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New answer on May 04, 2020
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Anonymous A asked on May 04, 2020

Hi!

During the preparation I’ve faced the following case: your “takeaway coffee point” is a monopolist in a small city near London.

What could be the impact on your market share if a new competitor enters the market? What is the best structure for this case?

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Anton
Expert
updated an answer on May 04, 2020
FREE 1st session in November | From Lawyer to MBB | Top in FIT | 10x your structuring skills | Message to get Free Prep Checklist

Hi,

This is a very typical case, which could be solved via table structure.

Let’s say you know, that your client sells 1000 cups of coffee for takeaway at the price of 1 GBP each. And there are 4 market segments (by income) in this town: mass, mass affluent, affluent, HNWI.

Now lets draw a table with the following structure:

Columns: market segment, segment revenue pool, segment price sensitivity, segment coffee quality sensitivity, segment geo location sensitivity, your offering, competitors offering

Lines: mass, mass affluent, affluent, HNWI

The next step is to fill this structure:

Market segment column - names of segments

Segment revenue pools

  • Mass - 100 pounds
  • Mass affluent - 400 pounds
  • Affluent - 450 pounds
  • HNWI - 50 pounds

Segment price sensitivity

  • Mass - High
  • Mass affluent - Low
  • Affluent - Low
  • HNWI - Low

Segment coffee quality sensitivity

  • Mass - Low
  • Mass affluent - High
  • Affluent - High
  • HNWI - High

Segment geo location sensitivity

  • Mass - Low
  • Mass affluent - Low
  • Affluent - Low
  • HNWI - Low

Your offering

  • Same for all lines: 1 GPB per cup, high quality, center location

Competitor’s offering

  • Same for all lines: 0,5 GPB per cup, medium quality, center location

Now we can see that your competitor offers a cheaper product with lower quality. This might only affect the mass clients as they have higher price sensitivity and care less about the quality.

What does it mean in terms of market share?

You might loss is 100 GPB revenue pool, which is equal to 10% market share (10% share in current market terms, but you have to take into account, that the whole market will be 950 GBP).

I used random assumptions in this solution to illustrate the approach.

I have a few ideas how to add sophistication for this case and draw a more detailed table. However, I can't attach it here. Message me and I will send it to you.

Good luck with your preparation!

Anton

(edited)

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Sidi
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replied on May 04, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers

Hi!

This is a nice exercise in top-down thinking. Let me give you a step-by-step description.

  1. Define your objective/focus metric. Market Share is not universally defined, so you need to define it before you can structure the problem. --> The most common definition for Market Share is (Our Revenue) / (Market size). Hence, a loss of market share mathematically means that the numerator becomes smaller relative to the denominator. Or in other words, our revenue becomes smaller relative to the market size. So losing market share happens if either (a) our revenue grows slower than the market, or (b) our revenue declines faster than the market.
  2. Identify how the market entry impacts each of the two drivers of market share (i.e., our revenue and the market size). It is not very plausible to expect the market size (the denominator) to grow because of a new player emerging. This means that most probably, you will have to check whether this new competitor will cause our revenue (the numerator) to decline.
  3. In order to run this check, we disaggregate revenue into its numerical drivers (e.g., number of coffees sold and average price per coffee), and then analyze how each of these drivers could be affected by a new competitor. This is where qualitative and contextual information comes into play during the analysis! The most obvious impact would consider the quantity of coffees sold - especially if the coffee quality and the accessibility of the new competitor is good. But it could also impact the price point that can be realized, if this competitor offers structurally lower prices. All of these points need to be discussed with the interviewer during the analysis.
  4. Now that you have identified the principle mechanism, you can try and estimate how much each driver would be affected, and substantially derive a quantification of your expected market share loss. Here, it might make sense to work with scenarios.

I hope this is helpful. :)

Cheers, Sidi

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Ian
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Content Creator
replied on May 04, 2020
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi there,

Also important is context for this. Do you understand the 4 main types of competition and how they affect firms' behaviour? Do you also know what industries (and brands) fall into each?

If not, the following two articles provide a nice summary:

1) https://bizfluent.com/info-7904519-types-competition-economics.html

2) https://saylordotorg.github.io/text_exploring-business-v2.0/s05-05-monopolistic-competition-oligo.html

The key differences in each of these markets fall along the following lines:

  • # of competitores
  • Price competition
  • Product differentiation (relates to price competition)
  • Substitutability of products (also relates to price competition)
  • Margins
  • Barriers to entry (natural and legal)
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Anton

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