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Hello! It would be interesting to see how others would approach this question? Thank you

bocconi MBB
New answer on Feb 16, 2020
2 Answers
1.6 k Views
Anonymous A asked on Feb 15, 2020

The client is an integrated oil company and controls the entire suppl ychain from oil wells to gas stations.

They have discovered a newautomobile fuel that will increase mileage by 30%. It will also cost 10% more to produce the fuel. The fuel is similar to the old fuel inevery other way. What should they do with the new fuel?

Additional information: There are 5 players in the industry (including our client). They all have equal market share. The interviewer asked to guesstimate what the demand would be like. No special environment concerns or advantages from the new fuel.

Under no circumstances can the client capture more than 10% of the market due to capacity constraint. Margins on old fuel are 10%

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Anonymous replied on Feb 16, 2020

Hi there,

A few observations:

1) the initial prompt is a bit confusing. If they can capture no more than 10% of the market, but all the 5 companies have equal market share, 20% vs. 10%?

2) If mileage goes up, then demand goes down. This is a significant risk for the client, so think about how this impacts your calculation, and what other effects fewer people fueling up would have. Less ancillary revenue from gas stations, for one)

3) If capacity is a problem, consider licencing the fuel to competitors. Presumably they'd be down if the product is that much better, and if they can charge up to 30% more for it (the point at which customers are indifferent).

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Clara
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replied on Feb 15, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

In a nutshell, I would:

1. Make the necessary questions to understand the whole value chain, both product flow and influencing parties

2. Below each "bucket", see what would need to be changed or what new info you have (e.g., +10% in cost, etc.)

Once this structure is layed out -in this case, more in the same of a "chain" than an "tree"-, you would problem-solve with the interviewer into one or various of the buckets, doing some math and brainstorming.

Hope it helps!

Best,

Clara

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