Mergers & Acquisitions: Valuation

“Price is what you pay. Value is what you get.” ~ Warren Buffett

LAST post, I highlighted the importance of strategy when considering the viability of a potential acquisition; however, before a final decision can be made, a consultant needs to estimate the value of the target company.

Building on information provided in Management Consulting: A Guide to the Profession, I highlight three approaches that a consultant can use when performing a valuation:

  1. Balance sheet valuation;
  2. Market based valuation; and
  3. Valuation of discounted expected future cash flows.

Target Valuation v4

Each valuation method will result in a different estimate, and the method you select will depend on the situation.

If you are working for the target company, then the obvious goal is to choose the method that yields the highest possible valuation for the company.

However, if you are working for the acquiring company, then the valuation method you select depends on the objective for the merger. If the goal is diversification, then calculating the present value of future cash flows would be appropriate (DCF valuation). If on the other hand the company is being acquired for its resources and capabilities, then valuation should be based on either the market value or replacement value of assets. The replacement value is simply an estimate of how much it would cost to build similar resources and capabilities from scratch.

In addition to valuing the target company, you also need to estimate the value of potential synergies.  Revenue synergies and cost synergies are the revenue streams and cost savings that would be available to a combined entity but not to the target or acquiring company acting by itself.

During a case interview, it is important to thoroughly explain your reasons for using a particular valuation method as well as describe the appropriate process for implementation.

Competitive Response

CanadaCo, the largest discount retailer in Canada, currently holds the dominant market share in the industry. USCo, the largest discount retailer in the United States, has decided to expand into Canada by purchasing CanadaCo’s competition. How should the CEO of CanadaCo respond?

WHEN considering a case that requires a competitive response, first take a look at the action which forced the company to respond.

In the example above, we should test the hypothesis that USCo has a cost advantage due to economies of scale. This advantage would allow USCo to provide lower prices to Canadian consumers compared with CanadaCo. As a result, USCo’s entry into the Canadian market would probably cause our client to lose market share.

Without a full understanding of the facts, a response could be determined prematurely, neglecting vital characteristics of the case. What other factors would you ask about?

If I were presented with the case above, I would ask questions specifically pertaining to the differences between the Canadian market and the US market in order to determine the magnitude of USCo’s advantage.

Once the situation has been fully fleshed out, the next step would be to recommend a course of action. CandaCo could opt to do nothing, or respond in one or more of the following ways:

  1. Change its pricing strategy,
  2. Hire top executives away from USCo,
  3. Acquire or merge with a competing company,
  4. Rouse customer loyalty through rewards programs and customer service,
  5. Mimic USCo’s new product offering,
  6. Market CanadaCo’s products and build brand awareness.

Competitive Response

Let’s assume USCo is relatively unknown in Canada and will incur costs resulting from challenges in establishing a Canadian distribution network, but not enough to cause costs to rise to CanadaCo’s level.

The solution I would propose is that CanadaCo should focus on reputation. Unfortunately, attempting a price war with USCo would appear to be futile, and so I believe the best response would be to attempt to retain existing customers by developing CanadaCo’s customer loyalty program and by focusing on customer service.

How would you respond?

Strategy and framework adapted from Case In Point, a case interview preparation book written by Marc P. Cosentino. Case scenario is a derivation from a practice case provided by The Boston Consulting Group.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Entering a New Market

Your client is a low-cost airline headquartered in Philadelphia with frequent service to cities along the East Coast of the United States. The CEO is interested in expanding service into a small town in the Midwest; let’s call it Greenville. What is your recommendation?

THE first step in approaching a question such as this one is simply to summarise the information provided. Considering the brevity of the question above, this process may seem unnecessary; however, by repeating the question in your own words you will be able to differentiate between relevant and irrelevant information. Furthermore, this engages you in a conversation with the interviewer as opposed to enduring an uncomfortable silence.

Once the important information has been identified, it is valuable to verify the client’s objectives. Consultants often begin their working relationship with a client by asking about objectives and determining the feasibility of those goals. In this scenario, it is vital to understand why the client wants to expand service to this area. Is it strictly profit related? Or is there a desire for diversification?

Grasping the objective will enable you to ask the right questions. This part of the interview allows you to understand the case, provide a suitable recommendation, and demonstrate your thought process when dealing with new information. What is the size of the market? What is the current growth rate? Who are the potential customers in Greenville? Who is the competition? This is also a good time to explore details about the product and pricing.

Finally, you determine whether to advise the client to enter the market and, if so, what is the best way to do so?

By organising your thoughts in a simple diagram such as the one below, you can ensure that you are providing a truly comprehensive answer.

Entering a New Market - Diagram 4

Strategy and framework adapted from Case in Point, a case interview preparation book written by Marc P. Cosentino.

Mastering the Case Interview

Demonstrating that you have the business acumen required for the job

AFTER impressing interviewers with tales of leadership ability and applicable work experience, the hard part commences: demonstrating that you have the business acumen required for the job.

Cases allow consulting firms to see how applicants would react in front of a client when faced with difficult situations, as well as provide insight into an individual’s thought process. While certain skills can be taught, an ability to rationalize logically, act objectively, and think creatively can often only come naturally. Consulting firms seek to discover whether you possess those necessary skills.

Over the next few weeks, I will explore the various methods used to approach these interviews as well as introduce cases used by top consulting firms.

I encourage you to collaborate together in the comment section to discover new solutions or present a different angle than the one I have chosen.

To start with, please take a look at the video below which presents an introduction to the case interview from Ernst & Young Advisory.

The Consulting Blog’s new editor

A_Sherman_Photo 3INTRODUCING Ashley.

We have chosen the talented Ashley Sherman to be an Editor of the Consulting Blog for 2013/14.

Ashley was previously a Staff Writer for the NYU International Business Journal. An accomplished Business & Political Economy student at NYU Stern, Ashley brings passion, keen intellect, and a unique perspective to the Consulting Blog. Currently based in New York, Ashley plans to broaden her international business experience and has secured opportunities to study abroad in two of the world’s leading financial centres, London and Shanghai.

Management consulting is a difficult industry to break into, and we look forward to reading Ashley’s insights about the case interview process and other aspects of the consulting industry.

Please join us in welcoming Ashley!

MECE Framework

MECE stands for “mutually exclusive” and “collectively exhaustive”

MECE

1. Background

MECE stands for “mutually exclusive and collectively exhaustive” and is one of the hallmarks of problem solving at McKinsey (The McKinsey Way by Ethan M. Rasiel).

2. Benefit of the MECE framework

You can use the MECE framework to help you think clearly about a business problem.  The framework aids clear thinking in two ways:

  1. No overlap: categories of information should be grouped so that there are no overlaps, which helps to avoid double counting; and
  2. No gaps: all categories of information taken together should cover all possible options, which helps to avoid overlooking information.

3. MECE explained

MECE is a framework used to organise information which is:

  1. Mutually exclusive: information should be grouped into categories so that each category is separate and distinct without any overlap; and
  2. Collectively exhaustive: all categories taken together should deal with all possible options without leaving any gaps.

4. MECE tree diagram

The MECE tree diagram is a way of graphically organising information into categories which are mutually exclusive and collectively exhaustive. The diagram as a whole represents the problem at hand; each branch stemming from the starting node of the tree represents a major issue that needs to be considered; each branch stemming from one of these major issues represents a sub-issue that needs to be considered; and so on.

A major issues list should not contain more than five issues, with three being the ideal number (see Rule of Three). If you are not able to categorise a problem in 5 major issues there is always the option of creating a category of “other issues”.

The MECE framework can be applied to a lot of different business problems, for example, “what is the source of Coca-Cola’s declining global profitability?”.  Coca-Cola could tackle this business problem by using a MECE tree diagram to help it locate the source of declining profitability.

MECE tree diagram v2

5. Resources

Victor Cheng, former McKinsey consultant and creator of CaseInterview.com, indicates that:

The definitive book on this subject is the Pyramid Principle by Barbara Minto. It’s a book that describes an approach to communicating complex ideas in easy to understand ways. It is based on the MECE Principles and was a book often referred to and used while I was at McKinsey.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

The Hospital Bed Question

THE guesstimate question is a usual type of question that you can expect to be asked when interviewing for a position at a consulting firm.

Here is one to test your mettle.

The Hospital Bed Question

The question is this: How many hospital beds are required in New York city to provide for all of its pregnant women? 

You can assume that:

  1. pregnant women stay in hospital for one night only (American hospitals are very expensive); and
  2. hospital beds in New York are used exclusively by New York residents (no sharing).

If you are game to test your skills, then this is what you need to do.

Please respond in the comments below, covering the following in your answer:

  1. set out the steps that you would take to answer the question;
  2. note any additional assumptions that you would make at each step; and
  3. provide a final numerical guesstimate to the question.

To spice things up, I will be happy to send the best answer (as judged by me) a copy of an interesting book by Lawrence Weinstein (nuclear physicist) and John Adam (professor of mathematics). The book is called Guesstimation: Solving the World’s Problems on the Back of a Cocktail Napkin.

Note that the comments section remains open for 14 days only, so you have a limited time in which to respond…

Happy guesstimating.

Why consulting?

You will be more likely to succeed if you can clearly articulate why you are getting into the consulting industry

BEFORE applying for interviews, one question that you will want to ask yourself is “why consulting?”

