Case

Laos Tire

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Problemdefinition

A manufacturer of tires in Laos has had a monopoly in the market for years due to high tariff on imports. If foreign producers wanted to import tires, they would have to pay a high import tariff which makes up 40% of the total cost to produce and ship to Laos. The Laotian government has now decided to lower the tariffs by 4% each year for the next ten years to open up the market to foreign companies and achieve lower consumer prices.

Our client is concerned this move will affect their market position and hired us to investigate the effects and help them decide what to do.


Kommentare

This is a interviewer-led case so the interviewer should guide the candidate in the big picture approach. Based on this high-level approach, the candidate can tackle the case and receive information & data where required.


Kurzlösung

Based on import tariff reduction, foreign players can enter the market in 3 years.

Client needs to implement technology to reduce its unit cost and operate at a similar level as foreign players.

Client also needs to implement loyalty programs to retain customers.


Detaillierte Lösung

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

1. How would you approach this case?

Share diagram 1 with the candidate.

High-level approach can be shared with candidate:

  • Understand the current cost structure of Laos Tire and foreign competitors.
  • Calculate impact of import tariff reduction over the next ten years.
  • Recommend steps Laos Tire can take to safeguard its position.

I. Cost structure

2. We have some data on performance. Take a look. What insights can you draw from this?

Share Table 1 with the candidate.

Possible answer:

  • Candidate should note that labor costs are very high in Laos compared to foreign manufacturers.

3. What could be potential causes for such differences in unit cost?

Possible answer:

  • This is caused by a lot of manual labor and lack of sophisticated machinery to reduce the impact of labor on its unit cost.
  • This means that Laos still has some technological development to implement to be able to compete with foreign producers without import tariffs.

II. Competitive position

4. The client wants to understand the effects of the tariff reduction. How would you approach this?

Possible answer:

  • Candidate should now calculate the effects of the import tariff reduction to see when producers would decide to enter the market.
  • Candidate should calculate the unit cost of the foreign producer based on the lower tariff each year to see the effects.

5. Can you take us through the future scenario to see the impact of possible entry by foreign producers?

Answer:

Currently the unit cost if foreign producers imported would be: $35*1.40=$49

If we calculate the unit cost for each year, we get the following table:

Candidate should note that client has only 3 years before foreign players can enter the market with a competitive price.

III. Recommendation

6. What solutions can the client push through to protect himself?

Possible answers:

  • Laos Tire needs to quickly implement new technologies to reduce its unit cost and operate at the same level as foreign players.
  • Labor costs should go down to 25% similar to foreign producers.
  • Laos Tire should think about marketing-initiatives to retain customers and ensure customer loyalty.

Schwierige Fragen

  • Is there a possibility that foreign players can enter the market sooner than 3 years?
  • What type of marketing/sales/distribution structures should Laos Tire implement to ensure customer loyalty?
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Beste Antwort bisher:
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi, 1) You proactively ask in the beginning, even before drawing the structure (something like "What kind of products / revenue sources do we have) and then split the structure into price, qty,... (mehr)

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Ex BCG | MBB Specialist | #1 Expert for coaching sessions (1400+) with 100% recommendation rate

Hi Moji, it seems your issue is not the math computation, but rather how to structure the math part once you receive a question (that is, the logic behind that you should apply). This means you sho... (mehr)

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Ex BCG | MBB Specialist | #1 Expert for coaching sessions (1400+) with 100% recommendation rate

Hi Elisey, I would personally not recommend to use a single framework for all the so-called business situations (M&A, Entry, New product, Operations etc). Although this would help to more easil... (mehr)

Hi there, It really depends where you're heading to, but in principle the easiest are: * Market entry * Profitability * Revenut growth * Market sizing The next (a bit harder) you have: * Pric... (mehr)

Bisher beste Antwort von 5 Antworten:
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 35+ candidates secure MBB offers

As highlighted several times, absolute profits are clearly defined as Revenues - Cost. Profitability however, even though always expressed as a ratio/percentage, is not universally defined. It can be... (mehr)

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