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Water flows

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Water flows We are a German owned water provider company based in the south west of the United States. As the biggest water provider in the region we serve the majority of the south west region. We measure our performance using the Economic Value Add (EVA) valuation technique. We are currently at a negative EVA level; what do you think we should do to achieve a positive EVA?  
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Difficulty: Beginner | Style: Candidate-led (usual style) | Topics: Market analysis, Growth strategy, Valuation

Problem Definition

We are a German owned water provider company based in the south west of the United States. As the biggest water provider in the region we serve the majority of the south west region.

We measure our performance using the Economic Value Add (EVA) valuation technique. We are currently at a negative EVA level; what do you think we should do to achieve a positive EVA?

Comments

The case is designed to be presented to the candidate by an interviewer, who plays the role of a representative of the German owned water company.

There is no real answer to the problem, hence the candidate should be evaluated on the type of suggestions he makes.

Short Solution (Expand)

Detailed Solution

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.

I. Background

EVA = Net Operating Profits – (WACC*Capital Asset Base); the unlevered operating income after tax less the fair return on invested capital.

It is important to understand that Net Operating Profits should be in general easier to adjust and thus have a more direct impact on the EVA. As un utility your capital base is more or less fixed. Ideally the candidate should come to this conclusion on his own but in case he doesn't, help him out.

Provide the following information to the candidate if requested:

  • Revenues have been more or less constant over the past couple of years
  • More than 80% of the revenue comes from residential and commercial water usage
  • Billing is done monthly according to the consumption of the customer. It is difficult to change the pricing due to certain government regulations
  • The capital base has remained the same over the past 5 years
  • Costs also have been relatively stable
  • The company can serve more customers if required

II. Recommendations

1. Different Channel

For example, the firm could start selling bottled water.

The interviewer should keep challenging the candidate for more ideas. For instance you could reject this idea saying it would be difficult to implement without incurring additional costs for distribution, packaging, branding, etc.

2. Expand into other regions

Currently the firm serves the south west region of the USA. Since the company has additional capacity, they should consider expanding into other regions of the country. Regulatory concerns come into play when discussing such a geographical expansion.

Past history suggests that local people and businesses are not very supportive with respect to expansion of German firms.

3. Merge with another firm

Merging with a local firm and dropping the German name should be considered.

III. Conclusion

The company should either start a new sales channel (for example, bottled water) or expand into new regions by merging with a local firm.

Difficult Questions

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

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