Relevance of the question

The question is important for at least two reasons:

  1. You will be asked this question in your interview so it is a good idea to be prepared; and
  2. You will be much more likely to succeed (in the interview and afterwards) if you can clearly and passionately articulate in your own mind the reasons why you are getting into the industry.

How to answer the question

The way you respond to the question is more important than what you say. The most important thing is to be sincere and passionate about getting into the industry.

Think about why you want to get into the industry and write down each reason as a dot point. Memorise your dot points before you step into the interview room.

Your reasons

It is important that you are true to yourself, and have your own reasons for wanting to enter the industry.

Here are the 4 reasons why consulting is an obvious choice:

  • Solving business problems: Working with high profile clients to solve challenging business problems
  • Learning from the best: Working with and learning from super intelligent and energetic people
  • Building relationships: Working on a consulting engagement would be a great opportunity to build relationships with colleagues and business leaders
  • Travel: Consulting is a great way to combine travel with work

What are/were your reasons for wanting to get into the industry?

Respond in the forum.

Approaching the Guesstimate Question

IN A RECENT post we learnt 12 tips for nailing the Guesstimate Question, which is a usual type of question that you can expect to be asked when interviewing for a position at a consulting firm. We now consider how to approach the Guesstimate Question.

There are at least three ways to answer a guesstimate question:

  1. Try to guess the answer;
  2. If you can’t guess, break the question down into smaller pieces that you can guess; or
  3. If you still can’t guess, establish possible upper and lower bounds within which the answer is likely to fall.

1. Guess the answer

In the case interview the “try and guess” approach is unlikely to be helpful because the guesstimate question is unlikely to be straight forward. For example, you could be asked “How many tennis balls fit in a swimming pool?” There is no way you can guess the answer to this question, and the interviewer will not be impressed if you try. The interviewer wants to assess your logic and creativity in arriving at the answer.  You will need to break the question down into smaller pieces.

2. Break the question down into smaller pieces

You can break the question down into smaller pieces by asking the interviewer questions. And if the interviewer doesn’t have an answer, you can make a series of narrowing assumptions.

a) What is the volume of a tennis ball? “Assume 140 cubic centimeters.”

b) Are we talking about a standard Olympic sized swimming pooling? “Yes.”

c) What is the volume of an Olympic swimming pooling? “What do you think?”  You will need to make a series of narrowing assumptions and might reason as follows:

I know that an Olympic swimming pool is 50 meters long.

An Olympic swimming pool has 8 lanes and, based on my experience, each lane is about 2.5 meters wide. So, I will assume that an Olympic swimming pool is 25 metres wide.

Based on my experience, an Olympic swimming pool is about 2 meters deep at the shallow end and 3 meters deep at the deep end. I will assume that the pool starts getting deeper at the 30 meter mark and hits maximum depth 10 meters from the end of the pool.

d) What is the volume of a tennis ball in cubic metres?

e) How many tennis balls fit in a swimming pool?

3. Establish upper and lower bounds

Establishing possible upper and lower bounds for an answer is a good way to sanity check that the final answer is in the right ball park.

The number of tennis balls that fit inside an Olympic sized swimming pool is almost certainly more than 10,000 and less than 100,000,000. Therefore, our initial estimate is in the right ball park.

4. Take the extra step

Since tennis balls are spherical, there will be small gaps between the tennis balls. This means that the actual number of tennis balls that fit in an Olympic swimming pool will be less than our initial estimate. Let’s assume that 5% of the pool is filled by the empty space between tennis balls.

12 Tips for Nailing the Guesstimate Question

AS WE found out in the previous post, the guesstimate question is a usual type of question that you can expect to be asked when interviewing for a position at a consulting firm.

Here are 12 tips to help you nail the guesstimate question:

  1. Practice: We live in a world where most of us use a calculator or computer every day and it can be easy to forget how to do basic arithmetic in your head. Practice doing some guesstimate questions before the interview so that you are prepared. It is a good idea to bring a pen and paper to the interview to keep track of your calculations.  The Vault.com has also suggested bringing graph paper to the interview so that you can graph your results.
  2. Know some basic facts: It will help to know a few basic facts to give you a starting point from which to make reasonable assumptions. It is a good idea to know some key country and city population estimates.  For example, estimates for the population of the world (7 billion), America (300 million), Australia (20 million), New York (20 million), Sydney (4 million) and Melbourne (4 million).
  3. Use round numbers: You are responsible for doing the calculations so pick numbers that are easy to work with. For example, estimate the population of America as 300 million not 309.3 million.
  4. Get into character: An easy way to calm your nerves and improve your performance is to role play. You are not a university graduate desperate for a consulting job, you are a professional consultant. Game on!
  5. Take a moment: It is important to maintain your composure so before starting to answer the guesstimate question take a moment to consider your approach. You can buy yourself some time by saying, “That’s an interesting question” and then pausing to think.
  6. Have a clear approach: It is important to have a clear approach to help you answer the question.
  7. Ask questions: Your interviewer may be able to provide you with direction. If the question is “How many ping-pong balls will fit inside a 747?” the first question you might want to ask your interviewer is “What is the volume of a ping-pong ball?”
  8. State your assumptions: The interviewer may not know the answer or may not want to give you direction so you’ll have to make assumptions.  It is a good idea to clearly state your assumptions. For example, “let’s assume that the diameter of a ping-pong ball is 4cm. The formula for the volume of a sphere is 4/3.pi-r^3. The volume of a ping-pong ball would therefore be about 11-pi centimetres cubed”.
  9. Think out loud: The interviewer is trying to assess your thought process in getting to the answer, not the answer itself. If you don’t think out loud, you make it difficult for the interviewer to give you points.
  10. Explain your logic: As you make your way through the problem it is helpful to explain the logic behind each of your assumptions. Instead of saying “a 747 is about 100 metres long” you could say “I know that  an average car is about 5 metres long and based on my experience I would say that 20 cars lined up end to end would be about the same length as a 747. So I will assume that a 747 is 100 metres long”.
  11. Answer the question: After doing all of the calculation remember to answer the question that has been asked.
  12. Be prepared for the follow-up question: After you answer the guesstimate question, you may be asked “If you had to find the real answer to the question, how would you do it?” This is a test of your creativity and resourcefulness.

The Guesstimate Question

THE guesstimate question is a usual type of question that you can expect to be asked when interviewing for a position at a consulting firm.

What will you be asked to do

A typical guesstimate question will require you to estimate a number by doing a rough “back of the beer coaster” calculation. You are supposed to reach a final answer by using a series of narrowing assumptions.

Your assumptions should have a sound basis and you should explain the logic behind your assumptions, however it is not important that your assumptions be 100% accurate.

What is being assessed

Your response to the guesstimate question will help the interviewer evaluate your strengths in the following areas:

  1. professionalism and ability to remain level-headed when placed in a tricky situation;
  2. creativity and sound judgement in being able to come up with plausible assumptions;
  3. logic and structured thinking; and
  4. numerical skills and level of comfort with doing basic arithmetic in your head.

The guesstimate question is quite different from the kind of interview questions that you are probably used to.  For the guesstimate question, it is better to arrive at the wrong answer with good assumptions and clear logic than to know the right answer because you saw it on the Discovery Channel last week.

Examples

Here is a list of example guesstimate questions to give you an idea of the kind of questions to expect:

  1. How many births are there in America each day?
  2. How many petrol stations are there in Sydney?
  3. How many bottles of wine are consumed in France each month?
  4. How many cups of tea are drunk in England each day?
  5. How far does the average Premiership footballer run in a single game?
  6. How much does Mount Kilimanjaro weigh?
  7. How many pounds are spent on haircuts in the UK each year?
  8. How many ping-pong balls will fit inside a 747?
  9. How many weddings are performed in China each year?
  10. How many men’s suits were sold in the United States last year?
  11. How many tennis balls fit in a swimming pool?
  12. What is the annual size of the golf ball market in Japan?
  13. Estimate the total revenues obtained from the movie Avatar.
  14. What is the size of the market for mobile phones in America?
  15. How many white cars are there in Australia?
  16. How many people are buried each year in England?
  17. What is the annual market for apples in America?
  18. What is the annual revenue of Harrods in London?
  19. What is the market for bicycles in America?
  20. How many taxis are there in New York?

Top 5 Tips to Nailing the Management Consulting Interview

This guest post is by Neal Dodd, a former McKinsey consultant who has interviewed and prepared well over 100 potential candidates over the years. Neal currently manages Briefcases Direct.

TOP tier management consulting companies are the preferred destination for many MBA graduates, as well as graduates with less traditional backgrounds. In general, the consulting positions for those straight out of an undergraduate program are fewer and farther between. That’s because the more junior analyst positions typically don’t lead to partner track consulting positions in most firms; analysts are expected to return to graduate school and only then, should they return, be on a partner track. This can vary from firm to firm but is definitely true for the McKinsey, Bain and BCG type firms.

That doesn’t mean that fresh graduates cannot find positions, even in financial times as difficult as these. Believe or not, consulting companies are busier now than in the prior recession of 2001, so don’t lose hope. I have personally coached over a hundred potential candidates and many were truly amazed that they were able to secure the coveted offer letter during a competitive interviewing season. In order to maximize your chances during the interviewing process, it’s important to prepare carefully, below are some tips to help you ace the interview:

1. Make a good first impression

This goes for any interview you’re on but is particularly true for fields like management consulting. Make sure you look like a consultant – what does that mean? Many of the smart people that interview for consulting positions have not interviewed anywhere before or only for academic type positions. Others are foreign born graduates of top MBA or other programs – whatever, the case may be, they have never interviewed for a top tier management consulting job or similar positions in companies. The fact that these firms interview the brainy types only makes the situation worse. Invest in well made suit, dark blue or grey with or without pinstripes is perfect for men, for women, black can also work. A tie with a splash of color is fine, it can convey a little bit of energy or pizzazz, but nothing too flashy, they like energy but not attention seekers. A briefcase or attaché is a perfect complement to an outfit, you can always borrow a friend or colleague’s and it doesn’t necessarily have to be new to convey a polished look.

