Incos is a global manufacturer of writing products with divisions in North America, Europe and South-East Asia. Their global sales are $60 m and their profits amounted to around $30 m. Their European division who manufactures and sells disposable pens is experiencing flattening sales and a decreasing profit.
The client hired you to help him come up with suggestions to get profits back on track.
This case is made to be interviewer-led. Therefore the interviewer should guide the interviewee through the interview.
The information given allows the interviewer to challenge the candidate with other questions that are not mentioned here.
Kurzlösung (Ausklappen) (Einklappen)
The following framework/structure provides an overview of the case:
I. Increasing revenue
1. Since sales are flattening, what type of suggestions would you make to help increase revenue?
- Increase sales to existing customers by adding accessories or bundling products.
- Initiate sales to new customers by entering new distribution channels or investing more in marketing.
- Increase prices.
- Launch new products for existing segments or new segments.
- Shut down unprofitable product segments.
2. The client has actually thought of entering the segment for premium pens since margins are higher there. How would you go about estimating the market size for premium pens in Europe?
Give candidate some time and challenge him to elaborate on the data he might need and ask candidate to estimate the size based on his own assumptions. Once complete, interviewer can share information below to estimate the size for our case.
- (350 m*80%*0.2)/4 years=14 m pens.
3. Given that the premium pen segment is a new segment for Incos, can you think of any barriers to entry?
- Access to distribution channels: Incos sells its pens through different channels than the premium segment uses. Incos will have to invest in gaining access to these channels.
- Market consolidation: The premium segment might be dominated by existing brands such as Cartier & Mont Blanc who have a strong brand position and a long history in the segment.
- Brand position/reputation: Incos might find it difficult to get consumers to perceive their brand as a premium brand. Heavy investments into Marketing will be required to build up a brand position.
4. The team has also run some scenarios on economics & profitability. We have some data on one of the scenarios. Calculate profitability and then make a recommendation on whether the client should enter the segment or not.
- Mainstream brands have about 85% of the market.
- Incos is expected to gain 3% market share.
- Average selling price for premium pens is $20.
- Gross profit margins are on average 30%.
- Margins after marketing expenses are on average 10%.
- With 3% of the market of 14 m pens and a selling price of $20, Incos would earn (3%*14 m*$20)=$8.4 m.
- With 10% margins, Incos would generate $840.000 in profits.
- This is fairly small in comparison with the company's global margin of 50% and $30 m in profits.
- Along with the difficult entry barriers, it would be unwise for Incos to enter the segment.
II. Decreasing costs
5. Let's move over to costs and see if we can increase profits by reducing costs. We have some data for you on the cost breakdown. What are some ways to reduce costs for Incos?
- Reducing material cost.
- Sourcing of materials in low-wage country like China.
- Use economies of scale.
- Simplify the product.
- Reduce wages.
- Move production to low-wage country.
- Hire more temporary staff.
- Automate more processes.
6. Let's look more into the outsourcing option to China. What cost reduction can we realize if we move production to China, assuming that wages are only 15% of wages in Europe? What other factors should you take into account?
- Wages will decrease by (25%*0.85)=21% to about 4% of total costs when moving production to China.
- We would have to look at the additional distribution/transportation costs when shipping from China to customers.
7. We're out of time. You run into the Incos CEO and he asks you for a summary. What would you communicate to him?
- So far, we have analyzed the impact of increasing sales by entering the premium segment. It's not a good fit due to limited profitability and high barriers of entry.
- We have also analyzed the option of moving production to China to decrease costs. This is a viable option that reduces wages from 25% to 4%, but we still have to analyze effects of possible increase in distribution costs.
- Additional options to increase include bundling & intensifying marketing, but these still have to be quantified.
- Assume that we can't save the division and the company wants to sell it to another player, how would you ensure our client receives the highest possible price?