The QVartz

case interview
handbook

INTRODUCTION
HOW SHOULD I USE THIS HANDBOOK?
The purpose of this handbook is to serve as a source
of inspiration during your interview preparation. We
recommend browsing through all sections of the
handbook to ensure that you are familiar with the
various topics covered in it. The content will, however, not be explicitly tested in any way during the
recruitment process at QVARTZ.

IS THIS HANDBOOK RELEVANT

FOR ME?
This handbook is relevant for you if you are preparing for upcoming interviews and are new to case interviews. If you are already a seasoned case solver
or have read other literature on the topic, this handbook may be of less relevance for you. See our section Additional resources for case preparation for
other recommended sources of information.

SHOULD I PREPARE BEFORE THE

INTERVIEW PROCESS?
While it is possible to make it through management consulting interviews without preparation, we
strongly recommend that you do prepare, as it greatly improves your chances of securing a job offer.
The vast majority of successful applicants across all
management consulting companies have prepared
by reading up on cases, practicing with friends and
brushing up on their arithmetic skills. Preparing is
especially relevant for non-business students who
may not be very familiar with business terminology
and problem solving methods.

TABLE OF CONTENTS
QVARTZ: a Nordic original. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
QVARTZ recruitment process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The case interview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Types of case questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
How to open and close a case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Frameworks for business cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Profitability framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Industry analysis framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Mergers & acquisitions framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Product strategy framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Additional resources for case preparation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Quantitative preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Example cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

QVArtz:
a Nordic original
QVARTZ is a management consulting company
employing more than 240 professionals across our
offices in Stockholm, Copenhagen and Oslo. Our
aspiration is to become one of the top-three consulting companies in all Scandinavian markets a
seemingly tough goal, yet an inspiring challenge.
Even though firmly rooted in the traditional, professional values of high-end management consulting,
QVARTZ was founded with the clear intention of
changing the industry from within. Our ambition
is to become the leading consulting company in the
Nordic region by presenting an alternative to the
standard consulting model. A Nordic model with
less dependence on standard methodologies and
more emphasis on listening and giving advice based
on the clients specific challenges and opportunities
as well as our specific insight and experience.
While strategy development has always been the
cornerstone of our offering, QVARTZ today works

extensively within transactions, commercial and operational excellence programmes and organisational
transformations. Our client base covers a range of
industries, including private equity, energy, pharma
& medtech, retail, transportation and many more.
Although most of our clients are large Nordic companies, approximately 40% of our projects are carried out outside the Nordics.
At QVARTZ, we see consulting as a true career path,
not just a stepping stone. We offer our consultants
the opportunity to influence their own career progression and work life to the highest possible extent.
We strive to provide individualised matchmaking
between personal wishes and project opportunities
to ensure that our consultants develop and succeed.
For the same reason, we attempt to nurture and develop our consultants as much as possible through
mentoring and internal academies so that we can
grow together as a company.

QVARTZ RECRUITMENT
PROCESS
FULL-TIME CONSULTANTs

JUNIOR CONSULTAnts

QVARTZ recruitment process for full-time consultants is centred around a comprehensive two-day
recruitment camp.

Our junior consultants work on client projects just

like any other consultant. They perform tasks similar to those of newly hired full-time consultants, but
typically work 15-20 hours per week while completing their studies.

Over two days you will get the chance to learn more
about what it is like to be a consultant at QVARTZ
and show us who you are through a combination
of interviews and group exercises on business dilemmas. You will also meet many of your potential
colleagues at QVARTZ, and the different sessions
will offer you an opportunity to learn more about
yourself and moreover provide you with concrete
input to be further applied in your career, whether
at QVARTZ or elsewhere. Among other things the
programme includes

An introduction to QVARTZ
A timed quantitative test
A series of case interviews
A group case session
A personal style and preference session

The recruitment process for Junior Consultants consists of an introduction to QVARTZ, case interviews
as well as a quantitative test. As for full-time consultants, we make sure that the candidates get to
meet quite a few potential new colleagues during
the process.
If you want to know more about your career opportunities with QVARTZ, please visit www.qvartz.com.

THE CASE INTERVIEW

WHAT IS A CASE INTERVIEW?
In a case interview, the interviewer will present you with
a situation or a challenge faced by a fictious company
might be facing. You are asked to analyse and solve the
problem through a discussion with the interviewer. The
majority of case interviews are based on real client projects and the interviewer may therefore have additional
knowledge or information to draw upon during your
discussions than was initially presented.

WHY CASE INTERVIEWs?

Consultants solve problems. Case interviews are an effective way of simulating the kind of problems we encounter on a daily basis. They are a fast and concrete
way for us to understand how you frame and solve ambiguous business problems. In addition, they also give
you an opportunity to gain a better understanding of
the work we do and if a consulting career is what you
want to pursue.

WHAT DO WE LOOK FOR IN

THE CASE INTERVIEW?
The case interview is designed to test skills that are
common to almost all consulting companies, though
they may be described and weighted slightly differently in different places. During case interviews, the interviewer is looking to answer at least two questions:

1. Would you thrive when solving

our clients problems?
The interviewer will assess your ability to combine
skills such as logical reasoning, creativity, quantitative skills and business acumen as well as your ability
to put it all together and structure the problem solving process. The interviewer checks whether you can
insightfully think through the problem and then tailor
your approach to the problem at hand, rather than trying to fit something in to a predefined framework. The
interviewer also seeks to understand if you base your
conclusions on evidence rather than beliefs, and if you
sanity check your answers to ensure they make sense
in the context of the case.

2. Would you work well with us and our clients?

Management consulting is based on teamwork. Your
ability to interact with others and your communication
and presentation skills are therefore of great importance. The interviewer wants to understand if you are
tactful and approachable, and how you handle constructive input. Additionally, he or she wants to evaluate
if you present your arguments in a clear and concise
manner that would be easy for a client to follow. Do not
be afraid to show that you are human; a welcoming and
attentive attitude goes a long way.

the group case session

The group case session is designed to give you an opportunity to show how you work with peers on challenging problems. In addition to the problem solving
approach, teamwork along with effective communication and ability to show respect and empathy will be
evaluated. Throughout the group case solving process,
an interviewer will listen in on the groups communication to observe how its members interact, and continuously provide feedback.

TYPES OF CASE
QUESTIONS
Interview cases generally fall into two categories,
(1) Estimation or market-sizing cases, and (2) Business cases. At times, the interviewer may also ask
you to include a market-sizing question as part of a
larger business case.

1. ESTIMATION Or
MARKET-SIZING CASES
In estimation or market-sizing cases, you are asked
to estimate a quantity that you will not likely know
in advance. Examples of estimation case questions
are: How many gas stations are there in Sweden?;
How many trains are in motion in the Stockholm
subway system right now?; or What is the value of
all coal produced in Sweden?.
Typically, there is no one correct answer, yet the purpose of these cases is to understand how you work
logically through a mathematical problem, make
reasonable assumptions and interpret mathematical results. While you cannot prepare for the exact
problems, there are a few things to think about and
possible approaches you could consider.

