Problem Definition
Your client is the owner of UBS #42, a rally racing team. There are 36 races in a season. At the end of the season, the driver who has earned the most number of points will win the championship.
Jeff Tarin, a well-known driver, races for UBS #42. He began racing in this tournament six years ago and is currently ranked fifth in a field of 40 drivers.
The director of marketing at Jazz Sweets recently contacted your client to ask whether your client would like to start a second racing team that Jazz Sweets could sponsor. The director realizes that rally racing is the fastest-growing race sport segment among males aged 18-45.
He has already asked a successful driver from a regional conventional racing circuit to be the new team’s first driver. Your client wants to know whether he should go ahead with this opportunity.
Comments
Since this is a candidate-led case, the candidate should drive the case from start to finish.
This is a market entry case within the professional car racing industry. The case is based on a cost-revenue framework and introduces the interviewee to special aspects of the industry’s revenue model.
The interviewee may ask questions about the rally season, driver eligibility and how drivers earn points. The interviewee may also recommend waiting until the start of the next racing season in order to spread the costs across more races.
There could be a potential conflict of interest when allocating resources between teams.
(E.g., highly qualified mechanics from Jeff’s team may work with the Jazz Sweets team. This may affect Jeff’s performance.)
Short Solution
- If Jazz Sweets sponsors $6 million and the new team generates $1 million in race-winning revenue, the new team could break even.
- The client should try to make Jazz Sweets pay for a premium sponsorship (more than $6 million). Otherwise, the client should try to acquire more sponsors before launching the new racing team.
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.
Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.
Suggested case structure:
I. Revenue analysis
In a first step we investigate the revenue sources.
Share Table 1 with an overview of the revenue if inquired. Table 2 gives additional revenue information.
Information that can be shared on the interviewee’s inquiry:
- If Jazz Sweets pays to the new team half the sponsorship fees that the existing team receives, we will receive $6 Million.
- Since the potential new driver is inexperienced in rally racing, the second team will only generate one-fifth of the race-winning revenue that the first team generates.
- No additional revenue will be generated from selling engines.
- No revenue will be generated from merchandising (new team has no image to sell).
Key Insights
Estimated first-year revenue: $7 million.
= Sponsorship fee + Race winnings
= $6 m + $1 m
= $7 m
II. Cost analysis
Next, let us analyze the new team’s cost structure. It is essential to identify potential synergies between both teams.
Share Table 3 with an overview of the costs if inquired.
Table 4 gives additional information about the costs.
Information that can be shared on the interviewee’s inquiry:
- No synergy for race-facing salaries and 100% synergy for non-race-facing salaries (UBS #42’s existing back office will also serve the new team).
The new team’s salary costs:
= Share race-facing costs * Share salary costs * TC
= 40% * 50% * $20 m = $4 m
- 60% synergy for equipment (the new team needs a new car but it can use the same spare parts)
The new team’s equipment costs:
= (100 - 60%) * Share equipment costs * TC
= (100 - 60%) * 25% * $20 m = $2 m
- No synergy for travel.
(two times more tickets and cargo shipments necessary).
That is a cost of $1 Million.
- 100% synergy for engine shop. No extra costs.
- 100% synergy for R&D. No extra costs.
Key Insights
Due to synergies, the new team can save some costs.
The new team’s total costs:
= Race-facing salary costs + Equipment costs + Travel costs
= $4 m + $2 m + $1 m
= $7 m
III. Conclusion
The candidate should include these points in the conclusion:
- If our revenue and cost synergy assumptions are accurate, the second team can break even as long as Jazz Sweets is willing to pay a sponsorship fee of $6 million.
- If they are willing to pay more than $6 million, the client should definitely launch the new team.
- Otherwise, the client should try to search for other sponsors. If the client can obtain more than $6 million in sponsorship fees, the client should launch the new team.
Difficult Questions
1. Should we ask Jazz Sweets to pay a premium sponsorship (more than $6 million) if they are the only sponsors of the new team?
Suggested answer:
The interviewer should evaluate the logic of the interviewee’s response. There is no right or wrong answer.
- Option 1: Yes, we should charge a premium. Jazz Sweets seems to be committed to the deal because they have already conducted initial negotiations with a potential driver. The client has bargaining power and can justify the premium by showing Jazz Sweets a good return on investment (RoI) analysis and by promising that Jazz Sweets will be the team’s sole sponsor.
- Option 2: No, we should not charge a premium. Jazz Sweets can choose to choose several other options to sponsor:
1) Another race team
2) Another sport (e.g., baseball)
3) Another racing category (e.g., Formula One).
2. What are the main risks involved in launching a new team? How would you avoid these risks?
Suggested answers:
- The synergies might be weaker than estimated. For example, the new race team might need more spare parts. This could result in losses.
- The new team could win fewer races than expected, thus reducing its revenue.
- These risks could be avoided by:
- Acquiring more sponsorship capital
- Putting a cap on the new team’s salary
- Trying to open more revenue streams, such as selling more engines of the first team and transferring some of the additional revenue (however not a long-term solution)
Additional questions
If the interviewee solves the case very quickly, you can come up with more challenging questions to ask them.
