Structuring and Hypothesizing

Anonymous A asked on Jan 07, 2019 - 2 answers

Good day!

I'm curious to see what people think of structuring/hypothesizing in 1) market sizing, and in 2) profitability analysis.

For market sizing: say you are asked "how much does a metric ton of aluminium cost in the Netherlands?" How do you proceed to a structure in such a case? My intuition tells me "find end consumer aluminium and work your way back the value chain," but how does that translate to structure?

For profitability analysis: say that the problem is "company A is trying to buy 20% share in startup B. Is this investment worth it?" How can I hypothesize with a case like this? Intuitively I can only see two hypotheses: 1) it's worth it, or 2) it's not worth it.

Thanks in advance!

2 answers

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Hubert replied on Jan 07, 2019
Preparing for MBB

Hi

For your first point, you need to clarify at what point of the value chain you are searching the cost: in a container in the Rotterdam harbour or an end product witghting a ton of aluminium (i.e: a car)? Beig in the Netherlands, you could consider an aluminium bike :p then estimate how much of the bike cost is aluminium (by estimating design and manufacturing cost and take them out of the full retail price).

Second point : you need to have a goal first : 300% ROI in 5 years? 2% growth every year at perpetuity? not hte same. This will usually depend on who is your client. VCs or business angle have very different business models.

So for both your points : clarify before jumping to the solution. A problem well framed is 50% resolved.

Hubert

Vlad
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replied on Jan 07, 2019
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Hi,

Re the pure market sizing cases - you structure it with the main drivers. In your example - the key cost components.

Re your second question - it's not a profitability case first of all. Moreover, if you perfectly solve the case without ever stating a hypothesis - you'll pass the interview.

There are two ways to use the hypothesis:

First - presenting a structure using the hypothesis. For example, if you are having a PE (private equity) case, you should do the following:

1) Make classic structure (market, company, competitors, feasibility of exit)

2) Make subpoints (e.g. in market: size, growth rates, profitability, segmentation, etc)

3) Present your 1st level Hypothesis:

  • - "In order to understand whether we should invest in Company A, I would like to check a number of the hypotheses - that the Market is Attractive, the Company is Attractive, the competition is favorable and we have good opportunities for of exit"

4) Present the main 2nd level Hypothesis:

  • "In the market, I would like to make sure that the market is big enough and growing;
  • In the company I would like to find additional opportunities for growth;
  • In competition I would like to check that the market is fragmented enough;
  • Finally, I would like to check if we have potential buyers and can achieve desired exit multiples"

Another way to use hypothesis is using the hypothesis to prioritize your analysis:

1) Make a structure: "Problem in sales may be related to Sales Motivation, Sales Strategy, Sales Coverage, and Sales Process:

2) Prioritize a part of the structure based on your knowledge / common sense / available data: "Taking into account that motivation is the core problem of the sales organization, I would like to prioritize this part of the analysis".

Good luck!