reduce costs through establishing a formal preventive maintenance program
Issues to be considered
Ø What organizational changes will be required
Ø What analysis will be performed to determine the appropriate amount of PM
Ø What training is required of the workforce
Ø What technical or system changes are required
Ø How will the unionized workforce respond
Key takeaways
This case can prove to 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 to impact profit Additionally a conadidate’s ability to work comfortably with the quantitative side of this case is important The above recommendations for improving profitability are just a few among many The candidate may come with their own ideas
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