Case

Bank envelope

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Problem Definition

Your client, Customlope, is the leader in the US secure envelope manufacturing industry. Banks buy these envelopes for operations such as money deposits and high value transactions.

Next year, a new digital technology will reduce the overall number of units sold in the industry by 25%.

In the short term, our client wants to maintain his current profit level without investing in the new technology.

How can you help him?


Comments

Since this is a candidate-led case, the candidate should drive the case from start to finish.

This is a classic example of a substitute product disrupting a well-established industry.

Competitors often react strongly to such products by utilizing strategies such as price wars.

To simplify the case, we will assume there is only ONE type of envelope in the market and that all the current manufacturers sell it for $1 per envelope.


Short Solution (Expand)


Detailed Solution

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.

The following structure is used as approach for the problem:

Case Structure

I. Company / Costs

Initially, the interviewee should outline the profitability equation:

Profit = RevenueCosts

The interviewee should ask for the following information:

  • Type of products sold
  • Number of units sold
  • Price of units sold
  • Cost breadkdown

Share Table 1 (Customlope’s cost break down) if the interviewee inquires additional information.

Information that can be shared on the interviewee’s inquiry: Customlope only sells ONE type of product Price: $1/unit. This year, Customlope sold 50 million units. Costs have already been reduced as much as possible. Customlope has excess capacity. It can produce at least double the amount of units per year at similar or lower unit costs. Customlope’s products are similar in quality and price to their competitors’ products. This year, 100 million secure envelopes will be sold. Next year, this total will shrink by 25%.

Costs per envelope

The candidate should calculate the costs per envelope:

Profit

The candidate should calculate last year’s profit because the client wants to maintain profit at that level.

II. Competition

The interviewee should ask for the following information:

  • Main competitors
  • Competitor’s size
  • Competitor’s cost structure
  • Competitor’s products

Share Diagram 2 (market share overview) if the interviewee inquires information about the market.

Information that you can share on the interviewee’s inquiry:
  • Since competitors do NOT benefit from Customlope’s economies of scale, their unit cost this year is $0.90 per envelope (Customlope’s is $0.70).
  • Competitors CANNOT further decrease their unit cost.

Key insights

Now that the interviewee knows more about the client and the client’s competitors, the interviewee should consider ways to help the client maintain his current profit level.

III. Revenues

Since costs are already optimized, the only way to maintain the current profit level is to increase revenue.

Increase price

  • This will probably NOT work because the product is commodity-like.
  • Now that a new substitute has appeared, it is even more unrealistic to raise prices.

Increase market share

  • Customlope could decrease its price to steal market share from its competitors.
  • We assume that competitors will leave the market if they cannot be profitable. Thus, if Customlope decreases its price to $0.90 (their competitor’s per-unit manufacturing costs), Customlope should obtain 100% market share.

New profit:

Key insights

Customlope can maintain its current profit level by reducing its per-unit price. The market share and revenue gained is greater than the loss from lower profit margins.

IV. Conclusion

Although there is no right answer, it seems that the client could benefit from a short-term price war because its costs are lower than its competitor’s costs.

Possible answer:

The client should initiate a price war and decrease the price of the customized envelopes to $0.90 or to slightly less than that.

Key insights

  • Increasing the price is NOT an option because the envelope is a commoditized good.
  • Decreasing costs is NOT an option because costs are already optimized.
  • The only way to maintain current profit levels (without investing in the new technology) is to increase market share by decreasing per-unit price.
  • By taking advantage of its lower costs, Customlope can push other competitors out of the market because the competitors cannot make a profit on their envelopes.
  • The objective of maintaining the current profits would be met, as proved previously.

Further considerations

Before implementing this strategy, the following points should be taken into consideration:

  • There could be market regulations against a monopoly. However, since the company would not be selling their products at a loss, competitors cannot accuse Customlope of price dumping.
  • Some competitors might remain active in this market even if they have to sell at a loss. For example, they might use their market presence to cross-sell different products to banks.
  • Thus, Customlope may not obtain 100% market share.
  • In the long run, the client should invest in and implement the new technology. The client can do this via R&D or by acquiring one of the new competitors and its technology.

Difficult Questions

Apart from banks, can you think of other potential markets for secure envelopes?

How would you enter these new markets?

Possible answer:

  • Companies that deal with high confidentiality
  • Government

First, we should look at the attractiveness of the industry:

  • Market growth
  • Profitability
  • Competitive landscape (is the market fragmented or concentrated)

Second, we should take a look at our ability to win in this market:

  • Can we easily adapt our existing bank envelope technology to the needs of these new customers?
  • Do we have the competence and the distribution channels necessary to thrive in this new market?

More questions to be added by you, interviewer!

If the interviewee solves the case very quickly, you can come up with more challenging questions to ask them.

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Case exhibits

Case Structure


Costs breakdown


COGS: Costs of goods sold


Market share