2. Keep your poise

Much of the interviewing process is very intense, with some companies intentionally playing “good cop, bad cop” between their interviewers. All this means is that you need to remain poised, don’t let them ruffle your feathers with abrupt or unfriendly behavior, pushing paper around or looking angry. Remember, you’re not here to make friends, you’re here to get a job and they’re here to test whether you can deal with nasty clients, managers and co-workers should the occasion arise. Keep smiling and a resilient positive attitude, you’re interviewers will find it irresistible.

3. Think and listen

This might sound obvious, but most people don’t do this during the case interview and miss the boat on what the interviewer is asking for or don’t get the hints that are being dropped during the discussion. A classic issue for interviewees is writing too much instead of listening to the question being asked. Practice listening to case questions and writing very few words, use symbols for profit (π), revenue (R) and other common words and don’t write down the fluff in the questions, flowery language is there to confuse, good consultants can spot the key facts quickly. Listen and then think about the implications of the question being asked. If there are declining profits in a business that is becoming commoditized, then opine as much and state your rationale. You can be thoughtful and comment on the question at hand based on what you know. Continue this process throughout the case interview, each piece of information is a clue, not just a plug into an equation or out of the box framework so common in business schools.

4. Ask questions

Now that you’re thinking about the case and the information you’re being given, be sure to ask intelligent questions; start a dialogue rather than barreling down a path that is preconceived or based on early inferences on the case at hand. Remember, you are expected to be engaging during team problem solving situations, be sure to appear this way during the interview and engage the interviewer. There is probably a lot you know about a particular industry based on general reading (you should be reading business publications to build your business acumen if you don’t have a typical business background). If the case is about the magazine industry, you should be able to guess what their sources of revenue are without having worked in the business – that’s just common sense, practice applying this common sense. Curiosity is a relentless trait in good consultants, mix this curiosity with intelligent thought to come up with hypothesis driven questions: “One would think that the roofing industry is seasonal…..are there seasonal variations in this company causing cash flow issues?” rather than, “is there uneven earnings throughout the year?”

5. Pass the airport screen

Consultants always ask, is this someone I’d like to be stuck at an airport with for 4 hours or in a small team room for 8 – 12 hours per day for weeks on end? Be sure you’re the type of person that is tolerable, hopefully enjoyable, to be around. Be yourself, don’t be too pushy or aggressive, it just turns people off. Have fun with the interview, if you’ve prepared well it should be fun for both you and the interviewer. Be sure to prepare well for the interview and the fit questions on your background, resume, interests, strengths and weaknesses – these all count, remember, they’re looking for the next round of leaders for their organizations, their people are their product so show them what a great product they’re looking at!

Product Life Cycle Model

The Product Life Cycle Model can be used to analyse the maturity stage of products and industries

Product life cycle

1. Background

THE idea of the Product Life Cycle was first developed in 1965 by Theodore Levitt in an article entitled “Exploit the Product Life Cycle” published in the Harvard Business Review on 1 November 1965.

2. Benefit of the Product Life Cycle model

For a business, having a growing and sustainable revenue stream from product sales is important for the stability and success of its operations. The Product Life Cycle model can be used by consultants and managers to analyse the maturity stage of products and industries. Understanding which stage a product is in provides information about expected future sales growth, and the kinds of strategies that should be implemented.

3. Product Life Cycle model

product_life_cycle_2

The “Product Life Cycle” is the name given to the stages through which a product passes over time. The classic Product Life Cycle has four stages:

  1. Introduction,
  2. Growth,
  3. Maturity, and
  4. Decline.

3.1 Introduction

At the market introduction stage the size of the market, sales volumes and sales growth are small. A product will also normally be subject to little or no competition. The primary goal in the introduction stage is to establish a market and build consumer demand for the product.

There may be substantial costs incurred in getting a product to the market introduction stage. Substantial research and development costs may have been incurred, for example, thinking of the product idea, developing the technology, determining the product features and quality level, establishing sufficient manufacturing capacity, preparing the product branding, ensuring trade mark protection, etc. Marketing costs may be high in order to test the market, launch and promote the product, develop a market for the product, and set up distribution channels.

The market introduction stage is likely to be a period of low or negative profits. As such, it is important that products are carefully monitored to ensure that sales volumes start to grow. If a product fails to become profitable it may need to be abandoned.

Some of the considerations in the introduction stage include:

  • Product development: research and development of the basic technology and product concept, determining the product features and quality level.
  • Pricing: should penetration pricing or a skimming price strategy be used? A skimming price strategy might be appropriate where there are very few competitors.
  • Distribution: distribution might be quite selective until consumer acceptance of the product can be achieved.
  • Promotion: marketing efforts are aimed at early adopters, and seek to build product awareness and to educate potential consumers about the product.

3.2 Growth

If the public gains awareness of a product and consumers come to understand the benefits of the product and accept it then a company can expect a period of rapid sales growth, enter the “Growth Stage”. In the Growth Stage, a company will try to build brand loyalty and increase market share.

Profits are driven by increased sales volume (due to growth in market share as well as an increase in the size of the overall market). Profits might also be driven by cost reductions gained from economies of scale, and perhaps more favourable market prices. Competition in the Growth Stage remains low, although new competitors are expected to enter the market. When competitors enter the market a company might be subject to price competition and increase its marketing expenditure.

Some of the considerations in the Growth Stage include:

  • Product improvement: product quality might be improved, additional features and support services added, and packaging updated.
  • Pricing: if consumer demand is high the price might be maintained at a high level.
  • Distribution: distribution channels might be added as consumer demand increases.
  • Promotion: promotion is aimed at a broader audience. A company might spend a lot of resources on promotion during the Growth Stage to build brand loyalty.

3.3 Maturity

When a product reaches maturity, sales growth slows and sales volume eventually peaks and stabilises. This is the stage during which the market as a whole makes the most profit. A company’s primary objective at this point is to defend market share while maximising profit.

In this stage, prices tend to drop due to increased competition. A company’s fixed costs are low because it is has well established production and distribution. Since brand awareness is strong, marketing expenditure might be reduced, although increased marketing expenditure might be needed to retain market share and fight increasing competition. Expenditure on research and development is likely to be restricted to product modification and improvement, and perhaps research into improved production efficiency and product quality.

Some considerations for the mature product market include:

  • Product differentiation: increased competition in the mature product market means that a company must find ways to differentiate its product from that of competitors. Strong branding is one way to do this.
  • Pricing: prices may be reduced because of increased competition. Firms in the market should be careful not to start a price war.
  • Distribution: distribution intensifies and incentives may be offered to encourage preference to be given over competing products.
  • Promotion: promotion will focus on emphasising product differences and creating/maintaining a strong brand.

3.4 Decline

A product enters into decline when sales and profits start to fall. The market for that product shrinks which reduces the amount of profit available to the firms in the industry. A decline might occur because the market has become saturated, the product has become obsolete, or customer tastes have changed.

A company might try to stimulate growth by changing their pricing strategy, but ultimately the product will have to be re-designed, or replaced. High-cost and low market share firms will be forced to exit the industry.

As sales decline, a company has three strategy options:

  • Hold: maintain production and add new features and find new uses for the product. Reduce the cost of manufacturing (e.g. move manufacturing to a low cost jurisdiction). Consider whether there are new markets in which the product might be sold.
  • Harvest: continue to offer the product, reduce marketing expenditure, and sell possibly to a loyal niche segment of the market.
  • Divest: Discontinue production, and liquidate the remaining inventory or sell the product to another firm.

Some considerations for a declining market include:

  • Product consolidation: the number of products may be reduced, and surviving products rejuvenated.
  • Price: prices may be lowered to liquidate inventory, or maintained for continued products.
  • Distribution: distribution becomes more selective. Channels that are no longer profitable are phased out.
  • Promotion: Expenditure on promotion is reduced for products subject to the Harvest and Divest strategies.

4. Criticisms

The Product Life Cycle is useful for monitoring sales results over time and comparing them to products with a similar life cycle. However, the Product Life Cycle model is by no means a perfect tool. Products often do not follow a defined life cycle, not all products go through each stage, and it is not always easy to tell which stage a product is in at any one time. Consequently, the life cycle concept is not well-suited for the forecasting of product sales.

The length of each stage will vary depending on the product and the marketing strategies employed. A Product Life Cycle may be as short as a few months for a fad or as long as a century or more for a product like petrol cars. In many markets the product life cycle is longer than the planning cycle of the organisations involved. Major products often hold their position for several decades or more, indeed, Coca-Cola was introduced in 1886 and is still the leading brand of cola.

The Product Life Cycle is only one of many considerations that a company must bear in mind. The product life cycle of many modern products is shrinking, while the operating life for many of these products is lengthening. For example, the operating life of durable goods like household appliances has increased substantially. As a result, a company that produces these products must take their market life and service life into account when planning.

