The new CEO of an optical fiber manufacturer, called FibOp, has come to you complaining that their revenues went down by 40% this year compared to last year.
He wants you to help him figure out what they need to do in order to achieve the previous year’s revenues again.
The key to cracking this case is to understand how the optical fiber business works (by large orders) and to realize that the revenue problem was caused by an external problem.
Namely there was a big client that stopped a series of investments in its infrastructure this year.
Short Solution (Expand) (Collapse)
A possibility for a framework for the case would be the following:
Here the interviewee should ask general questions about the company and the product if offers. He should NOT spend too much time on this topic as it is not the key to cracking the case.
Information that should be shared if inquired:
- There is only one product available: 50-km optical fibre spools.
- Optical fibres are usually dug 5 meters below surface or laid on the ocean’s floor. That means the installation costs are very high for the client.
- The product is a commodity: Price and quality are almost standardized in the market.
The interviewee should inquire about the client’s position in the market:
- Competitors’ size
- Competitor advantages
- He should also ask if the industry saw a similar downturn in revenues like FibOp did. This is crucial to understanding that the problem is NOT industry wide, but specific to FibOp.
Share Diagram 2 with an overview of the market share of the company and Diagram 3 with a prediction for the market development, if inquired by the interviewee.
Information that you should share if inquired:
- Competitors did NOT experience the same fall in revenue as FibOp did.
- They actually had an average increase of 15% in their revenues.
- The client is a small player without much bargaining power (commodity market).
- Competitors saw an increase of 15% in revenues on average:
Decreasing revenues are only a problem for FibOp!
Here lies the key to understanding the 40%-revenue-fall problem.
The key questions that should be asked to unveil the main issue are:
- Customer segmentation
- Revenue streams of previous year
Information that should be shared if inquired by the interviewee:
- FibOp’s customers are segmented as key accounts clients (customers with huge orders) and retail clients (customers with little orders).
- Sales to retail clients this year have increased by 20% compared to last year.
- 4 years ago FibOp has signed a contract of exclusivity in the Mobile Telecom industry where only D-Com, a big national mobile network provider, would have the right to buy from FibOp. The contract was signed with 5-year duration and gave FibOp the chance to serve the biggest client it ever had. D-Com in turn had the guarantee of a fast and local provider of their optical fibres.
Only tell candidate if he/she asks for it!
- D-Com had a 3-year infrastructure expansion plan where its transmission capacity would grow from 6 KTs (kilo terabits per second) to 15 KTs. This expansion ended last year, therefore D-Com made only orders for maintenance of the installed capacity this year.
The candidate should come besides the already mentioned information to the following conclusions by interpretation of the given data:
- Sales to retail clients increased. That means FibOp had a massive decrease in sales for key account clients.
FibOp’s most important client, D-Com, has stopped making huge orders this year.
Having uncovered all the available information, the interviewee should conclude that the problem is not industry-wide, and is not caused by the general market, which is increasing by 2 digits yearly.
The strategy to sign an exclusivity contract in the mobile industry to capture a heavy-weight customer was good. However the customer’s demand should have been better planned and discussed since the beginning, so that the FibOp could find other big clients in other industries to replace D-Com’s interrupted demand smoothly. Another option could have been agreeing on a minimal yearly order throughout the 5 years of the exclusivity contract.
- Offering FibOp’s free capacity to competitors that might be losing orders because of lack of capacity.
- Selling spools to other competitors so they resell it under their label.
- Finding other heavy-weight customers in other industries.
- Trying to cancel the contract with D-Com (based on the interrupted demand) and looking for other mobile network clients.
- Trying to differentiate the product somehow (e.g. by making the optical fibre thinner, thus increasing its use scope).
Suppose D-Com’s capacity is today of 15 KTs. The usage is however only 5 KTs.
Assuming that the usage doubles every 18 months and that there has to be a free-capacity margin of 20% (for quality reasons), how much should the capacity grow (in percentage) in 4.5 years compared to today?
5 years = 3 * 18 months.
Usage will then be 2 * 2 * 2 * 5 KTs = 40 KTs.
In order to have a 20% margin we need a capacity of 50 KTs, a growth of 233% compared to today’s capacity.
More questions to be added by you, interviewer!
At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).