Communicate your approach

Before you dig into the details, it is a good idea to
think through your mathematical approach on a
high level and then briefly communicate it to the interviewer. If the interviewer understands your model and its subcomponents, he or she can be certain
that you are on the right track from the start, or potentially intervene and help you before you spend
time on an approach that may not work out in the
given time frame.

12

Approaches
A) Extrapolation
One approach is to extrapolate a metric from one element against an entire population. As an illustrative
example, you could answer the question How many
gas stations are there in Sweden? by extrapolating
your knowledge about the number of gas stations in
your local region against the whole country.
(E.g. three gas stations per 50,000 inhabitants in
a given city would bring you to 600 gas stations
across Sweden, assuming a population of 10 million
people).
B) Segment-by-segment breakdown
An alternative approach is to isolate the estimation per segment. Visually, you could do your calculations in a table format, which makes your work
well-structured and easy-to-follow. As an illustrative
example, you could answer the question How many
deodorants are sold in Sweden each year? by segmenting Swedens population by logical age groups
and then making sound assumptions of the average
amount purchased per capita for each group.
C) Driver breakdown
A third approach that works well for many estimation or market-sizing cases, especially more unconventional ones, is the driver breakdown approach.
Here, you begin with the key metric and systematically decompose it into its corresponding drivers.
Keep attempting different decompositions until you
find that the subcomponents are manageable to
make assumptions around. As an illustrative example, you could answer the question How many golf
balls are in the air in the US at 11 am on a Saturday
morning? by breaking it down into its subcomponents number of golf balls in the air per course
times number of courses in the United States, and
subsequently breaking those down further.

2. BUSINESS CASES
The business case interview is by far the most common type of case interview. A business case interview begins with the interviewer presenting you
with a challenge or opportunity faced by a company
and asks you to analyse and resolve the situation
through a discussion with the interviewer.
Business cases are designed to simulate real life
consulting projects, and sometimes the interviewer
may even role play one or several characters involved in the case to get as close to a real project as
possible. He or she could provide you with relevant
data upon request - or - after a given section of a
case, ask you to analyse or investigate certain topics. The types of topics vary; you may for example
investigate how to make a companys distribution
chain more effective, how to best enter the Brazilian
soda market or how to make use of overcapacity in
a car manufacturing facility.
The purpose of these types of cases is to understand several of your competences: the depth of
your business acumen; how you structure and prioritise issues; how you handle different types of

information; and your overall fit with the type of

work that we do.
You can significantly increase your chances of being successful in a business case interview by practicing. The opening and closing of the case is fairly
generic, practicing how to open will get you off to
a good start and practicing how to close will make
your wrap-up more concrete and concise. The middle part is more difficult and requires more natural talent, yet there are a number of methods and
frameworks which can help you along the way when
practicing case interviews.
The following pages contain a selection of approaches and frameworks which might inspire you in your
case solving. But keep in mind always to adapt your
thinking. Interviewers look for candidates with business acumen, who are able to develop high-quality frameworks on their own, in contrast to merely
repeating rehearsed frameworks. The key takeaway
is to use frameworks as a source of inspiration, but
not to force-fit a case into one just because you are
familiar with it.

Typical business cases you could be presented with

Strategy

Organisation

Operation

Increasing market share

Incentive systems

Cost-out

Market entry strategies

Organisational design

Strategic sourcing

M&A transactions

Roles and responsibilities

Supply chain optimisation

Starting a new business

Post-merger integration

Production capacity change

Competitive response

Pricing strategies

New product strategy

13

HOW TO OPEN
AND CLOSE A CASE

14

RECEIVING AND GATHERING

INFORMATION

SUMMARIsE THE PROCESS

AND SYNTHESIsE

Listen carefully to the question and confirm that

you have fully understood the assignment or
problem the client is facing. A good way is to
paraphrase the question back to the interviewer.
And take notes, especially if you are presented
with data

Ask clarifying questions if necessary. Even the

most obvious questions are sometimes appropriate to ask and it provides you with more time
to think

Either the interview comes to a natural close when

you feel that you have solved the problem or when
the interviewer steers you in that direction as time
is running out. Regardless, a good close is one of
the most crucial parts of the interview. At this point
you have hopefully asked all the questions you want
and performed your analysis. So where do you go
from there?

If you feel you need to, take a moment to collect

your thoughts

PROCESS INFORMATION AND

PRESENT YOUR APPROACH

Try to quickly take your interviewer through the

analysis as well as your most important findings

Ask for time to collect your thoughts and structure your analysis. Often the interviewer leaves
the room to give you some time, while at other
times the interviewer may stay in the room in
either case, do not feel stressed and take the
time you need

Answer the question! If there is a clear question

at the beginning of the interview, do not forget
to answer it. If the question is whether or not to
enter a specific market, your conclusion should
be just that, whether to enter it or not. Not all
cases are the same but keep in mind to make
your conclusion as action-oriented as possible

Present to the interviewer how you are going to

approach your analysis. This is very important
and often forgotten. Be a good listener, the interviewer might give you hints on where to go
first or if you should rethink your approach altogether. If this is the case, ask for another minute
to collect your thoughts

Lastly, back up your conclusion with supporting arguments. Try to not include too many but
rather spend time on the ones that you find
most important to your overall conclusion

FRAMEWORKS FOR
BUSINESS CASES
You will quickly find frameworks if you start looking around for material on management consulting
interviews. Basically, frameworks are tools for you
to use when structuring your problem solving in a
case interview. Sometimes they could also just be a
checklist to avoid missing the most important steps
in the process. You should keep in mind that a case
question rarely turns out to fit perfectly into a predefined framework instead you will have to adapt
your approach and use the framework more as a
backbone in your analysis. In the following pages,
you will find four useful frameworks.

16

PROFITABILITY
FRAMEWORK
In many cases you will be expected to analyse the
profitability of a company at a more granular level.
The profitability framework helps you to systematically break down the profitability drivers. Your goal
is often to isolate significant historic developments
(e.g. the cost of raw material has been surging);
benchmark profitability drivers with competitors
(e.g. our prices are lower than our peers); and evaluate opportunities (e.g. is it possible for us to increase
profits by boosting sales of product A?). The key to
solving these cases is often to understand the underlying mechanics that produce the eventual anomalies in the numbers (e.g. our prices are lower than

our competitors because our brand is the weakest

in the industry, but it is possible to improve it by an
investment?).

Segment your analysis

Think of different ways to segment costs and
revenue. During a real project you will have
time to investigate several different ways of
segmenting, but in case interviews the interviewer often has a preferred segmentation.

profit components

revenue

CostS

(price * volume)

(fixed + variable)

Decompose by applying appropriate segmentation, e.g.

Decompose by applying appropriate segmentation (by e.g. looking at revenue)

Business units

Customer types

Decomposing according to the value chain is

another powerful way of analysing costs, e.g.

Large vs. small customers

Geographies

Product types

Sales representatives

Etc.

1.

Raw materials

2. Inbound logistics
3. Production costs
4. Sales and distribution costs

Do not forget overhead costs (e.g. administrative, IT and marketing costs)

hints

18

Identify increases or decreases in components (e.g. have units sold gone up, down or stayed consistent)

Understand if trends are company-specific or an industry-wide problem

INDUSTRY ANALYSIS
FRAMEWORK
The industry analysis framework is designed to help you gather information on a companys external environment. At first glance, it may appear overwhelming but many of the elements are likely already familiar to you.
Industry facts

Industry growth

Business life cycle

Is the industry cyclical, stable or counter cyclical?