Some critics have argued that the Product Life Cycle may become self-fulfilling. For example, if sales peak and then decline a manager may conclude that a product is on the decline and cut back on marketing, thus precipitating a further decline.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Five C Analysis of Borrower Creditworthiness

When a company is trying to borrow money, executives, entrepreneurs and consultants should be aware that there are five criteria that most lenders care about

5 C Analysis of Borrower Creditworthiness

(Source: Flickr)

What are lenders looking for?

IT IS important to understand what lenders look for when they lend money because companies often need to borrow money for various reasons: increase cash reserves, refinance existing debt, pay regular operating expenditures, research and development, capital expenditure, product development, expansion into new markets, strategic acquisitions, etc.

There are five criteria that most lenders use to assess a borrower’s creditworthiness:

  1. capacity to generate sufficient cash flows to service the loan;
  2. collateral to secure the loan in case the borrower defaults;
  3. capital that shareholders have invested in the business;
  4. conditions prevailing in the borrower’s industry and broader economy; and
  5. character and track record of the borrower and the borrower’s management.

It is important to keep in mind that lenders don’t give equal weight to each criterion and will use all five criteria to create an overall impression of a company’s creditworthiness. Lenders are typically cautious and weakness in one of the five criteria may offset strength in all of the others. For example, if a company is in a cyclical industry (e.g. construction, auto, or aviation) the company may find it difficult to borrow money during an economic downturn even if the company shows strength in all of the other criteria. Similarly, if a company’s management has a bad reputation and poor track record then the company may find it difficult to borrow money even if it has strong financial statements.

Taken together, these five criteria indicate a borrower’s ability and willingness to repay its debts. As such, if you are advising a company in relation to raising finance, you must ensure that each of the five criteria is fully addressed in your loan request.

Let’s consider each of the five criteria in a little more detail:

1. Capacity

Capacity to repay a loan is the most important criterion used to assess a borrower’s creditworthiness. The borrower must be able to satisfy the lender that it has the ability to repay the loan. To satisfy itself of the borrower’s capacity, the lender will consider various factors including:

  1. Profitability: What are the revenues and expenses of the borrower?
  2. Cash flows: How much cash flow does the business generate? The lender is interested not only in cash flows from operations, but also cash flows from investing and financing activities. What are the timing of cash flows with regard to repayment?
  3. Payment history: What is borrower’s payment history and track record of loan repayment?
  4. Debt levels: How much debt does the borrower have? How much debt can the borrower afford to repay?
  5. Industry evaluation: What is the normal debt/liquidity level for companies in the borrower’s industry?
  6. Financial ratios: There are a number of financial ratios, such as debt and liquidity ratios, that lenders will evaluate before lending money: e.g. debt to equity ratio, debt to asset ratio, current ratio, quick (acid test) ratio, operating cash flow ratio, working capital ratio, etc.

2. Collateral

While cash flows are the primary source for the repayment of a loan, collateral provides lenders with a secondary source of repayment. Collateral represents the assets that are provided to the lender to secure a loan. In the event that the borrower fails to repay the loan, the collateral may be seized by the lender to repay the loan.

The borrower must usually provide the lender with suitable collateral. To do this, the borrower normally pledges hard assets like real estate, office equipment or manufacturing equipment. However, accounts receivable and inventory might also be pledged as collateral.

Service businesses and small companies may find it difficult to provide lenders with the collateral they require because they have fewer hard assets to pledge. If the borrower doesn’t have the necessary collateral, the lender may require personal guarantees from the borrower’s directors or from a third party such as the borrower’s parent company.

3. Capital

Capital is the money that shareholders have personally invested in the business. Capital represents the money that shareholders have at risk should the business fail.

Lenders are more likely to lend money to a borrower if shareholders have invested a large amount of their own money in the business. If the business runs into financial difficulty, then the capital of the business provides a cushion for repayment of the loan. If shareholders have a large amount of capital invested in the business, this indicates they have confidence in the business venture and that they will do all that they can to ensure the borrower does not default on the loan.

4. Conditions

Conditions refer to two factors that the lender will take into account. Firstly, conditions refer to the overall economic climate, both within the borrower’s industry and in the economy generally, that could affect the borrower’s ability to repay the loan. For example, during recessions and periods of tight credit it becomes more difficult for small businesses to repay loans and more difficult for lenders to find money to lend. Thus, during these periods a small business will find it difficult to borrow money and must present lenders with a flawless loan application.

In considering the overall economic climate a lender may consider various questions including:

  1. What is the current business climate?
  2. What are the trends for the borrower’s industry? How does the borrower fit within them?
  3. What is the short and long-term growth potential in the industry?
  4. How is the market characterised? Is it an emerging or mature market?
  5. Are there any economic or political hot potatoes that could negatively impact the borrower’s growth?

Secondly, conditions refer to the intended purpose of the loan. The borrower’s reasons for seeking the loan should be spelt out in detail in the loan application. Will the money be used to buy new equipment for expansion? Will the money be used to replenish working capital to prepare for a seasonal inventory build-up?

5. Character

Character refers to the general impression that the borrower makes on the prospective lender. The lender will form a subjective judgement as to whether the borrower is sufficiently trustworthy to repay the loan.

Lenders want to put their money with companies that have impeccable credentials. Relevant factors that a lender may consider in deciding whether the borrower is sufficiently trustworthy include:

  1. What is the character of each member of the management team?
  2. What reputation do management have in the industry and the community?
  3. What educational background and level of experience does management have?
  4. What is management’s track record?
  5. What is the overall consumer perception of the borrower?
  6. Is the borrower progressive about its waste disposal, quality of life for its employees, and charitable contributions?
  7. Does the borrower have a track record of fulfilling its obligations in a timely manner?
  8. What is the borrower’s payment history and track record of loan repayment?
  9. Are there any legal actions pending against the borrower? If so, what is the reason for these legal actions?

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Value Chain Analysis

To understand which activities provide a business with a competitive advantage, it is helpful to separate operations into a series of value-generating activities referred to as the “value chain”

Value Chain Analysis

(Source: Flickr)

1. Background

VALUE Chain Analysis is a concept that was first described and popularised by Michael Porter in his 1985 book, Competitive Advantage.

2. Relevance of Value Chain Analysis

In order to understand the activities that provide a business with a competitive advantage, it is useful to separate the business operation into a series of value-generating activities referred to as the value chain.

Value Chain Analysis involves identifying all of the important activities in which a business engages and then determining which ones give the company a defensible competitive advantage. By doing this, we can identify which activities are best undertaken by the company itself and which ones are able to be outsourced.

3. Value Chain Analysis explained

Michael Porter introduced a generic value chain model that comprises a sequence of activities common to a wide range of firms. Porter suggested that the activities of a business could be grouped under two headings:

  1. Primary activities: those that are directly concerned with creating and delivering a product; and
  2. Support activities: those that are not directly involved in production, but may increase effectiveness or efficiency.

The firm’s margin or profit depends on its ability to perform these activities efficiently, so that the amount that the customer is willing to pay for the products exceeds the cost of the activities in the value chain.

3.1. Primary activities

The primary activities in Porter’s model include:

  1. Inbound Logistics: Receiving and storing externally sourced materials.
  2. Operations: Manufacturing products and services – the way in which inputs are converted into final products.
  3. Outbound Logistics: Getting finished goods and services to consumers.
  4. Marketing & Sales: Identification of customer needs and the generation of sales.
  5. Service: Supporting customers after the product or service has been sold to them.

3.2. Support activities

The support activities in Porter’s model include:

  1. Human resource management: Recruitment, training, development, motivation and compensation of employees.
  2. Infrastructure: Includes a broad range of support systems including organisational structure, planning, management, quality control, culture, and finance.
  3. Procurement: Sourcing resources and negotiating with suppliers.
  4. Technology development: Managing information, developing and protecting new products and services, developing more efficient processes, and improving quality.

4. Application of the Value Chain Analysis

4.1. Steps to take

Value Chain Analysis can be broken down into a three sequential steps:

  1. Break down a company into its key activities under each of the headings in the model;
  2. Identify activities that contribute to the firm’s competitive advantage either by giving it a cost advantage or creating product differentiation. Also identify activities where the business appears to be at a competitive disadvantage; and
  3. Develop strategies around the activities that provide a sustainable competitive advantage.

4.2. Cost advantage

A business can achieve a cost advantage over its competitors by firstly understanding the costs that are associated with each activity and then organising each activity to be as efficient as possible.

Porter identified 10 cost drivers related to each activity in the value chain:

  1. Economies of scale
  2. Learning
  3. Capacity utilisation
  4. Linkages among activities
  5. Interrelationships among business units
  6. Degree of vertical integration
  7. Timing of market entry
  8. Firm’s policy on targeting cost or product differentiation
  9. Geographic location
  10. Institutional factors (regulation, union activity, taxes, etc.)

A firm can develop a cost advantage by controlling these 10 cost drivers better than its competitors.

A cost advantage can also be pursued by reconfiguring the value chain. Reconfiguration means introducing structural changes such as a new production process, new distribution channels, or a different sales approach. For example, Qantas structurally redefined its maintenance of aircraft, which was traditionally conducted by inhouse engineers, by outsourcing this function to private overseas contractors.

4.3. Product differentiation

Product differentiation can be achieved by a business by focusing on its core competencies in order to perform them better than its competitors.

Product differentiation can be achieved through any part of the value chain. For example, procurement of inputs that are unique and not widely available to competitors, providing high levels of product support services, or designing innovative and aesthetically attractive products are all ways of creating product differentiation.

