Case #3: The government is changing regulations, what should we do?

Graduates applying for consulting jobs will likely face case study interviews. This case looks at how a client should respond to changing government regulations.
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Case study examples

Case interviews allow you to demonstrate how you think - your ability to understand a problem, break it down into its requisite parts, analyse them and communicate a solution. In this series, we give you ten case studies to give you an idea of how to approach the case and how to walk through it with your interviewer.

You may want to consider the case question first and think about how you might structure a response before looking at the ‘answer’. Of course, bear in mind there are many ways to answer a case, so this is just one example!

For the purposes of these examples, we will only look at market sizing and business cases.

Case #3: The government is changing regulations, what should we do?

Question

A tyre manufacturer in Thailand, TyresRUs, has been the only player in that market due to high tariffs on imports. As such, they dominate the tyre industry. Currently, the tariff is 50 per cent of the total cost to produce and ship a tyre to Thailand. However, because of the forces of globalisation and lower consumer prices, the Thai government has decided to lower the tariff by five per cent every year for the next ten years.

TyresRUs are very concerned about this change as it will radically alter the landscape of the industry in Thailand. They have hired you to assess the situation and advise them on what steps to take.

Solution

We propose the following steps:

  1. Understand the current cost structure of TyresRUs’ product
  2. Understand the impending competitive situation
  3. Calculate the impact the reduction of tariff will have
  4. Recommend specific steps that TyresRUs can take to protect themselves from increased competition

Let’s take a look at how a conversation with an interviewer might unfold.

You: What would you say are the major costs associated with making a tyre? I assume there are things such as raw materials and labour?

Interviewer: Correct. Let’s say that raw materials comprise of about 20 per cent of the cost, labour at about 40 per cent and all other costs such as overheads are about 40 per cent. The average tyre costs about $40 to make.

You: Right, so the average tyre costs $40 to make and labour is about 40 per cent of that cost, that means it is about $16 per tyre. That sounds quite high. Why is that?

Interviewer: This is because it is done manually. Most of the technological advances in the tyre industry have not yet been introduced in Thailand.

You: Ok got it. What about the cost structure of the competition?

Interviewer: An average tyre manufacturer in the US produces a tyre at a cost of about $30 each.

You: Assuming then that shipping to Thailand costs $4 for each tyre and a tariff of 50 per cent, the average imported tyre in Thailand amounts to $49, even though the cost to produce a tyre in the US is much cheaper due to technological advances. This means that foreign competitors are out of luck because of the tariff.

Tariff cost table

You: Depending on what price they are willing to set, the competition will start to think about entering the market in year four. In year six, the competition will surely enter the market as their prices become lower than domestically produced tyres.

Interviewer: Are there any other considerations that TyresRUs should think about?

You: This analysis assumes that the cost structure for the competition will remain constant. It is likely however that technology will continue to advance and that the costs of producing tyres will decrease. This may mean that competitors enter the market even sooner than we have expected.

It’s important that TyresRUs benchmarks itself against world class tyre manufacturers, and in particular, look to re-engineer its production methods and cost structures. It is critical that they invest in the latest technology to reduce their labour and operational costs. They may also consider developing loyalty from their customers in order to lock in a certain percentage of market share ahead of the competition.

Up next

Next, check out Case study #4: ‘Why are we making less than the industry average?’.