Our client, GamingHub, is a large diversified entertainment corporation that received a request to approve a $200 m capital allocation from its video game manufacturing division. The division wants to triple the capacity.
The client hired us to help him decide if he should approve this capital request and have asked you what critical issues are to be looked into to decide if the division's market is attractive enough to expand.
This is a candidate-led interview, so the candidate should take the interview from start to finish.
This is a qualitative case where the emphasis lies more on understanding the market dynamics and the client's business. The aim of this case is for the candidate to process a lot of information and convert that into a structured game-plan.
Short Solution (Expand) (Collapse)
The following framework/structure provides an overview of the case:
The candidate should ask for more background information on the division. The interviewer should provide all available information & data to candidate and it is up to candidate to define the issues that should be looked into based on the data/info provided.
- Division is 3rd largest manufactuer of hardware in the industry with a 10% market share.
- Top two competitors A & B have a 42% and 38% market share respectively.
- Division sells to broad range of consumers.
- Division makes up for 20% of the company's total sales.
- Division sells 500,000 units per year.
- Total industry sales are 5 m units per year.
- Total industry growth has been strong but slowed down in last few months.
- Price per unit is $45, while the two competitors A & B sell for $44 & $47 respectively.
- Current unit cost is $30 while competitor A & B's unit cost is $27 & $24.
- Division wants to achieve a 5-7% cost reduction through the expansion.
- Main cost components are assembly & labor.
- Main competitors have 10-20% cost advantage.
- The main user segment are young families with at least one child.
- Primary distribution channels are electronics stores.
- Division has so far exceeded corporate return targets, but margins have recently started falling.
- Hardware standards are determined by the market.
- New product features are developed on a constant basis to appeal to the user segment.
Candidate should take clear notes during the interview. In case the candidate got lost with the quantitative data, interviewer can share Table 1.
Items candidate should point out for discussion:
- Candidate should note that the future market potential isn't very clear with the industry slowing down.
- The competitive outlook is also not clear as there could be a concentration of market shares to control retail channels & control pricing.
- Profitability is also an issue, since margins have been falling.
- Proposed cost reduction of 5-7% isn't enough given the cost advantage of competitors and their pricing strategy.
Candidate should note that so far it is very unclear if the capital expansion will help the division grow and stay profitable. Candidate should recommend to client that there is a need to address these critical issues:
- What is the cause of the decline in profitability?
- How will the cost reduction improve division's position in comparison with its competitors.
- How will the increase in capacity affect the industry's volume/pricing and overall profitability.
- Which issues would you deem more important to analyze first in this scenario?
- How would you respond to the client if he asked you to provide a Yes/No answer?