5. Issues arising from the Value Chain Analysis

5.1. Linkages between Value Chain activities

Value Chain activities are not isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities.

Consider the case in which the design of a product is changed in order to reduce manufacturing costs. Suppose that the new product design inadvertantly results in increased service costs; the cost reduction could be less than anticipated and even worse, there could be a net cost increase.

5.2. Business unit interrelationships

Business unit interrelationships can be identified using the Value Chain Analysis.

Business unit interrelationships offer opportunities to create synergies among business units. For example, if multiple business units require the same raw material and the procurement process can be coordinated then bulk purchasing may result in cost reductions. Such interrelationships may exist simultaneously in multiple value chain activities.

5.3. Outsourcing

Value Chain Analysis assists management decide which activities should be outsourced. It is rare for a business to undertake all primary and support activities internally. In order to decide which activities to outsource managers must understand the firm’s strengths and weaknesses, both in terms of cost and ability to differentiate.

6. Case example

For example, Coca-cola might have the following value chain elements:

  1. Research and development (Will cherry taste good with cola?)
  2. Manufacturing (How much does the bottling plant cost to build and run? How often do factories need to be re-engineered?)
  3. Cost of goods sold (How much does it cost to manufacture cola? Is there a frost in Florida that will drive up the cost of cherries?)
  4. Packaging and shipping (How much does that new design of packaging cost? Are many cans of cola lost in transit? What are the fixed costs of shipping?)

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Four P’s Marketing Framework

A useful framework for evaluating the marketing strategy for a product

Four P Marketing

THE Four P’s consists of:

  1. price ;
  2. product ;
  3. position/place; and
  4. promotion .

1. Price

The pricing strategy employed by a firm for a particular good or service will have a significant effect on profit.

There are many different pricing strategies that can be employed in different combinations, including:

  1. Price differentiation – setting a different price for the same product in different segments of the market. First degree price discrimination involves charging each customer a different price. To do this, the seller must be able to observe each customers willingness to pay, this is very difficult to do in practice. Second degree price discrimination involves varying the price according to quantity sold. Third degree price discrimination involves varying the price by location or market segment. For example, charging discounted prices for students.
  2. Dynamic pricing – a form of first degree price discrimination, dynamic pricing is a flexible pricing mechanism that allows online companies to adjust the price of identical goods to correspond to a customer’s willingness to pay. This is made possible by using data gathered from a customer including where they live, what they buy, and how much they have spent on past purchases.
  3. Predatory pricing – aggressive pricing intended to undercut competitors and drive them out of the market.
  4. Limit pricing – a low price charged by a monopolist in order to discourage entry into the market by other firms.
  5. Using a loss leader – a loss leader is a product sold at a low price to stimulate other profitable sales. For example, the 30 cent soft serve cone at McDonalds.
  6. Penetration pricing – the price is set low in order to gain market share.
  7. Marginal cost pricing – the practice of setting the price of a product equal to the cost of producing one extra unit of output.
  8. Market-orientated pricing – setting a price based upon analysis of the targeted market.
  9. Psychological pricing – pricing designed to have a positive psychological impact. For example, selling a product at $3.95 instead of $4.
  10. Skimming – charging a high price to gain a high profit, at the expense of achieving high sales volume. This strategy is usually employed to recoup the initial investment cost in research and development, commonly used in electronic markets when a new product range is released.
  11. Premium pricing – involves keeping the price of a good or service artificially high in order to encourage a favorable perception among buyers.
  12. Target pricing – a method of pricing whereby the selling price of a product is calculated to produce a particular rate of return on investment.
  13. Seasonal pricing – adjusting the price depending on seasonal demand.
  14. Cost-plus pricing – a very basic pricing strategy where a firm sets price equal to unit cost of production plus a margin for profit.

2. Product

Product differentiation is a source of competitive advantage. Product differentiation is the process of describing the differences between a good or service in order to demonstrate the unique aspects of the good or service and create an impression of value in the mind of the consumer.

The major sources of product differentiation include:

  1. Vertical differentiation –where products differ in their quality. For example, BMW and Hyundai.
  2. Horizontal differentiation – where products differ in features that cannot be ordered. For example, different flavours of ice-cream.
  3. Availability – where products are available at different times (e.g. seasonal fruits) and locations (e.g. location of an ice-cream store near the beach). See section 3, “Position/Place”.
  4. Perception – branding, sales, and promotion can be used to distinguish a product in the market. See section 4, “Promotion”.

Successful product differentiation leads to monopolistic competition. In a monopolistically competitive market consumers perceive that there are non-price differences between products. As a result, even though there are a large number of producers, each producer has a degree of control over price.

3. Position/Place

The physical location of a good or service can be a source of competitive advantage. For example, imagine we have two ice-cream stores. One ice-cream store (Store A) opens next to a popular tourist beach, and one ice-cream store opens in the backstreets of a quiet suburb (Store B). We expect that Store A will be able to charge a higher price and sell more ice-cream than Store B, other things being equal.

4. Promotion

Promotion is used to enhance the perception of a good or service in the minds of consumers. A promotion will draw peoples attention to any features of a product that people might find attractive including its quality, specialised features, availability, brand name, or image.

Promotion can be carried out in various ways including:

  1. advertising (developing brand awareness);
  2. publicity (sponsoring a sports team);
  3. public relations (donating to charity);
  4. celebrity appearances;
  5. door to door sales;
  6. price discounting (see section 1, “Price”); and
  7. quantity discounting (two for one offers, bundling).

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

McKinsey 7 S Framework

The 7 S Framework can help executives and consultants to understand the inner workings of an organisation, and it provides a guide for organisational change

McKinsey 7 S Framework(Source: Flickr)

1. Background

DEVELOPED around 1978, the 7 S framework first appeared in a book called The Art of Japanese Management by Richard Pascale and Anthony Athos, and also featured in In Search of Excellence by Thomas Peters and Robert Waterman.

McKinsey has adopted the 7 S model as one of its basic analysis tools.

2. Benefits of the 7 S Framework

The 7 S framework is a useful diagnostic tool for understanding the inner workings of an organisation. It can be used to identify an organisations strengths and sources of competitive advantage, or to identify the reasons why an organisation is not operating effectively. As such, the 7 S framework is an important analysis framework for mangers, consultants, business analysts and potential investors to understand.

The 7 S framework provides a guide for organisational change. The framework maps a group of interrelated factors, all of which influence an organisation’s ability to change. The interconnectedness among each of the seven factors suggest that significant progress in one area will be difficult without working on the others. The implication of this is that, if management wants to successfully establish change within an organisation, they must work on all of the factors, and not just one or two.

3. McKinsey’s 7 S framwork explained

The 7 S framework describes seven factors which together determine the way in which an organisation operates. The seven factors are interrelated and, as such, form a system that might be thought to preserve an organisation’s competitive advantage. The logic is that competitors may be able to copy any one of the factors, but will find it very difficult to copy the complex web of interrelationships between them.

McKinsey 7 S model

  1. Shared values (also called Superordinate Goals) refer to what an organisation stands for and believes in. This includes things like the long term vision of the organisations, its charitable ideals, or its core guiding principles. For example, the core guiding principle at McKinsey is professionalism.
  2. Staff refers to the number and type of people employed by the organisation.
  3. Skills refers to the learned capabilities of staff within the organisation.
  4. Style refers to the way things are done within the organisation, that is, the work culture.
  5. Strategy refers to the plans an organisation has for the allocation of its resources to achieve specific goals.
  6. Structure refers to the way in which an organisation’s business units relate to each other. For example, a company may use a centralised system where all key decisions are made at the head office.
  7. Systems are the practices and procedures that an organisation uses to get things done, e.g. financial systems, information systems, recruitment and performance review systems, etc.

As a consultant, you will need to ask targeted questions to identify an organisation’s strengths and weaknesses for each of the above factors.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

NPV: Net Present Value

The NPV of an investment is the present value of the series of cash flows generated by the investment minus the cost of the initial investment

Net Present Value

(Source: Flickr)

1. Net Present Value (NPV) explained

THE net present value (NPV) of an investment is the present value of the series of cash flows generated by the investment minus the cost of the initial investment. Each cash inflow/outflow is discounted back to its present value and then summed together:

NPV

Where t is the time of the cash flow; r is the discount rate (see below for further explanation); Ct is the net cash flow (cash inflow minus cash outflow) at time t; and Co is the cost of the initial investment made at time zero.

NPV is used to analyse the profitability of an investment. As a general rule, assuming you have selected an appropriate discount rate, only those investments that yield a positive NPV should be considered for investment.

2. The discount rate

The rate used to discount future cash flows to their present value is an important variable in the net present value calculation. To some extent, the selection of the discount rate depends on the use to which the NPV calculation will be put.

2.1 Option 1 – cost of capital:

One option that is often used is to use a firm’s weighted average cost of capital.

There are two problems with using the cost of capital for the discount rate. Firstly, it may not be possible to know what the cost of capital will be in the future. One solution to this problem is to use a variable discount rate that increases over time to reflect the yield curve premium for long-term debt. A yield curve is the relation between the interest rate (or cost of borrowing) and the time to maturity and is usually upward sloping asymptotically. There are two common explanations for why the yield curve is upward sloping. Firstly, it might be that rising interest rates are expected in the future and investors who are willing to lock their money in now therefore need to receive a higher rate of interest. Secondly, even if interest rates are not expected to rise, longer maturities involve greater risks to an investor and so, to compensate for these inherent uncertainties about the future, a risk premium should be paid.