CompetETive Landscape
Client

Competitor A

Competitor B

...

Market share

Financials
Product
(differentiation, packaging, prices, etc.)
Other drivers
(brands, loyalty, etc.)

Value chain analysis

Upstream

Production

Suppliers

Economies of scale

Have their costs shifted?

Is there better technology?

Bargaining power?

Can we change our staff?

Is outsourcing a possibility?

Raw materials

Has the price changed?

Is the economy affecting prices?

Distribution, Sales and Marketing

End user

What is the channel mix?

B2B or B2C?

Distributors

Preferences

Have their costs shifted?

Product

Bargaining power?

Distribution

Price

Sales personel

Are there large differences in competences?

Is the right incentive system in place?

Has the bargaining power shifted?

Marketing

Other factors
Change factors

20

Logistics

New players in the market or new players entering?

Can we change the mode of transportation to be more effective?

Substitute products?

Can we manage inventory more effectively?

Is the market getting consolidated?

MERGERS & ACQUISITIONS

FRAMEWORK
This framework is seemingly quite narrow in scope and perhaps not as important as the other frameworks.
It is, however, not uncommon for transactions to come up in business case interviews and it is good idea to
have thought them through in advance, especially if you have no previous experience from transaction work
or studies.

Client and purpose

Price and Financing

What does the client do?

Can we afford the company?

What do our financials look like?

Is the price fair?

Potential reasons for M&A

Are there any benchmark transactions?

Increase market share or access

How do we finance the transaction?

Economies of scale or scope

What is our expected return?

Learning curve advantages

Diversification

Pre-empt competition

Tax reasons

Exit strategy

Due Diligence

Use a light version of the industry analysis

framework

Do we expect to make an exit?

For how long are we going to hold the

company?

How are we planning to sell the company?

23

PRODUCT STRATEGY
FRAMEWORK
This framework is similar to the industry analysis framework but with some important differences and additional issues.

Competitive position

Strategic fit with product

How does the product and its features compare to competing alternatives?

Do we sell similar or competing products

today?

Is there an intended price level for the product?

If no, consider

Do we benefit from economies of scale or

scope?

Is there a risk of cannibalisation?

Cost-based pricing
(Applying a margin on top of costs)

Market pricing
(Based on prices of competing products)

Do we have the capabilities necessary to introduce the product? (e.g. technical knowhow,
financing, operational set-up, suppliers)

Value-based pricing
(What are customers willing to pay?)

Is our technology protected by patents?

Reaching the customers

24

Economics

Who are the target customers?

What is the revenue potential?

Are there different customer segments? (e.g.

businesses vs. consumers?)

What are the corresponding costs?

Is there an overlap with our existing customer

base?

Are there any capital expenditure requirements

to consider?

What is the break-even volume?

What would be the expected payback period?

What are the customers key purchasing

criteria?

Do we have an appropriate distribution set-up?

(e.g. retail sales, internet sales, direct salesmen
or distributors)

ADDITIONAL RESOURCES
FOR CASE PREPARATION
Source
www.caseinterviews.com

Comments
A recent and popular case site developed by a
former consultant.
The site includes a range of material containing
useful and concentrated frameworks and case tips.
The materials come in the form of videos and PDFs
and are typically free of charge. However, beware
that the site is designed to encourage you to make
large add-on purchases not necessary for interview
preparation.

Case Interview Secrets

Same as above, in book format.

Author: Victor Cheng

How to Get Into the Top Consulting Firms:
A Surefire Case Interview Method

A book written by a VP of a large American consulting firm.

Author: Tim Darling

The book offers a condensed overview of how to

create problem solving structures and communicate like consultants. It also provides ten well-written practice cases.

Case in Point

One of the most frequently used case preparation

books.

Author: Marc Cosentino

The book contains detailed descriptions of case

interviews and samples of how a case interview
may play out.
The Pyramid Principle
Author: Barbara Minto

Almost all consultants have a copy of this book.

This is not a typical case interview preparation
book, but reading it will provide you with a solid
understanding of how consultants work with structure and communication.

27

QUANTITATIVE
PREPARATION
Most management consulting companies put emphasis on a candidates numerical capabilities, and
strive to test these in one way or another as part of
the recruitment process. Numerical skills are easy to
improve with practice and we strongly recommend
that you put some time aside for practicing numerical accuracy and speed by repeating basic arithmetic operations.

WHY ARE YOU TESTED

QUANTITATIVELY?
We need to be confident that every team member
is able to structure and carry out quantitative analyses. Most client recommendations are based on
quantitative evidence. Comfort with numerical estimations and arithmetics is also a cornerstone of a
consultants sanity checking procedures.

28

HOW ARE YOU TESTED

QUANTITATIVELY?
Normally you will be tested on

Your ability to make computations accurately

and efficiently without a calculator

Your ability to develop and communicate

a numerical model

Your ability to interpret quantitative

measures and data

EXAMPLE CASES
THE JUICE CASE
Interviewer

Our client, a Scandinavian private equity fund, is considering an acquisition of a Swedish

company that produces freshly squeezed juice. We have been invited to help the client
evaluate the attractiveness of such an investment. What are the key elements for us to
look at?

Candidate

Just to be clear, are we talking about a retail juice chain or a wholesale juice manufacturer?

Interviewer

Good question, we are evaluating a manufacturer/wholesaler.

Candidate

Interesting, let me think about my approach for a short while.

Interviewer

Sure, Ill be back in a minute or two

The interviewer walks out of the room and returns a couple of minutes later

Candidate

All right! On a high level, I would like to understand

1) The attractiveness of the market in terms of size and growth
2) The competitive landscape and the target companys competitive position
3) The companys current business portfolio and its performance

Interviewer

Okay, that sounds appropriate. Why dont you start with the size and growth of the market? How would you estimate the size of the Swedish juice market?

Candidate

Okay, let me take a minute to think through my approach.

The candidate thinks for about a minute and resumes the conversation

32

Candidate

In order to estimate the market size in terms of value, I need to look into the drivers of
market value, which are (a) yearly juice consumption in litres and (b) price per litre. Ill start
with the consumption.

Interviewer

Okay, good. It sounds like you have a good overall approach but I would like you to refine
your structure a bit; what do you think is an appropriate customer segmentation to find
out how much juice is consumed every year?

Candidate

Hmm, we could segment the consumers into different categories both in terms of behaviour and in terms of age groups.

Interviewer

Sounds good!

Candidate

Lets start with the behavioural parameters. Since we are only focusing on the wholesale
market, I will look at the consumption of pre-bottled juice. This is more or less the same as
breakfast consumption, according to my experience. Lets create three types of breakfast
juice drinkers; a) everyday drinkers, b) occasional drinkers and c) non-drinkers. I assume
that the weekly consumption within the three groups is: a) 7 glasses (1.5 litres), b) 2-3
glasses (0.5 litres) and c) nothing.

