Our client is a Canadian TV company, Universal TV. They recently entered the US market in the northeast to expand its market share and capture a large part of the 4 m consumers in a market that has little competition. However, in the past few years, Universal TV has been unable to realize a profit.
You are hired to figure out why this is the case and what their next move should be.
This is a profitability case where the candidate also has to explore the business situation to get to a conclusion.
This is a combination of an interviewer-led & a candidate-led case. The case consists of two parts and is mainly qualitative with an emphasis on understanding WHY the company isn't making a profit.
Short Solution (Expand) (Collapse)
Suggested case structure:
- Candidate should look into revenue & cost first.
- Secondly, candidate should ask more on consumer behavior and possible competition/substitutes.
- Thirdly, candidate should define his/her conclusion & recommendation.
I. Revenue/cost analysis
Candidate should start with revenue & cost to see if they have changed and what type of pricing the client maintains.
- Costs have not changed over the past years.
- All costs associated with cable wire, debt, maintenance etc. are all proportionally the same, so no difference there.
- Company charges $35 a month for the cable package.
- Out of 4 m consumers, only 1.5 m have signed up so far.
- Company needed at least 2.5 m subscribers to turn a profit.
It seems that the company hasn't been able to increase its revenues and costs have stayed the same. So the absence of profit is caused by a lack in revenue growth.
Now we need to understand why consumers aren't signing up.
II. Consumer behavior
Candidate should now get into the second part and ask more on consumer behavior and competition/substitutes.
- There are no other competitors offering cable tv.
- Customers who signed up didn't have cable tv before and were using free local tv.
- The American customer seems to shy away from the $35 and prefers local tv which is free.
- Target customer also has a 25% lower income than their Canadian peers.
- There are 16 local tv stations who do a pretty good job at providing the consumer with what they want.
- Target customer doesn't really see the value the extra $35 brings.
It seems that the American consumer was alright with the free local tv and doesn't see the value of adding cable. Their lower income also means that they are more critical of spending more on watching TV.
Clearly, there is a lack of market fit with what the client is offering and what the American consumer wants.
Candidate should come up with recommendations. These can include the following, but any other recommendation that makes sense can work:
- Company should focus its offering more with lower prices.
- Company should scale back its operations and focus on one area only.
- If no strategy works, company should exit the market.
- How could the company have avoided this market-fit before entering the market?
- Where do you think it went wrong by entering a market that had no need for client's product?
- How do the free tv-stations make money?