The second problem with using the cost of capital for the discount rate is that it does not take into account opportunity costs. A positive NPV calculation would tell us that the investment is profitable, but would not tell us whether the investment should be undertaken because there may be more profitable investment opportunities.

2.2 Option 2 – opportunity cost:

A second option is to use a discount rate that reflects the opportunity cost of capital. The opportunity cost of capital is the rate which the capital needed for the project could return if invested in an alternative venture. Obviously, where there is more than one alternative investment opportunity, the opportunity cost of capital is the expected rate of return of the most profitable alternative.

For example, assume that a firm has two investment options, investing in Project A (its existing line of business) or Project B (a new line of business). Based on past experience, the firm knows that it can obtain a 15% return from investing in Project A. This means that the opportunity cost of capital for investing in Project B is 15%. Thus, an NPV calculation for Project B will use a discount rate of 15%.

3. Common pitfalls

3.1 Negative future cash flows:

One potential problem with NPV is that if, for example, the future cash flows are negative (for example, a mining project might have large clean-up costs towards the end of a project) then a high discount rate is not cautious but too optimistic. A way to avoid this problem is to explicitly calculate the cost of financing any losses after the initial investment.

3.2 Adjusting for risk:

Another common pitfall is to adjust for risk by adding a premium to the discount rate. Whilst a bank might charge a higher rate of interest for a risky project, that does not necessarily mean that this is a valid way to adjust a net present value calculation. One reason for this is that where a risky investment results in losses, a higher discount rate in the NPV calculation will reduce the impact of such losses below their true financial cost.

3.3 Dealing with negative NPV:

The general rule is that only those investments that yield a positive NPV should be considered for investment. However, this will only be true if we have selected an appropriate discount rate. For example, in the example in section 2.2, if we used a discount rate higher than 15% in the NPV calculation for Project B then obtaining a negative NPV calculation does not necessarily mean that we should reject Project B. Unless we have intellionally chosen a higher discount rate to adjust for the risk of the project, the negative NPV result does give us any useful information.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Porter’s Five Forces Analysis

The Porter’s Five Forces framework is used to determine the competitive intensity and attractiveness of an industry

Porter's Five Forces

HARVARD Business School professor Michael Porter, in his 1979 book Competitive Strategy, developed the Porter’s Five Forces.

The Porter’s Five Forces framework is used to determine the competitive intensity and attractiveness of an industry. Attractiveness in this context refers to the overall industry profitability. You can use this framework when introducing a new product, expanding into a new market, divesting a product line, acquiring a new business, or assessing the cause of declining sales or profitability.

In determining the competitive intensity of an industry, Porter’s Five Forces include three forces from ‘horizontal’ competition (1, 2 and 3), and two forces from ‘vertical’ competition (4 and 5):

  1. Existing competition: How strong is the rivalry posed by the present competition?
  2. Barriers to entry: What is the threat posed by new players entering the market?
  3. Substitutes: What is the threat posed by substitute products and services?
  4. Supplier bargaining power: How much bargaining power do suppliers have?
  5. Customer bargaining power: How much bargaining power do customers have?

Porter's Five Forces

1. Competition: How strong is the rivalry posed by the present competition?

The intensity of competition in an industry is affected by various factors, including:

  1. The number of firms in the industry, the more firms the stronger the competition because there are more firms competing for the same customers;
  2. Slow market growth leads to increased competition because there is only a small number of new customers entering the market each year, firms must compete to win existing customers;
  3. Where firms have economies of scale, that is they have relatively high fixed costs and low variable costs, the more they produce the lower their per unit costs become. This results in more intense rivalry between firms as they compete to gain market share;
  4. Where customers have low switching costs, this intensifies competition as firms compete to retain their current customers and steal customers from other firms;
  5. Low levels of product differentiation between firms leads to increased competition. Where a firm has a strong brand name or a highly differentiated product, this reduces the intensity of competition;
  6. Diversity of competition (for example, firms from different countries and cultures) reduces the predictability and stability in the market.  Uncertainty in the market leads firms to compete more agressively, thereby driving down firm profits in the industry;
  7. High exit barriers increase competition because firms that might otherwise exit the industry are forced to stay and compete. A common exit barrier is where a firm has highly specialised equipment that it cannot sell or use for any other purpose; and
  8. An industry shakeout will result in a short period of intense competition. Where a growing market induces a large number of new firms to enter the market, a point is reached where the industry becomes crowded with competitors. When the market growth rate slows and the market becomes overcrowded, a period of intense competition, price wars and company failures ensues.

2. Barriers to entry: What is the threat posed by new players entering the market?

In theory, any firm should be able to enter a market, however, in reality industries often possess characteristics that prevent new players from entering the market (barriers to entry).  Barriers to entry reduce the rate of entry of new firms, thus maintaining the level of profits for those firms already in the industry.

Barriers to entry may exist for various reasons, including:

  1. high capital costs of setting up a business in a particular industry;
  2. where an industry requires highly specialised equipment, potential entrants may be reluctant to commit to acquiring specialised assets that cannot be sold or converted into other uses if the venture fails;
  3. lack of the proprietary technology or patents that are needed to become a player in the industry;
  4. extensive scale and branding of existing competitors may prevent potential entrants from gaining market share and hence deter entry into the market;
  5. government regulations: Government may regulate to prevent new firms from entering an industry. It might do this because of the existence of a natural monopoly. A natural monopoly is an industry where one firm is able to produce the desired output at a lower social cost than could be achieved by two or more firms (social costs being the sum of private and external costs). Natural monopolies exist because of the existence of economies of scale, and examples include railways, water services, and electricity; and
  6. Individual firms may have economies of scale. The existence of such economies of scale creates a barrier to entry because an existing firm can produce at a much lower cost per unit than a new firm.

3. Substitutes: What is the threat posed by substitute products and services?

Economics defines substitute goods as goods for which an increase in demand for one leads to a fall in demand for the other. In the Porter’s Five Forces framework, a reference to a substitute good refers to a good in another industry. For example, natural gas is a substitute for petroleum.

Good A and good B are substitutes if they can be used in place of one another (at least in some circumstances). The existence of close substitutes constrains the ability of a firm to raise prices and, as the number of substitutes increase, the quantity demanded will become more and more sensitive to changes in the price level (i.e. price elasticity of demand for the product increases).

The threat posed by substitute goods is affected by various factors, including:

  1. the cost to customers of switching to a substitute product or service (switching costs). For example, the cost of switching between the Windows operating system and Apple operating system might be prohibitive because computer programs and accessories are built to work with one operating system or the other;
  2. buyer propensity to substitute;
  3. relative price-performance of substitutes; and
  4. perceived level of product differentiation.

4. Supplier bargaining power: How much bargaining power do suppliers have?

Suppliers are providers of the inputs to the industry, for example, labour and raw materials. Factors that will effect the bargaining power of a supplier include:

  1. The number of possible suppliers and the strength of competition between suppliers;
  2. Whether suppliers produce homogenous or differentiated products;
  3. The importance of sales volume to the supplier;
  4. The cost to the firm of changing suppliers (switching cost);
  5. The presence of substitute inputs; and
  6. Vertical integration of the supplier or threat to become vertically integrated. Vertical integration is the degree to which a firm owns its upstream suppliers and its downstream buyers. For example, a car manufacturer may also own a tyre manufacturer.

5. Customer bargaining power: How much bargaining power do customers have?

Customers are the purchasers of the goods or services produced by the company.  Factors that will effect the bargaining power of a customer include:

  1. The volume of goods or services purchased. If the customer purchases a significant proportion of output, then they will have a significant amount of bargaining power;
  2. The number of customers. The fewer customers there are, the more bargaining power they will have to negotiate price. For example, in America the market for defence equipment is a monopsony, a market in which there are many suppliers and only one buyer. As such, the Department of Defence has strong bargaining power to negotiate the terms of supply contracts;
  3. Brand name strength. A product that has a stronger brand name will be able to be sold for a higher price in the market;
  4. Products differentiation. A firm that produces a product or service that is unique in some way will have more bargaining power and will be able to charge a higher price in the market; and
  5. The availability of substitutes.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

BCG Growth Share Matrix

The BCG growth share matrix is a simple conceptual framework for resource allocation within a firm

BCG Growth Matrix(Source: Flickr)

1. Background to the BCG matrix

IN 1968, BCG developed the growth share matrix, which is a simple conceptual framework for resource allocation within a firm.

2. Purpose of the BCG matrix

The BCG matrix is a simple tool that enables management to:

  1. classify products in a company’s product portfolio into four categories (Stars, Cash Cows, Question Marks, and Dogs);
  2. index a company’s product portfolio according to the cash usage and generation;
  3. determine the priority that should be given to different products in a company’s product portfolio; and
  4. develop strategies to tackle various product lines.

3. BCG matrix explained

The idea behind the growth share matrix is that the amount of cash that a product uses is proportional to the rate of growth of that product in the market, and the generation of cash is a function of market share for that product.

Money generated from high-market-share/low-growth products is used to develop high-market-share/high-growth products, and low-market-share/high-growth products.