Interviewer

Great, then you mentioned that you were going to analyse age groups. How?

Candidate

In addition to the behavioural aspects, I believe that age is relevant due to different lifestyles. I think that the share of people who belongs to the different behavioural groups (a,
b and c) varies with age. I would like to start off by defining the age groups: 0-20 years,
20-40 years, 40-60 years and 60-plus.

Interviewer

Okay, tell me why you chose those age groups?

Candidate

Hmm, I get your point; I need to explain the rationale for defining different age groups
which has to be connected to the different lifestyles I was talking about.

Interviewer

Thats right!

Candidate

OK, so 0-7 is the first group and I assume they do not drink juice at all. The next group is
720 as they typically live at home with their parents and are not buying juice themselves.
Based on my experience, half of these people do not drink juice at all, in fact many of them
dont even eat breakfast. I assume 1 out of 4 drinks every day and the rest drinks a couple
of times per week. The next group is 20-65, which is basically the working population. If
I look at my friends and family, there are about 50% who do not drink juice at all. Then I
think there is a slightly higher share of everyday drinkers than in the 7-20 age group. Based
on my experience, I assume 30%, leaving us with 20% drinking occasionally. Finally, in the
group 65-plus I think the share of everyday drinkers goes down a bit due to lower income,
I assume 20% and I think the non-drinkers are still about 50%, leaving us with 30% occasional drinkers.

Weekly litres/behavioural type

Behavioural distribution

Ages

Number of
people

Everyday

Occassionally

Never

Everyday

Occassionally

Never

Total week

Total yearly
consumption

0-7

700,000

0%

0%

100%

1.5

0.5

7-20

1,300,000

25%

25%

50%

1.5

0.5

650,000

33,800,000

20-65

4,500,000

30%

20%

50%

1.5

0.5

2,475,000

128,700,000

65-plus

3,500,000

20%

30%

50%

1.5

0.5

1,575,000

81,900,000

Total

10,000,000

4,700,000

244,400,000

33

Interviewer

Excellent, what do you do next?

Candidate

Lets continue with (b), price per litre. Based on my experience from ICA, a package of
juice is about SEK 18 per litre

Interviewer

Okay, but before you do the calculation I would like to ask you there is an element, which
youre missing, can you think of what it is?

Candidate

Ah! Yes, since we are talking about a wholeseller, my price includes a retailer mark-up
which should not be considered in the wholeseller market.

Interviewer

Yes, thats it. There is also another consideration. What do you think that is?

Candidate

We are only talking about one juice type here. Maybe we should consider different types
of juices?

Interviewer

Yes, what would that mean?

Candidate

That we get different prices for different juices; I would say that there are three basic types
with different price levels; high end, low end and private label.

Interviewer

Exactly, Ill help you out and give you some numbers.
The candidate runs the numbers based on an assumed retail price and calculates
backwards to find out the wholesale price

34

Share of sale

Volume in
litres

Retail price

VAT

Retail mark-up

Price/litre to
retailer

Total value

Brand
high end

10%

24,440,000

30

25%

20%

20.0

488,800,000

Brand
low end

65%

158,860,000

18

25%

20%

12.0

1,906,320,000

Private label

25%

61,100,000

20

25%

60%

10.0

611,000,000

Total

100%

244,400,000

3,006,120,000

Candidate

Okay, so given these price levels, I arrive at approximately SEK 3 billion in wholesale value.
In terms of weaknesses of the estimation I would say that the consumption assumptions
are the ones that Im least comfortable with. If I had more time I would dig deeper into that.

Interviewer

What do you think of SEK 3 billion? Is it realistic?

Candidate

Well, a simple sanity check is to find out how much that would be per person per week,
and it is about SEK 6 plus retail mark-up across the entire population. To me, that sounds
reasonable, which would make 3 billion a realistic estimate.

Interviewer

Okay, it sounds like you have thought this through. Assume for the rest of the case that
your estimate of SEK 3 billion is correct. So whats next?

Candidate

Next I would like to look at the market growth and if we have any information on whether
it is set to grow in the next years.

Interviewer

Okay, you can assume that the market has been declining by 4% per year over the past five
years and is set to continue do so over the next five years.

Candidate

Is that 4% in real decline or nominal decline?

Interviewer

Good question, assume it is 4% in nominal decline.

Candidate

Okay, so is it fair to assume that we can expect even more than 4% real decline in the next
five years?

Interviewer

Yes. So where do you want to go next?

Candidate

Next I would like to analyse (2) the competitive landscape and the target companys competitiveness to see if it might have some kind of unique position in a particularly attractive
subsegment because overall, the market does not seem very attractive.

We will wrap up the case example at this stage. We do, however, encourage you to try and think what your
approach would have been in mapping the competitive landscape and how you would have proceeded in
analysing whether we should recommend the private equity fund to acquire the company or not.

35

THE space CASE

Interviewer

After years of engineering work, you finally have the worlds first commercially viable
spacecraft. It costs you EUR 50 million to build. From its launch pad outside Paris, it can
take a load of up to 12 passengers into space, orbit earth and then return safely eight hours
later. There are no safety concerns whatsoever. The spacecraft can do three trips per week
and the operational costs related to the trips (salaries, fuel, maintenance) are EUR 75,000.
There are no competing products, and the design is effectively protected by patent rights
for the next 25 years. It will take you three years to build an additional spacecraft.
My question to you is: how would you take the product to the market in the next three
years, before you could have another spacecraft?

Candidate

So were talking about a commercial spacecraft here? Our goal is to push this thing to the
market, right? Okay, let me make sure that I caught all the details in the data.

In terms of costs, we have invested EUR 50 million, and each

round trip costs us approximately EUR 75,000.

We can do three trips per week, so basically 150 trips per year,
and each trip can carry 12 passengers.

Our technology is completely protected for the next 25 years.

Did I get all that right?

Interviewer

Yes, thats right. What I want you to start with is deciding on a couple of areas that you
would like to investigate further.

Candidate

Okay, give me a minute and Ill collect my thoughts a bit.

The candidate takes around three minutes and then resumes the conversation

Candidate

All right - there are a couple of areas that I would like to explore, which fall into three main
categories
1) What is the market for commercial space trips?
2) What are the economics behind the operation?
3) How do we market the space trip?
My primary concern with area (1), the market, is that I want to understand the product and
situation a bit better. My hypothesis is that the demand is rather high in relation to our
supply

Interviewer

36

Well, the demand would depend on the price, right?

Candidate

Yes, of course you are right. I would like to explore the dynamics of the market
by understanding:
(1.1) Who are our potential customers? What are the segments? What are their
considerations when buying a ticket?
(1.2) How big is our market? What I would like to figure out is whether we can fill
our capacity or not.
(1.3) What is the competition like? I.e. are there any substitutes?
For (2), the economics, I would like to do a break-even analysis to understand whether it
is a profitable idea, and if yes, how much room do we have left for marketing?
For (3), marketing, I dont have a clear idea yet. But well dig deeper into that later.

Interviewer

Good. I would like to hear your thoughts on topic (1.3), competition, what do you think?

Candidate

Well, I dont know of any other space trips, and I guess it is safe to assume that no one else
will develop such a concept in a three-year period?

