BCG Final Round Case - Sugar to Indonesia

Information to be shared only under request:

• First, our client would like to quantify the expected profit losses due to the competitor’s expansion. Then, they would like to assess possible strategies to increase their profits.
• In a commodity market, the price depends on the overall demand and on the production costs of the producers. If the production costs of some players decrease, the price may drop. If demand increases, the price may increase. Please keep in mind these are possible outcomes. To predict their happening, additional data is needed (as shown later).

Example of an excellent answer (score: 2)

GOAL CLARIFICATION

An excellent candidate would clarify the objective of the client.

STRUCTURE

1. Company potential following the competitor's move (quantification of the impact of our competitor’s action)
   1. Revenues
      1. Price
      2. Volume
   2. Costs
2. Counter-reaction – Identification of possible countermeasures
   1. React
   2. Not react
3. Risks and next steps

COMMUNICATION

An excellent candidate should present clearly the different areas in a structured way.

Moreover, the candidate should clearly present the rationale for why he/she wants to explore a particular point, connecting the answer to the objective of the client.

Suggested score

An excellent candidate should: 

1. Clarify the goal of the client
2. Include the main elements as presented above in the structure
3. Communicate the structure in a clear way

The candidate should explain possible reasons for a decline in volume (market share taken by the Thai supplier) or in price (drop of price due to higher supply in the market) and how this could be responsible for the decline in revenues.

Provide extra credit if the candidate can derive some possible solutions for a reaction to the competitor, such as decreasing the price or merging with the competitor.

Recommended score calculation: starting from 2, decrease the score by 0.5 points down to 0 for any of the following:

• The candidate did not clarify the objective
• The candidate did not include two or more of the areas described above
• The candidate included multiple useless elements in the structure
• The candidate communicated the structure in a disorganized way or without a clear connection to the goal

Looking at Exhibit 1, and knowing that the total demand is 5,000k tons, how will the market price for raw sugar in Indonesia change if our main competitor increases its capacity from 1,700k to 2,000k tons?

Example of an excellent answer (score: 2)

The candidate should identify that:

• The current market price is $50, so our client makes $25 per ton.
• If the main competitor increases its capacity from 1,700k to 2,000k tons, the market price will drop to $45.
• The estimated losses for our client would be equal to $5 per ton. Given its capacity is 1,500k tons, that results in a 7.5m decrease in profits.

Suggested score

An excellent candidate should: 

1. Take a reasonable amount of time to look at the graph and ask questions to understand how to read it if not familiar
2. Identify the current market price for sugar
3. Identify how the market price would change
4. Compute the losses and comment on it

Recommended score calculation: starting from 2, decrease the score by 0,5 points down to 0 for any of the following:

• The candidate struggled to understand the graph and did not proactively ask for the right information to read it (Note: it is acceptable not to know the industry cost curve, but it is important to show proactivity in these situations)
• The candidate did not identify the insights of the graph (current and future market price)
• The candidate did not proactively compute the losses in a clear way
• The candidate did not comment on the implications of the result

What options do you think our client has to face this loss?

Example of an excellent answer (score: 2)

The candidate should already know and remember that the goal of the company is to find ways to maximize profits. 

A good answer shall be structured and include the advantages and disadvantages of each proposed option.

Example (+=advantage, -=disadvantage):

• Non react
  • Do nothing different (- no profit increase, + low risk, + low effort)
• React
  • Cooperate: merge or agree on partnership with the competitor (+ may avoid the market change, - may be against law)
  • Compete:
    • Increase revenues
      • Increase volumes (+ may increase profit, - may reduce market price)
      • Increase price (+ market price would remain the same → no losses without changing our structure, - may cause a reaction in the competitor, - may not be feasible)
    • Reduce costs
      • Reduce cost per unit (+ profit increase, - may impact product quality)

Note. Increase revenues and decrease costs may be done via the acquisition of a competitor / merger with a competitor to increase profits and obtain revenue or cost synergies (- high due diligence effort, - risk of M&A failure, - may not be compliant with the law, + higher profits, + possibilities of revenue/cost synergies). Provide extra credit to the candidate if he/she is able to personalize the options (eg specific ways to cooperate or to decrease costs)

Suggested score

An excellent candidate should: 

1. Take some time to structure his/her thoughts
2. Present the ideas in a clear, structured way
3. Come up with at least 3/4 ideas
4. Comment on the option, for example providing advantages and disadvantages

Recommended score calculation: starting from 2, decrease the score by 0.5 points down to 0 for any of the following:

• The candidate did structure his/her thoughts
• The candidate did not effectively and clearly present the ideas
• The candidate came up with few ideas (less than 3)
• The candidate did not provide a comment regarding the advantages and the risks of each option

Following the Thai competitor expansion to 2,000k tons, our client found out that they have the opportunity to expand their production by 400k tons per year, reaching a total of 1,900k tons per year, without increasing the production costs. Should they take the opportunity?

Information to be shared only under request:

• The investment would be equal to $40m.
• The board of the company usually approves investments of this size if they pay off within 3 years.

Example of an excellent answer (score: 2)

The candidate should first of all check if the price of raw sugar would change because of this expansion. From Exhibit 1, he/she should see it would remain equal to $45.

• Marginal contribution per ton would be: market price - production costs = $45 - $25 = $20.
• Additional profits per year would be: 400k tons/year * $20/ton = $8m/year.
• Break-even point in years: $40m / $8m/year = 5 years.
• The company would not reach the 3-year target with the investment.

Suggested score

An excellent candidate should: 

1. Ask for additional information
2. Check if the market price would change because of this expansion
3. Present the structure of the computation and carry it out clearly
4. Comment on the result, highlighting the risk that the board may not proceed with the investment because it would not break even in 3 years

Recommended score calculation: starting from 2, decrease the score by 0,5 points down to 0 for any of the following:

• The candidate did not ask for additional information
• The candidate did not check if the price of raw sugar will change
• The candidate made mistakes in the computation
• The candidate did not highlight that the break-even results may be problematic for the board

Can you sum up the case to the client?

Example of an excellent answer (score: 2)

The candidate should:

1. Recap the objective
2. Provide an answer-first approach to the question asked
3. Mention risks and the next steps to take

RECAP OF THE OBJECTIVE

“Our client asked us to quantify the expected profit losses due to the competitor’s expansion and to assess possible strategies to increase their profits.”

ANSWER-FIRST APPROACH TO THE QUESTION

“Based on our analyses, profits are expected to drop by $7.5m. A possible way to respond to that is to increase capacity by 400k tons per year which would imply  additional $8m/year and break even within 5 years.”

RISKS AND NEXT STEPS

“The main risk that emerges is that the board usually approves opportunities that break even within 3 years. Also, in this analysis we expect no market price reduction, but we are not considering possible moves of other players. Hence, the next steps may be to identify such moves and evaluate the ways and the implications to increase capacity, to present a robust solution to the board."

Recommended score calculation: starting from 2, decrease the score by 0,5 points down to 0 for any of the following: 

• The candidate did not have an answer-first approach regarding the losses
• The candidate did not mention all the key aspects of the opportunity to expand
• The candidate presented the analysis in a disorganized way
• The candidate did not conclude the recommendation proactively, mentioning the next steps