Under the BCG matrix, products are classified into four business types:

  1. Stars are leaders in high growth markets. Stars grow rapidly and therefore use large amounts of cash. Stars also have a high market share and therefore generate large amounts of cash. Over time, the growth of a product will slow. So, if a Star maintains a high market share, it eventually becomes a Cash Cow. If not, it becomes a Dog.
  2. Cash Cows are highly profitable, and require low investment because they are market leaders in a low-growth market. Growth is slow and therefore cash use is low, and market share is high and therefore cash generation is high. Money generated from cash cows is used to pay dividends, interest, and overheads, and to develop Stars and Question Marks.
  3. Question Marks are the real cash traps and gambles. Question Marks grow rapidly and therefore use large amounts of cash. However, they do not have a dominant market position and hence do not generate much cash.
  4. Dogs generate very little cash because of their low market share in a low growth market. BCG refers to these products as cash traps. Although they may be sold profitably in the market, Dogs are net cash users and BCG indicates that, in terms contributing to growth, they are essentially worthless.

4. Available strategies

  1. Develop: The product’s market share needs to be increased to strengthen its position. Short-term earnings and profits are forfeited because it is hoped that the long-term gains will outweigh these short term costs. This strategy is suited to Question Marks if they are to become Stars.
  2. Hold: The objective is to maintain the current market share of a product. This strategy is often used for Cash Cows so that they continue to generate large amounts of cash.
  3. Harvest: Under this strategy, management attempts to increase short-term cash flows as far as possible (e.g. by increasing prices, and cutting costs) even at the expense of the products long-term future. It is a strategy suited to weak Cash Cows or Cash Cows that are in a market with a limited future. Harvesting is also used for Dogs, and for Question Marks that have no possibility of becoming Stars.
  4. Divest: The objective of this strategy is to get rid of unprofitable products, or products with a low market share in a low growth market. Money from divestment can then be used to develop and promote more profitable products. This strategy is typically used for Question Marks that will not become Stars and for Dogs.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

SWOT Analysis

SWOT Analysis is a strategic planning tool used to evaluate the strengths, weaknesses, opportunities, and threats involved a business venture

SWOT Analysis

1. SWOT Analysis Explained

ALBERT Humphrey is credited with inventing the SWOT analysis technique.

SWOT analysis is a strategic planning tool used to evaluate the strengths (S), weaknesses (W), opportunities (O), and threats (T) involved a business venture. It involves specifying the objective of the business venture and identifying the internal and external environmental factors that are expected to help or hinder the achievement of that objective.

After a business clearly identifies an objective that it wants to achieve, SWOT analysis involves:

  1. examining the strengths and weaknesses of the business (internal factors); and
  2. considering the opportunities presented and threats posed by business conditions, for example, the strength of the competition (external factors).

By identifying its strengths, a company will be better able to think of strategies to take advantage of new opportunities. By identifying current weaknesses and threats, a company will be able to identify changes that need to be made to improve and protect the value of its current operations.

2. Criticisms

SWOT analysis has two clear weaknesses. Firstly, using SWOT may tend to persuade companies to write lists of Pros and Cons, rather than think about what needs to be done to achieve objectives. Secondly, there is the risk that the resulting lists will be used uncritically and without clear prioritisation. For example, weak opportunities may appear to balance strong threats.

3. Case example: drinks manufacturer

Let’s use SWOT analysis to consider the strategy of a hypothetical prominent soft drinks manufacturer called Coca-Cola. Coke is currently the market leader in the manufacture and sale of sugary carbonated drinks and has a strong brand image. Sugary carbonated drinks are currently an extremely profitable line of business. The company’s goal is to develop strategies to achieve sustained profit growth into the future.

3.1 Strengths

A firm’s strengths are its resources and capabilities that provide the firm with a competitive advantage in the market place, and help the firm achieve its strategic objective. Coke’s strengths might include:

  • strong product brand names,
  • large number of successful drink brands,
  • good reputation among customers,
  • low cost manufacturing, and
  • a large and efficient distribution network.

3.2 Weaknesses

Weaknesses include the attributes of a business that may prevent the business from achieving its strategic objective. Coke’s weaknesses might include:

  • lack of a large number of healthy beverage options, and
  • large manufacturing capacity makes it difficult to change production lines in order to respond to changes in the market.

3.3 Opportunities

Changing business conditions may reveal certain new opportunities for profit and growth. Coke’s opportunities might include:

  • new countries and markets that Coke might expand into, and
  • a lack of any strong global fruit juice or other healthy beverage manufacturer leaves a gap in the market.

3.4 Threats

Changing business conditions may present certain threats. Coke’s threats might include:

  • shifting consumer preferences away from Coke’s core products, and
  • new government competition regulations that prevent the acquisition of large competing soft drink companies.

3.5 Proposed strategy

The main opportunity for Coca-Cola is the rising popularity of healthy beverage alternatives, such as water and fruit juice. The dominance of Coca-Cola and the increasing number of competition regulations that prevent Coke’s acquisition of competing drink manufacturers presents a threat to Coke’s objective to obtain profit and growth. A proposed strategy may therefore be to find small healthy beverage manufacturers with quality products. Purchasing these small companies will not raise competition concerns. Coke might use its strong brand name, manufacturing capacity and distribution networks to obtain strong market penetration for its newly acquired healthy beverages.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Case Interview Guides & Books

THIS list of guides and books is a a work in progress. If you come across any other useful resources that I haven’t listed here, please let us know.

Online case interview guides

  1. Make Your Case: Master Consulting Interviews | WallStreetOasis.com
  2. ATKearney – interview casebook
  3. Deloitte – 2007 Boston College – Conducting Case Interviews
  4. Deloite – 2005 Michigan State University – Case Workshop
  5. University of Pennsylvania – interview guide
  6. Yale School of Management – sample interview questions

Books

  1. Case in Point: Complete Case Interview Preparation by Marc P. Cosentino
  2. Crack the Case: How to Conquer Your Case Interviews by David Ohrvall
  3. How to Get Into the Top Consulting Firms: A Surefire Case Interview Method by Tim Darling
  4. Management Consulting: A Complete Guide to the Industry by Sugata Biswas and Daryl Twitchell
  5. Mastering the Case Interview: The Complete Guide to Management, Marketing, and Strategic Consulting Case Interviews by Alexander Chernev
  6. The Fast Track: The Insider’s Guide to Winning Jobs in Management Consulting, Investment Banking, & Securities Trading by Mariam Naficy
  7. The Harvard Business School Guide to Careers in Management Consulting by Maggie Lu
  8. Vault Case Interview Practice Guide
  9. Vault Guide to the Case Interview
  10. Ace Your Case! Consulting Interviews (WetFeet Insider Guide)

Cost Benefit Analysis

The cost benefit analysis is a basic analysis framework that involves weighing up the costs and benefits of one course of action against another

Cost Benefit Analysis

IN YOUR consulting case interview you will most likely be required to make a recommendation on a hypothetical business problem. Understanding how to use the cost benefit analysis could come in handy.

The cost benefit analysis

One of the most basic analysis frameworks you can use to solve a business problem is the “cost-benefit analysis”. This method is fairly self-explanatory. It involves weighing up the total expected costs and benefits of one course of action against another. Having done this, you will be able to formulate a more well-thought-out solution to the business problem.

For example, consider the following business problem (Project Gold Mine). Your client says to you, “Currently we run a single gold mine (Mine A) and are trying to decide whether we should expand Mine A or build a second mine (Mine B). Which project should we undertake?” In this problem there are three possible recommendations: (1) expand Mine A, (2) build Mine B, or (3) do nothing (i.e. maintain the status quo). To make a recommendation, you will need to consider the benefits and costs of each course of action.

Evaluating the benefits

In considering the benefits, you will mainly want to think about revenue (Revenue=quantity x price); more on this in a later post.

Counting the cost

As far as I’m aware, there are four types of costs that you need to pay attention to: sunk costs, fixed costs, variable costs, and opportunity costs. I will consider them in turn.

1. Sunk costs

Sunk costs are expenditures that have already been made and cannot be recovered. As such, sunk costs should not be factored into your decision-making process. For example, in Project Gold Mine the original cost of building Mine A is a sunk cost. This money has already been spent and cannot be recovered, it is therefore a sunk cost, and should not be factored into the decision-making process.

2. Fixed costs

Fixed costs are costs that do not vary with the quantity of output produced. In the Project Gold Mine example, fixed costs might include things like rent, land taxes, utilities and other overheads.

It is important to understand that fixed costs are fixed only in the short term. In the short term, the cost of labour may be a fixed cost if the mining company cannot vary the number of employees due to contract obligations. In the long run, these contracts can be renegotiated. In the long run, nearly all costs are variable, even things like rent, because the mining company could move its operations overseas to a country where operating costs are lower.

3. Variable costs

Variable costs are costs that vary with the quantity of output produced. In the Project Gold Mine example, the main variable costs would be the cost of extracting the ore from the ground, and the cost of transportation.

When making decisions in the short run, variable costs are the only costs that should be considered because, in the short term, a company cannot change its fixed costs.

4. Opportunity costs

The opportunity cost of an item is what must be given up to obtain that item.

In the Project Gold Mine example, failing to consider opportunity costs could lead to the wrong decision being made. Consider the following hypothetical:

If the mining company expands Mine A the profit is $1 million, and if it builds Mine B the profit is $2 million. Which project should it undertake? Building Mine B is the more profitable of the two projects; however, the company also needs to consider the opportunity cost of building Mine B. In this hypothetical example, the profit obtained from not undertaking either project is $3 million. So, although building Mine B is the most profitable project, doing nothing is even more profitable.

[For more information on consulting concepts and frameworks, please download “The Little Blue Consulting Handbook“.]

Researching consulting firms: what do you need to ask?