Interviewer

You are right, and in addition, I did mention that there are no competing products,
remember?

Candidate

You are right, I forgot to note that down.

Interviewer

No problem, so what about substitutes?

Candidate

Good question, the closest thing I can think of is different types of leisure trips, which
arent really comparable to this, if you ask me. My hypothesis is that there are no real substitutes. I mean, what compares to travelling to space?

Interviewer

I agree. Lets assume there are no substitute products either, so effectively there is no competition of any kind for the remainder of the case.

Candidate

Okay, then I would like to continue with the first branch of the analysis: (1.1), customers,
who are they in this situation?

Interviewer

Well, what do you think?

The candidate takes about half a minute to think before he proceeds

Candidate

This is a bit tricky, because I would assume that the vast majority of the human population
would be interested in travelling to space but, as we concluded, this depends on the ticket price. For example, I would definitely go for EUR 100, but maybe not for EUR 1 million
in my current situation. The key takeaway here is that: the higher the price, the fewer the
people who would be interested in a ticket.

Interviewer

Yes, of course. Can you look at the customer group and price issue from another angle
perhaps? Lets assume we are looking at the market for the next three years.

37

Candidate

Ah, yes, we could look at how many tickets we could possibly sell per year, and divide this
by the number of inhabitants in the world. I think this can give us a clue as to how much
we can charge for the tickets.

Interviewer

Okay, let us explore that.

Candidate

We have around 150 trips per year, with 12 passengers each, which adds up to 1,800 seats
per year to fill. Considering a world population of 7 billion people, this corresponds to less
than one person in a million. Given that, I think it is safe to assume that we could charge a
lot for these tickets. I mean, one person in a million is quite a small group of people.

Interviewer

That sounds reasonable, with that in consideration I would like you to go into issue (2), the
economics, and run some numbers on the break-even price for the first three years.

Candidate

All right, we have two cost components that I noted down during the introduction of the
case, the initial investment cost and the round trip cost. Im not completely sure of whether
we should consider the initial investment as a sunk cost or use it in the break-even analysis.
My suggestion is that we should include it.

Interviewer

Great! Do that.
The candidate writes down his calculations on a piece of paper

38

Candidate

Okay. I will translate both costs into costs per seat, so given that and assuming that there
are no additional costs, the investment cost of EUR 50 million will be EUR 16.7 million per
year, and a little less than EUR 10,000 per seat, lets assume EUR 9,500. The round trip cost
of EUR 75,000 becomes EUR 6,250 per seat since we have 12 seats. So in total we have a
cost per seat of around EUR 16,000, which would be our price if want to break even after
three years.

Interviewer

Okay, what does that tell you? That we should charge at least EUR 16,000 per ticket?

Candidate

It completely depends on the circumstances. If the useful life of the spacecraft is three
years we would have to charge significantly more to make a good profit but if the useful
life is longer it could be a viable option to charge the 16 thousand.

Interviewer

Good thinking, unfortunately we dont have any information on the useful life right now so
lets leave it at that. But what about EUR 16,000, how do think that ticket price sounds?

Candidate

Well, since we are looking at the one-in-a-million-most-willing-to-pay-person as our customer group, I think that it is safe to assume that we can charge at least that. EUR 16,000
is a lot but I am confident we could sell the tickets to at least that price. As I mentioned
before, however, I think we should make a large marketing campaign to build some momentum around the demand so we might want to add a bit of a margin on top of that EUR
16,000 if we are to break even including that in three years.

Interviewer

That is true. We should probably try to make a splash before the launch, but at the same
time, a big attraction like this might almost sell itself, dont you think?

Candidate

Well, yes, you might be right but we should still ensure that the word gets out there so we
dont risk not filling the seats during the first weeks before the word spreads.

Interviewer

Okay, so what are your ideas on marketing?

We will wrap up the case example at this stage of the case. We do, however, encourage you to try and think
what your approach would be for a marketing campaign for the first commercial space trip.

39

VERTICAL WINDOWS

Interviewer

Our client, the Swedish window manufacturer Vertical Windows, is considering entering the German market. The company has an annual revenue of EUR 600 million and is
currently the market leader in Sweden, and one of the top three in Denmark and Norway
90% of its sales are within the Nordic region. Vertical Windows also has sales and production facilities in the UK.
What aspects do we need to look into in order to evaluate whether entering the German
market is an attractive opportunity for Vertical Windows?

Candidate

Ok, let me think about how to approach this issue for a moment.

Interviewer

No problem. I will grab a coffee and be back in a couple of minutes.

The interviewer returns to the room after a short break.

Candidate

To assess how attractive it would be to enter the German market, I would start by looking at:
1) The size of the German market
2) Market growth to better understand the dynamics
3) Current profitability in the industry, if information is available
4) Vertical Windows product offering versus current market demand

40

Interviewer

Good, it sounds like an approach that can provide useful insight to get us started. How
would you estimate the size of the German market for windows?

Candidate

First, I would start by estimating the number of households in Germany, to get an idea of
the total number of windows sold. I know that the population in Germany is roughly 80
million. Assuming that each household counts, on average, two people, this would give us
a total of 40 million households.

Interviewer

The assumptions you have made so far are fairly accurate, but maybe we should slow
down a little bit and try to structure our approach a bit more, so that we do not miss out on
any important details? For example, would private households represent the only potential
market for a company selling windows?

Candidate

Yes, of course. In addition to the residential market, we also have to consider the non-residential market. Maybe I should set up an issue tree to make the analysis more structured?

Interviewer

I think that is a good idea!

Candidate sketches a simplified issue tree on his paper

Residential market
Market size
Non-residential market
Market growth
Attractiveness of the German market
Profitability

Product

Candidate

I use the four elements initially mentioned as the base of my issue tree, and I will continue
down the market size branch first. I would like to complete the analysis of residential
property before moving on to non-residential.

Interviewer

That is fine.

Candidate

So, if we have 40 million households, these can be split into flats and houses. Is it fair to say
that the split could be 50/50 between family houses and apartments?

Interviewer

Sounds fair, so let us go with that.

Candidate

Great, obviously houses would have more windows than apartments, so this has an influence on our total number of windows. I would say houses have, on average, twice the
number of windows compared to those of apartments. Perhaps 10 windows per house and
5 windows per apartment are reasonable estimates?

Interviewer

I agree that those numbers sound reasonable.

Candidate

Then that would give us a total residential market size of: (20 million apartments x 5 windows) + (20 million houses x 10 windows) = 300 million windows in the residential market.
I think the residential market is larger than the non-residential market by a decent margin.
Perhaps 2/3 of all windows are residential and 1/3 is non-residential?

Interviewer

Sounds reasonable. Anything else we need to consider here? Would this be the total market size and what does this number actually imply?

Candidate

Given that we have estimated the residential market to 300 million windows, the total
market would amount to about 450 million windows. However, windows are normally not
changed every year, so annual sales would not be 450 million windows. I do not know too
much about windows, but is it fair to say they are changed, on average, every 20 years?

Interviewer

Do not worry! This is not a test of your knowledge of the lifetime of windows, but I would
say your number is a bit low and that a better estimate would be 30 years. What else do
you need in order to get an idea of total annual sales?

