A chemical producer is a major manufacturer of chemical products used to preserve foods in containers. The company has seen an increase in market share, but the company has also seen a decline in profits. Our client, the CEO is worried about this trend and hires you to investigate what is going on.
Candidate needs to understand qualitatively what is going on with the client's business without relying on quantitative calculations.
Asking the right questions should help candidate figure out what is going on in overall.
Short Solution (Expand) (Collapse)
Suggested case structure:
Ask candidate first if she understands the concept of an increase in market share before moving forward, as it can mean different things and it might not be so straightforward as candidate might think.
- A market share number is a percentage, not an absolute number.
- It can mean that client has outbeat competition and increased his marketshare.
- It can also mean that competition has left the market.
- It can also mean that the overall market is shrinking, but client's sales are decreasing less than its competitors.
From here on, candidate should lead the case by using the profit framework and asking questions on revenue, costs and competitor's moves.
Based on candidate's question, interviewer can share the following information in case required:
- Variable costs per item have not changed in the past years.
- On the revenue-side, client has seen an increase in the volume output which is higher than the industry average, but prices have decreased.
Based on this information, candidate should ask to compare the revenue-insights with competitors.
- Competition has decreased and some players have exited the industry.
Candidate should keep asking on the exiting of competitors to understand what is going on.
- Competitors were losing money with a feeling that the market has saturated.
- The industry on overall has seen negative numbers with a decrease in demand for the product.
Candidate should stick with the competition and the industry as a whole and should note that client might had to lower prices due to lower demand.
- There are no substitute products on the market - consumers want fresh food now and not preserved food.
- The food industry is also losing money and is pressuring suppliers to renegotiate raw material prices.
- Client gained marketshare due to exit of existing suppliers.
- Client has gained market share through exit of competitors.
- Prices have gone down and costs stayed the same explaining the fall in profits.
- Structural change in consumer trend that's affecting the entire industry and its suppliers negatively.
- Preserved food as a product maybe at the end of its product life cycle.
- Client should focus on cost reduction to maintain profitability since prices are falling.
- Client should look for partnerships with other suppliers to strengthen negotiation position.
- Client should diversify its product portfolio and develop new products/enter new markets.
- To secure a future, should client acquire direct competitors or food manufacturers?
- Should acquisition be an option at all?
- Under what circumstances?