THIS article looks at some of the questions that you should consider asking in your consulting case interview. After reading this article and one of my previous articles on researching for your consulting case interview, make sure to access the practice case interview questions.

Questions, everyone’s asking them

Preparing a resume, and building a personal story, is one of the first and most important steps in applying for a job. This kind of preparation helps you answer your interviewers questions, “Who are you? And, why should we hire you?”

The reason your interviewer will ask so many questions is because they are trying to get to know you, and to decide whether they want to hire you. Consulting firms invest a lot of time and money in their employees. So, hiring the wrong person is a costly mistake.

Consulting firms will ask a lot of questions, and so should you. You can only begin your career once, so you want to start out on the right foot. Some of the reasons why you need to research your potential future employer are outlined in the article “Researching consulting firms: what do you need to know?”.

Whatever you are looking for in a consulting job, asking questions is the best way to go about finding the firm that is right for you. For example, asking questions will help you find the firm that:

  • interests you,
  • inspires you,
  • suits your lifestyle and family needs,
  • will help you achieve your current goals, or
  • will give you the skills and experience you need to move on to the next big thing.

Some questions to ask

Here is a list of 7 questions that you might want to ask. You could ask these questions in your interview, or try to answer them for yourself by doing some pre-interview research:

  1. What kind of consulting projects does the firm normally work on? For example, does the firm deal with high level strategy? Does the firm work primarily with particular industries?
  2. Do associates work on more than one project at the same time? The answer to this question will help you understand whether the firm will give you depth or breadth of experience. For example, McKinsey and Booz Allen Hamilton normally assign their associates to a single project at a time, providing associates with depth of experience.
  3. Do project teams include both consultants and full-time client members? Try to get an idea of how much client contact you can expect to have.
  4. What is the size of a typical project team? Some consulting firms use a lowly leveraged structure. That is, one partner will work on a project team with one or two other consultants. This kind of firm will give you more exposure to clients and more interaction with the partner.
  5. What is the travel model? Think about how much travel you want to do. Booz Allen Hamilton, and McKinsey typically keep their consultants on client site four days a week.
  6. Does the consulting firm have offices worldwide? If so, there may be opportunities to work overseas.
  7. At what level do consultants begin to specialize by industry, function, or geographic expertise? That is, for how long will you be able to remain a generalist before specialising in a particular practice area or industry group.

Researching consulting firms: what do you need to know?

THIS article looks at why, how and what to research for your consulting case interview. To get started with your interview preparations, take a look at my list of consulting case interview practice questions.

Preparing for an interview with a consulting firm can be a difficult task. Having obtained an interview, you will need to do some thorough research of the firm. But why, I hear you ask, do I need to spend so much time researching when I have been successful in gaining an interview? And, where should I start? These are very valid questions and hopefully this article will help get you thinking the right way about researching consulting firms.

This article is broken up into four sections:

  1. Why should you research?
  2. How should you research?
  3. What should you research?
  4. Making the most of your research

1. Why should you research?

The objective is to get a job offer. This point sounds obvious, and it is, however it can be easy to take your eyes off the prize. After having spent days preparing resumes and cover letters for your multiple consulting firm applications, getting invited for an interview can feel like a success. Being invited for an interview is only the first step in the recruitment process. You need to do your homework if you want to increase your chances of being successful in the interview process. Neglecting to do your research can be the difference between a job offer and a rejection letter.

It is important to show a genuine interest. Being knowledgeable about the consulting industry and the firm for which you are applying shows that you have a genuine interest in working in this field. It is important to remember that, regardless of your university grades, the firm will need to train you from the ground up once you start. A consulting firm does not want to spend tens of thousands of dollars on training a young graduate who isn’t keen to be there.

Take control of your professional career. Researching a consulting firm doesn’t just help you do well in the consulting interviews; it also helps you decide whether the firm you are applying for is where you want to be. In more general terms, your research will also help you decide whether you are really interested in pursuing a career as a consultant.

Keep the stress levels down. Being well informed can help to lower your stress levels and present at the interview in a more relaxed and confident manner. For example, if you have done your homework before hand, questions like “Why do you want to work here?” and “What is it about our firm that interests you?” should not faze you in the slightest.

2. How should you research?

Read the firm website. The amount of information that firms provide on their websites will no doubt vary but, at the very least, this is a good starting point for your research. All big consulting firms will have a website. Making yourself familiar with the firm website should provide you with all of the basic information that you are looking for. The website will often provide you with information on the firm’s history, the firm’s vision and values, firm culture, clients, areas of expertise, office locations, recent news, and the names of important employees.

Talk to people. The best source of information about a consulting firm is from people who have had direct contact with the firm in some way. Talking with current and former employees, friends who have gone through the interview process and to company recruiters can be an invaluable source of knowledge.

Read widely. In general, the more you know about consulting the better. Some good publications include Vault Career Guide to Consulting, and Vault Guide to the Case Interview.

Stay abreast of the news.The internet makes this job a lot easier that it would have been ten years ago. Staying abreast of the news will allow you to put the firm’s work into a broader context and help you to understand the nature of the firm’s work, and who the firm’s main clients and competitors are.

3. What should you research?

Know the company basics. The basics include:

  • firm history,
  • firm vision and values,
  • culture,
  • current practice areas and industry specialisations,
  • areas of expertise,
  • recent news involving the company,
  • key factors that distinguish the company from its competitors,
  • the names of major clients,
  • the names of important employees, and
  • office locations.

Know the core competencies or skill set that the firm is looking for in potential candidates.

Understand how the firm interviews. Do they ask case questions? Does the firm put an emphasis on asking questions with a numerical component? Are there multiple interview rounds? Does the firm use interview panels, or is each interview conducted in a one-on-one format?

Read the firm’s annual report if it is publicly available.

4. Making the most of your research

Research is not an end in itself. Use your research to help you structure your thoughts, to provide substance to your discussions with the interviewer, and to ask intelligent questions.

The consulting case interview: 10 tips for a successful performance

THIS is the first of a series of posts looking at the consulting case interview. Below, I provide ten insightful tips that will help you achieve success in your case interview. The information below is from my own thoughts and by reference to Vault Guide to the Case Interview.

1. Practice, practice, practice

Preparation is important for three main reasons:

  1. The interview process is extremely competitive. You are unlikely to succeed without a lot of practice;
  2. Case problems are indicative of the type of work that you will have to do as a consultant. So, your ability to answer case problems indicates your readiness to start work as a consultant; and
  3. Your preparedness for the interview is an indicator of your motivation and passion to be a consultant. If you can’t be bothered to prepare, then you don’t want the job badly enough.

2. Take notes

You should take notes when the interviewer is giving you the facts of the problem question.  Remember to bring a notepad and pen to the interview because the benefit of writing things down is that:

  • It helps ensure that you don’t need to ask the same question twice;
  • It helps you to structure your thoughts; and
  • It allows you a moment to pause and think before addressing the question.

3. Don’t make assumptions

Your interviewer will most likely leave information out when giving you the facts. You should not assume facts that have not been given to you. The interviewer has more than likely drawn the business case from the interviewer’s experience of a real world business problem. In answering a business case problem, you should assume the persona of a consultant trying to learn about an assignment. For example, you should ask if the company, or another company in the industry, has encountered a similar business problem, and what they did about it. Although your interviewer may not release that information, the interviewer will be impressed that you asked these sensible questions.

4. Ask questions

Your interviewer expects you to ask questions in order to obtain an accurate picture of the relevant facts in the case. For example, if you don’t know the first thing about the automobile market, ask how much it costs to manufacture an engine. If you are asked to estimate the demand for hamburgers in Sydney, feel free to ask how many people live in Sydney and the surrounding areas. Your interviewer is likely to direct your line of questioning to a specific area, but you must always be ready to control the conversation in case the interviewer does not direct your reasoning.

5. Engage in active listening

It is not wise to stick religiously to asking a list of pre-prepared questions. Listen to the information that you have received and the answers you get to your initial questions and how this affects your understanding of the problem. What is unclear and what do you still not know? Make sure you respond to the information you receive and incorporate it into your analysis.

6. Maintain direct eye contact

Eye contact is important because it demonstrates confidence and authority. As a consultant you will have to meet with upper management and boards of directors regarding matters that you have been briefed on only hours before. The case interview is a practice for the real thing.

7. Take your time

It’s okay to take a minute to collect your thoughts. However, it’s probably not such a good idea to leave the interviewer hanging for 5+ minutes while you ponder the deeper aspects of the problem. In short, it is more important to give a well thought out and structured response than to respond immediately.

8. Clearly structure your answer

Clearly structure your answer by identifying to the interviewer the analysis framework you are going to use and the structure of your answer. For example, “firstly I will consider X, secondly I will consider Y, and finally I will make a recommendation.” A large part of a consultant’s job is to explain complex ideas clearly and succinctly. By structuring your answer, this will help you to structure your thoughts and may alert you to factors that you would have otherwise failed to consider. Providing a clear structure will impress your interviewers by avoiding the impression that you “made it up as you went along”. I will consider the main analysis frameworks that you might be able to use in a later post.

9. Think out loud

The business case is an opportunity to show the interviewer how you think. As you analyse the elements of the business case, be sure that you talk out loud and explain your reasoning. This is the only way the interviewer can assess your performance.

10. Summarise your conclusions

You have limited time in your case interview to make your point. It is important to be able to briefly summarise the conclusion you have come to based on your analysis of the facts and to make a recommendation.