41

42

Candidate

Thanks! So, this would give a number of 15 million windows sold in Germany every year. To
estimate annual sales, I would need the average price of a window. Does EUR 400 sound
like a fair guess?

Interviewer

EUR 400 per window sounds like a good estimate.

Candidate

Great! Then that would give us total annual sales of 15 million windows times EUR 400,
which gives annual sales worth EUR 6 billion.

Interviewer

Does that number make sense to you?

Candidate

Vertical Windows currently has a revenue of 600 million from sales in the three Nordic
countries. Altogether, the Nordics are about one quarter of Germany in population size;
following the same reasoning as before, this means that the total Nordic market should
be about 1.5 billion. With a market share of 40%, Vertical Windows could be making 600
million in sales. So, given this, I would say the estimate is within the ballpark.

Interviewer

That was a good approach to check your estimate. Let us use 6 billion as the market size
for Germany. What should we look at next?

Candidate

Next, I would like to look at growth: How has the market developed historically and are
there available predictions for the upcoming years?

Interviewer

The market has been, and is predicted to remain, stable.

Candidate

Ok, then I think it is safe to say that there will be no change in market size. Next, I would
like to look into the profitability of the industry do we have any data on this?

Interviewer

Yes, we do. Looking at the largest players in Germany, they are currently operating at a
lower profitability than that of the Nordic countries.

Candidate

Ok, I would need to continue my investigation whether Germany would be a good fit for
our clients company.

Interviewer

I think that is a good idea. How would you do that?

Candidate

First, I think it would be interesting to look at the competitive landscape to see if the market is fragmented or consolidated. Secondly, I would ideally like to see if the company has
any kind of competitive advantage it can benefit from.

Interviewer

We actually have some data on the competitive landscape.

The interviewer hands over the following diagram to the candidate.

The European vertical windows market split by market share

European vertical window market
100% total market size

100%

100%

100%

100%

Market share of top 3

players in the market

20%
40%
55%
90%

80%
60%

45%
10%

Sweden

Candidate

Denmark

Norway

Germany

It looks like the German market is much more fragmented than the Nordic markets, indicating that there are no large players dominating the market but rather a lot of smaller
players. This might actually be good for our client, since then there is no player that can
easily start a price war to keep our client out of the market.
Given that the current competitive landscape looks fairly good, I think we should look into
our clients product portfolio to see if there are any pockets in the market that look obvious for it to take advantage of.

Interviewer

Let us do that!
Interviewer provides data.
The European vertical windows market split by market material
European vertical window material
100% total market size

3%

3%
5%

100%
10%

17%
53%

50%

37%
37%

7%

4%

80%

42%

Wood/Aluminium
Aluminium
Wood

90%

PVC

41%

8%

4%

4%

Sweden

Denmark

Norway

Germany

53%

Vertical Windows

43

Candidate

My first observation is that Vertical Windows currently does not offer windows in the segment that is the largest in Germany, PVC. This is an immediate concern, as it reduces the
addressable market by 41%, unless Vertical Windows would be able to broaden its portfolio to include also PVC windows.

Interviewer

I agree that it reduces the addressable potential of the German market, but do you perceive it to be a reason not to enter the market?

Candidate

No, I would not dismiss the German market based on this information, since Vertical Windows strongholds are wood and aluminium, which still account for 54% of the German
market. Furthermore, Vertical Windows has a somewhat similar situation in Denmark and
Sweden, where woods/aluminium represents roughly 50% of the market but constitutes
only 10% of Vertical Windows total sales.

Interviewer

I think you are right in that we should not dismiss the German market simply because Vertical Windows cannot address the entire market. To help you in the continuation of your
analysis, we have also been provided with some data on the price levels of the different
window types. Does this new data give you any additional reflections regarding the attractiveness of the market?
Price level by window type
Price levels by material
Indexed

300

100

PVC

44

Aluminium

Wood

Wood / Alu

Candidate

Well, Vertical Windows sells mainly the slightly more expensive windows, which indicates
that its value proposition is that of a premium brand rather than an economy brand. As
a premium brand, you will typically have greater margins and be less dependent on high
volumes, making the fact that Vertical Windows currently can address only 59% of the
German market less troubling. In fact, this convinces me that the German market does
have an attractive pocket that Vertical Windows should address by trying to enter the
market as a premium brand.

Interviewer

Exactly. So how would you sum up the analysis at this point?

Candidate

Based on the provided information and the conducted analysis, I would say that entering
the German market is a potential next step for Vertical Windows. This conclusion is based
on the attractiveness of the market in terms of its size and competitive situation. Furthermore, Vertical Windows main segments constitute 54% of the German market, which
represent a significant pocket to tap into.

Interviewer

Vertical Windows has actually reached the same conclusion as you did in your analysis. It
has started to develop a market entry strategy for Germany and it has also started talking
to a German window manufacturer, which it thinks may represent an interesting acquisition target

We will wrap up the case example here. We do, however, encourage you to try to reflect over what your approach would be in order to analyse the potential acquisition as a means for supporting Vertical Windows
market entry.

45

THE TOYOTA CASE

Interviewer

We are on our way to the Danish affiliate of Toyota Motors to attend a meeting with the VP
of sales. The VP is currently in the process of setting the budget for 2014, when he calls us
to resolve a growing concern of his. For the year 2015, he has set the total sales budget of
the new Toyota Prius to 5,000 units. However, he is a bit concerned whether this target is
realistic or not.
As a consequence, he has asked us to provide an initial assessment of the feasibility of
his budget target. Furthermore, he would like some pointers for initiatives that could help
increase the sales of the vehicle.

Candidate

I am not familiar with the car, but I believe it is a hybrid car?

Interviewer

That is correct. It is a medium-sized, hybrid car.

The interviewer shows a picture of the car.

Candidate

Great! Let me make sure I have understood the task correctly. The VP of sales for the Danish affiliate of Toyota Motors wants to know if it is realistic to sell 5,000 Toyota Prius cars in
the Danish market in 2015. Furthermore, he is interested in possible initiatives to increase
sales of this particular car.

Interviewer

That is right!

Candidate

I do not have any further questions right now, but I would like to have a minute to gather
my thoughts.

Interviewer

Take the time you need.

Candidate takes a minute to gather her thoughts and organise her high-level approach in
bullet points to solve the task.

Candidate

I want to start by looking into the feasibility of selling 5,000 units. In order to do this my
suggested approach is:
1) Define the total number of passenger cars in Denmark and then estimate the

number of new cars sold each year
2) Do a segmentation of the market to achieve an understanding of the addressable

market for Toyota Prius

Interviewer

Your approach sounds good. I would like you to continue with the analysis of the passenger car market.

Candidate

Give me a minute to structure my approach a bit.

The candidate takes another minute to gather her thoughts around the main drivers of the
Danish car market. She then takes a marker and walks up to the whiteboard.

46

Candidate

To calculate the total car population I would like to use number of households as a starting
point.

Interviewer

Sorry for interrupting, but before you proceed I would like to know if this approach will
capture the entire passenger car fleet?

