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Case study #6: How do we maximise value for our shareholders?

Team Prosple

This detailed case study will walk you through a sample question that you might come across in your bid to land a graduate consulting job.

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 study #6: How do we maximise value for our shareholders?

Question

The CEO of a major conglomerate is dealing with poor profitability in each of her three divisions: A, B and C. What should she do to maximise shareholder profitability?

Solution

In this case, you should start with understanding the three divisions in more detail. Once you have this information, you can then compare them against each other and understand what might be driving the poor profitability.

Let’s see what we can find out.

You: I would like to start by better understanding the three divisions in more detail. Let’s start with division A. Can you tell me anything more about what they make or do?

Interviewer: No. Let’s keep the divisions fairly generic in terms of product.

You: Okaaay. Is there a demand for division A’s products though?

Interviewer: The overall market for division A’s products has been shrinking the past few years and looks like it may continue to do so.

You: Is there a reason for that? Are customers moving away from division A products because of trends or competition?

Interviewer: Customers are moving to an entirely new product category.

You: So you mean as a substitute for our product?

Interviewer: Yes, they prefer the product category of division A less and less.

You: Can division A enter this new product category easily?

Interviewer: No, they are not well-positioned to do so.

You: Ok. So, can you tell me anything about division A’s revenue and pricing strategy?

Interviewer: This division generates 60 per cent of the firm’s revenues but gross margins have been declining in recent years. The high fixed costs maintained by this division have moved net income into the red as gross margins have declined.

You: Interesting. And how about pricing then? Have they had to price aggressively to maintain sales volume?

Interviewer: Correct. Price has become increasingly competitive. They have had to price aggressively even with its strong market leadership position.

You: What is the market share of this division?

Interviewer: Our firm is the clear market leader with a 60 per cent share.

You: Ok, so we have an idea about the revenue and pricing structure. On the cost side, where is manufacturing done?

Interviewer: Manufacturing is done in Asia by all firms, and is largely considered to be as low-cost as possible.

You: Interesting, so in summary, it sounds like division A is in a declining industry as customers are moving to a new product category altogether. It doesn’t sound like division A has an easy way to move into this product category.

It also appears that the incumbent firms are struggling to maintain volume in this shrinking market and that prices have fallen with volume. With such a high fixed cost base and with operating income no longer high enough to cover it, our client is bleeding from this division with little chance to recover. This doesn’t sound great but before we make a final recommendation on division A, let’s understand the other divisions.

Interviewer:  Sounds good. What would you like to know?

You: Let’s understand division B more. What market share does this division have?

Interviewer: Only 5 per cent.

You: Are there many players in this market?

Interviewer: Yes. It is fairly fragmented.

You: What has it been like on the revenue side?

Interviewer: Revenues have been low but are growing. The division is running a negative net cash flow.

You: Why is that? Where is it putting most of its cash?

Interviewer: It is currently investing a lot in marketing, R&D and plant capacity.

You: Ok, what are the margins like on division B’s product?

Interviewer: A wide range of prices exist in the market currently with margins generally high.

You: Are customers willing to buy division B’s products? Interviewer: This is a relatively new product category and customers aren’t yet sure what they want or like.

You: This potentially sounds like an emerging market. What has the market growth been like?

Interviewer: The overall market is growing at 10 per cent a year and is expected to experience significant growth in the future.

You: Hmm, ok so while division B may not be making a lot of money today, it sounds like there is an opportunity for growth. It may represent a strong investment opportunity and that continued investment in marketing, R&D and plant capacity could help division B grow in this market.

Interviewer: That sounds like a good summary of division B.

You: So, let’s move on to division C now. What kind of market share does this division have?

Interviewer: We have a 50 per cent share with only one other major competitor and a few minor ones. We also have price leadership in the market.

You: Ok, so we have a strong market share and price leadership. What does our revenue look like?

Interviewer: Revenues have been strong with good operating margins but have been flat over the past few years.

You: Is that because of the overall market? Are other competitors the same?

Interviewer: Yes, the overall market is not growing and is expected to remain flat for the foreseeable future.

You: What about on the cost side? What does their cost structure look like?

Interviewer: The firm has significant economies of scale and has the lowest variable cost in the market. Significant expenditures are being made in marketing, R&D and plant capacity in an attempt to grow revenues.

You: Division C sounds like a fairly mature industry. The market is flatlining and we have a significant market share. It sounds like we do have a steady stream of revenue though, which we could use to invest in other divisions such as division B, where we could try to establish a market leading position by developing differentiated, branded products.

So in summary, division A is in a declining industry and it seems unlikely that we can move into the new product category. I recommend we look to divest division A immediately. We treat division C as a cash cow and streamline operations by eliminating all expenditures not directly needed to maintain profitability. And the money we get from division C can then be used to support division B. While division B may not be making any money today, it has growth potential and represents a strong investment opportunity.