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What is the meaning of a „total market “?

Anonymous A

My question is in regard to the following McK case http://www.mckinsey.com/careers/interviewing/electrolight, especially question number 2! Regarding my background, I am a specialist in mathematics and I could solve the math part of this case easily, but I have some weak spots, when it comes to economical terms. Problem: If the launch of a new product, produces cost of 40 Mio. € and each sold bottle generates 1 € profit, is it not the easiest solution, to just wait till enough bottles got sold and the cost are covered? Or do I need a certain share of market? If a total market includes 8 billion gallons, does that mean, that each year an amount of X (in this case 8 billion gallons) is consumed? Would the common definition then be, that the market share, sizes the volume or revenue of a market for one year? But if so, the question should be “what share of the electrolyte drink market would Electro-Light need to capture in order to break even within one year?” or do they assume that automatically by mentioning “break even”?

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Elias
Expert
replied on 09/18/2016
Experienced consultant, now running own consulting business

Just as a side note, not directly linked to the case at hand, but maybe for your future (consulting) life:

The question "What is my market?" is probably one of two or three make-it-or-break-it questions in business. Because the answer is often not obvious and success in a given case may even depend on ignoring the obvious answer.

For more on this, I strongly recommend these two books:

"The Innovators Dilemma" by Clayton Christensen

and

"From Zero to One" by Peter Thiel & Blake Masters.

Both yield extremely interesting insights into this question. Thiel for example propagates that rather than going for 1% of an 8 bln USD market, it's probably wiser to go for market domination in an 80 mln market and then see where you go from there.

Christensen demonstrates how industries become disrupted by companies and products that are sub-par in an existing market (the "obvious answer" I mentioned above) by creating a new market where the new product is competitive and then ladderig their way upmarket.

Hope that helps,

Elias

Dolf replied on 09/15/2016

Just took a look at the case out of curiosity and agree with you:

  • It doesn't say that the market value is on an annual basis, but would assume it as well
  • It doesn't say in the question that the cost needs to be recuperated (break-even) within a year.

So if it was a real case situation, I would ask these questions for clarification. Otherwise (and probably more naturally), you would be able to make the money of the investment back over a longer period, say 2-3 years and would require only a lower market share.

No idea whether it is intentionally ambiguous or just assumed to be clear, but your thinking is spot on. :)

Anonymous A replied on 09/18/2016

Thank you both! Seriously! And of course, I'll have a look at the recommended books mentioned above.

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