Candidate

I think it will cover the majority since this approach will account for the B2C market, and
it will also account for business fleets used by employees since these are often used privately as well. One part of the B2B segment which is not covered is the taxi segment, but
I would presume that the taxi market is quite small. I could of course add an additional
analysis of the taxi segment, if you consider it to be relevant?

Interviewer

You do not need to do the additional analysis for the taxi market, I agree that it is most
likely fairly small. So for now, let us assume that Toyota Prius is only sold B2C and B2B for
business fleets. With that sorted, you can now continue your analysis of the market for
passenger cars.

Candidate

Great! I will start the analysis by assuming that the average size of a household is two
people and that the population size in Denmark is roughly 6 million, giving us a total of 3
million households in Denmark. The households can then be divided into three main types,
depending on their access to a car:
The candidate explains the structure of her matrix.
Per cent of
households

Number of
households

Number of cars

Households with
two cars or more

20%

600,000

1,200,000

Households
with one car

60%

1,800,000

1,800,000

Households
with no car

20%

600,000

Total

100%

3,000,000

3,000,000

Candidate

Given that 20% of the households own two cars, and 60% of the households own one car,
the total number of private passenger cars in Denmark is 3,000,000. To calculate how
many new cars are sold each year, I will assume that the average lifetime of a car is 15
years. The total number of new cars sold each year is then 200,000 cars (3,000,000/15),
depending on one additional assumption, notably that the total population of cars remains
constant.

Interviewer

Good. I agree, but could you elaborate on how you found the percentage split for the number of cars per household?

Candidate

Absolutely! Based on my experience from the Nordics, I believe that the majority of households in Denmark have at least one car, which is why I have set the share of households
without a car to 20%. Out of the households with a car, I am quite certain that most of
them only have one car, explaining why I have set that share to represent 60% of all households or 75% of all households with a car.

47

Interviewer

That makes sense. Do you want to continue the analysis of the 200,000 cars or is that the
addressable market for Toyota Prius?

Candidate

The 200,000 cars do not reflect the addressable market for the Toyota Prius. There are
different needs in relation to size and usage. Hence, I will break down the market further by
looking into four main types of cars: SUVs, family cars, mid-sized cars and compact cars.

Interviewer

Can you think of another dimension that is relevant when choosing a car?

Candidate

I suppose that price is also an important differentiator. Other consumer typology, such as
age, could also be relevant, but given the limited information, consumer typologies would
be complicated to analyse with reasonable certainty unless it is possible to obtain this
information from the client?

Interviewer

We do not have any more information regarding consumer typologies and it can also
be difficult to operationalise such segmentations so price sounds like a good additional
segmentation parameter.

Candidate

Ok, let me organise the different parameters into a matrix to get a clear overview of the
different car segments.
Candidate sketches a matrix on the whiteboard.
Pricing

Size

Price fighter

Mainstream

Premium
segment

SUV

10%

Family

30%

Mid-sized

8%

24%

8%

Compact
Share of
mid-sized market

48

Share of total
market

40%
20%

20%

60%

20%

Candidate

I have added percentages of the estimated market split for the two dimensions by first
estimating the split based on car size, and then estimating the distribution across price
levels within the mid-sized market.

Interviewer

Excellent, but before you continue with your analysis, could you explain the reasoning behind your percentage splits?

Candidate

Yes, of course. The first split of the market, by size, is based on my own observations of
the cars people drive in the Nordics. I perceive that most cars are either family or midsized cars, but that compact cars are still fairly common. SUVs, on the other hand, are less
common. With that in mind, I have assumed that SUVs make up 10% of the market, and
that the more common compact cars have a market share twice as large of 20%. Thus, the
remaining 70% are family and mid-sized cars, between which I consider mid-sized to be a
bit more common, and has therefore set its market share to 40%.

Interviewer

I agree with your reasoning. Would you please also elaborate on your reasoning for the
split of the mid-sized market based on pricing?

Candidate

I have only considered the mid-sized market for the market share split based on pricing
due to the assumption that Toyota Prius only competes in the premium-priced segment
for mid-sized cars, and I believe that the split based on pricing will vary with the car size.
My view is that within the mid-sized car segment most cars are found within the mainstream pricing segment, why I have assumed these to stand for 60% of the market. For
the remaining 40%, I believe the split to be 50/50 between price fighter and premium,
which is why both segments make up 20%. Do you agree with the assumptions and the
underlying reasoning?

Interviewer

It sounds fair.

Candidate

Ok. Given this, the market in which Toyota Prius operates accounts for 8% of the total annual sales of new cars. This gives us a market of 16,000 new cars each year, which implies
that Toyota Prius would have to take roughly one third of the market in this segment to
meet the sales budget.
Based on this, I would say that selling 5,000 Toyota Prius cars in Denmark in 2015 is very
ambitious and probably unrealistic. Especially given the fact that Toyota Prius uses hybrid
technology and is therefore only relevant for parts of the premium segment for mid-sized
cars.

Interviewer

I agree, what do you do next?

Candidate

Now that this is clarified, I would like to move on to the second part of the VPs request and
identify possible measures to increase sales.
I would like to divide initiatives to boost sales into three main types of growth levers:
1) Enter new segments
2) Increase the addressable market by making the car more affordable
3) Increase awareness through marketing

Interviewer

I think those are three relevant levers. What are the possible segments for the first lever?

Candidate

This brings us back to our initial discussion about the market, from which I would consider
the possibility of increasing sales in the B2B market. The attractiveness of this initiative
depends partly on how active Toyota already is in the B2B segment. This initiative covers
both taxi fleets and business car fleets. One approach to attract large companies would be
to convince them to update their business car fleet to include more green cars. This is also
an approach that could be used towards the largest taxi companies.

Interviewer

Good. What is your assessment of the two other growth levers?

49

Candidate

The second measure for increasing sales is to make the car more affordable. The segmentation matrix tells us that making the car more affordable and hereby gaining access to
the mainstream segment could increase the potential market by 300% or 48,000 cars.
In order to avoid reducing the actual price of the car, another approach for tapping into
the market could be to offer attractive leasing solutions, seemingly making the car more
affordable.
The third initiative involves increasing awareness about the car and its qualities as a greener alternative to conventional passenger cars.

Interviewer

Could you please elaborate on how you would proceed the process of increasing awareness?

Candidate

I would suggest two main approaches to increase overall awareness, hereby also increasing the chance of getting people to consider a hybrid car over a conventional car hopefully the Toyota Prius in particular:
1) Make an above-the-line (ATL) marketing investment, such as TV commercials, that

could help increase overall awareness of Toyota Prius and promote the qualities of

a hybrid car
2) Implement an ambassador programme, where celebrities are used as ambassadors

for the car, hereby attracting extra attention

Interviewer

Excellent! Do you have any last comments?

Candidate

I would just like to sum up the case by saying that the budgeted sales target of 5,000
cars in 2015 is very ambitious due to the size of the addressable market. However, there
are measures that could be made to increase sales and, hopefully, reduce the gap. These
include entering new segments, make the car more affordable and increase awareness.

We will wrap up the case example at this point.

50

THE INVESTMENT CASE

Interviewer

A Nordic private equity fund is considering the acquisition of a Swedish wood pellets manufacturer. The company is currently owned by an industrial conglomerate.
Wood pellets are used as heating fuel. They are manufactured by compressing sawdust
into pellets. Pellets are extremely dense and can be produced with a low moisture content,
which allows them to be burned with a very high combustion efficiency.
In this case, only the heating of buildings with wood pellets is in scope.
The first question our client asked was to assess whether there will be a future demand for
wood pellets. What do you think would be a good structure to analyse future demand for
wood pellets?

Candidate

Let me take a minute to structure my thoughts.

Interviewer

Of course, take the time you need.

A minute passes and the candidate resumes the conversation

Candidate

In order to assess the future demand for wood pellets, I would like to divide the issue into
two main parts:
1) Who are the main users of wood pellets?
2) What is the substitute for using wood pellets?

Interviewer

Interesting, let us start with looking at the first one. Who are the primary users of wood
pellets?

Candidate

Since pellets are used for heating, owners of any kind of building in need of heating is a potential customer. There are different set-ups for heating a building. In my view, multi-family
houses and commercial buildings in cities are primarily connected to central heating systems, and would therefore not be direct users of pellets. The primary customers of pellets
would be A) small family houses and B) commercial buildings in rural areas.

Interviewer

You mention central heating systems, what kind of fuel do they use?

Candidate

I see your point. Central heaters can probably also run on pellets.

Interviewer

Good! So, you have now identified three main types of customers. What would the alternative for wood pellets be in each category?

Candidate

I believe that there is a different dynamic to each segment. There are central heating systems running on garbage, wood well, anything that burns basically. They buy fuel in great
quantities and probably shift it depending on price.

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Candidate

For small houses, demand is more static. They can use electricity, oil or geothermal for
heating, but they do not shift fuel. Shifting fuel would be connected to an investment in a
new boiler. So, the installed base would perhaps be slightly more stable over the investment horizon.

Interviewer

Yes, there is a different dynamic in play for each segment. Could you describe in an overall
way how you would investigate future development in each segment?

Candidate

One could look at the historical development and growth rates, and of course get hold of
an industry expert to provide additional market insight.

Interviewer

That sounds like a good approach. Let us say that after looking at historical data and
conducting expert interviews, we found that the demand from small houses is declining,
commercial is increasing and central heating is flat lining.

Candidate

So there will be a demand for wood pellets over the investment horizon, but no spectacular growth.

Interviewer

That sounds like a good hypothesis.

I will provide you with some additional information about the target company, so you can
evaluate the attractiveness of the potential investment.

The target company is a pioneer in the industry and

was established some 25 years ago

According to the management team, the company has a very

strong brand and excellent customer relations which enable a
modest price premium compared to its competitors

The companys business model is to operate four factories

in forest areas where it sources sawdust from local sawmills
(50-100 km from the production sites)

Would you say that the pellets company is an attractive target for the private equity fund?

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Candidate

Hmm, the attractiveness of the investment is determined by the private equity funds ability to increase the value of the firm and ensure that it becomes an attractive target when
selling again. Buy low and sell high, right?

Interviewer

Thats right. And how would they try to increase the value of the company?

Candidate

There should be a case for how to increase the companys profits, either by increasing
revenue or lowering the cost base or both.

Interviewer

Ok, if we start by looking on the revenue side, what could be done there?

Candidate

Well, the company already has a strong brand and good relations with its customers. But,
wood pellets is a really basic product, a commodity I mean, I would not pay extra for a
branded bag charcoal for the barbeque. I wonder if the companys price premium is sustainable over time

Interviewer

What options could the company pursue to increase revenue?

Candidate

Well, the market is not really growing, so to increase revenue they either need to gain market share or raise product prices.

Interviewer

Is raising prices a possible strategy? What do you believe is the most important criterion
for the customer when shopping for wood pellets?

Candidate

Assuming that the quality is equal across suppliers, the most important thing would be
the price.

Interviewer

That is right, so how would you go about determining the target companys market
position?

Candidate

Since wood pellets are a commodity, the price is determined by the market and the suppliers competitiveness is about being the most cost-efficient. The way forward would be to
make a cost comparison across the value chain for the target company and its competitors.
Do we know who the other suppliers of wood pellets are in Sweden?

Interviewer

Good question, there are three main categories of competitors in the market. A) medium-sized suppliers with a similar set-up as the target company, B) large forest companies
and C) international importers.

Candidate

Do the largest forest companies operate their own sawmills, and can, thus, produce the
pellets out of sawdust from their own wood production?

Interviewer

Yes, they use their own sawdust for the production.

If you were to make a structured comparison of the different competitors value chain, how
would you approach this?

Candidate

Give me a minute to gather my thoughts.

A minute passes
We have three types of competitors, and a value chain for producing and distributing
pellets consisting of four main steps: A) acquiring raw material B) transportation to production, C) production and D) distribution. By evaluating each step per competitor, we can
identify advantages and potential disadvantages to base our assessment on.

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Value chain

A) Raw material

B) Transportation

C) Production

D) Distribution

Candidate

We concluded that the large forest companies have a minor advantage compared to the
target company with regards to raw material. Also, the large forest companies have an advantage when it comes to transportation, by having the production of pellets in immediate
connection to the sawmills.

Interviewer

Good. As you mentioned, the forest companies have back-integrated their operations and
co-located the pellets production with the sawmill. How could you assess the advantage
of having the production next to the sawmill?

Candidate

Well, that depends on how much sawdust you need to produce one unit of pellets?

Interviewer

The density of sawdust is six times less than in pellets, which is the whole idea of the
product.

Candidate

So, in order to produce one truckload of pellets, they would need to transport six loads of
sawdust between the sawmill and the production site. That is a pretty big disadvantage
for the target company.
If we look at production, are there any significant economies of scale when producing
wood pellets?

Interviewer

Production costs are almost equal across competitors. There is no economy of scale that
is relevant in this case.

Candidate

Looking at the final step of the value chain, distribution, importers would have a disadvantage, as they need to ship the pellets in by boat. Shipping costs are still low, so perhaps it
is just a minor disadvantage.
So, summing up the cost advantages and disadvantages and plugging them into a matrix
organised according to value chain and competitors, we see that the target company
holds a poor competitive position compared to their competitors.
Candidate explains the rationale behind his matrix.
Value chain

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Raw material

Transportation

Production

Distribution

A) Equal to target company

-/+

-/+

B) Forest companies

-/+

-/+

C) Importers

-/+

Candidate

Do you have any information on the recent market development such as sales or market
share per competitor?

Interviewer

The forest companies and the importers have only been on the market for a couple of
years, but have quickly gained significant market share from the traditional players (like
our target company). This proves that we are facing a price game, and that customer relations is not a sustainable competitive advantage but rather a reflection of the management teams wishful thinking.

Candidate

That further supports my suspicion.

The large forest companies have integrated the pellets production directly with their sawmills, hence, they have a structural advantage that the target company cannot mitigate.

Interviewer

Interesting, so what recommendation would you give to the investment committee?

Candidate

The structural disadvantage compared to competitors will make it hard for the target company to compete on price. We already see signs of this disadvantage in the current market,
with the companys decreasing market share.
In my view, the wood pellets company would not be a good investment for the private
equity fund.

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