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Swiss Coffins – The Death Business

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Difficulty: Advanced

Candidate-led

< 100 Ratings

Times solved: 2.7k

Brain teaser Growth strategy Market analysis Market sizing Operations strategy

Case Prompt:

Your client is the CEO of a coffin manufacturing company based in Geneva, Switzerland (Europe).

The company has existed with little changes to the business model for three generations, manufacturing high-quality, hand-crafted coffins, with a highly skilled and specialized labor force. The industry has been recently disrupted by new technologies that no longer need human manufacturing: machines can manufacture faster and cheaper.

Your client needs your help in deciding whether to invest in this technology and transform his business, or remain in the hand-manufactured business for coffins

*Note: On top of this initial question that focuses on the strategy and should be tackled by the candidate with an issue tree, the case includes more questions that can be found in the "Detailed solutions" and "Difficult questions" boxes below, with the correspondent proposed answers.

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Question 1 – Structuring

Should your client invest in this technology and transform his business, or remain in the hand-manufactured business for coffins? Which analysis and data would you like to know to help our client?

Suggestion: present as an issue tree or a list

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Example of an excellent structure (presented as an issue tree):

ECONOMIC ANALYSIS

Profitability analysis: given that client has already clarified that they are mostly focused on profitability, conduction of deep analysis on:
- Revenue: Coffin sales is our main revenue source. We must perform and P x Q breakdown (price per quantity).
  - Price: How does the new price compare to the old one? Is price affected by losing the handcrafted process and personalization?
  - Quantity: Can we produce significantly more with industrialized way? Is there demand for this delta in production, or would it only generate inventory?
- Cost: We must deep dive on the different costs that will be incurred, and how they compare between the two manufacturing methods.
  - Fixed: The new industrialized method has a big initial CAPEX investment
  - Variable: Variable costs should dramatically go down, as most of the human work is substituted. Is the new CAPEX investment needed compensated by lower variable costs? If so, in which timeline?
Market and competitor landscape analysis , in order to calculate our previously explained profitability equation:
- Market size: population and death rates, as well as people´s preferences when it comes to being buried vs. cremated
- Market fragmentation: Who are the other players? (current and potential, other traditional manufacturers may be thinking of doing the same as us)
- Estimated market trends: both short and medium term
  - Potential number of users
  - Industry growth rate
Operational approach: Once we have clarity on profitability and we understand the market and its direction, we would make a decision between:
- Continue with our handcrafted manufacturing process: if the new method doesn´t imply improved profitability
- Change to new industrialized process: if the new method improves profitability
- Exit: if the new method is better than the current one but we cannot convert, or if the industry overall is not attractive anymore and is best to liquidate assets and leave.

RISKS AND OTHER CONSIDERATIONS:

Brand perception risk when changing the historic handcraft manufacturing and adopting and industrialized approach
Usage forecast: population aging, new trends substituting traditional burials, etc
Capability risks with highly specialized tech
Social impact of workers layoff, if they were substituted by technology
Government regulation regarding burying regulation and alternatives

IMPORTANT NOTE: The last section, "risk and other factors" -that can be called many ways, i.e., risks, further consideration, qualitative considerations, considerations beyond financials, etc- , that encompass the risks of the operation, are key in the case. Structures without them lack a key part of the analysis

Figure 1 exemplifies an excellent issue tree presented solution for the case

Question 2 – Math

Now that we have structured our problem, let´s start with market estimation. In order to calculate (1) the market size for coffins in Switzerland and (2) our customer´s current production, what data would you need?

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Example of an excellent exhibit analysis:

An excellent candidate understands straight ahead of the meaning of "average life expectancy" in market sizing problems:

Little´s law: the number of elements in the system (i.e., total population) divided into lead time (i.e., the average number of years each person lives)
Intuitively, every year, 1/70th of the population will turn 71 and therefore (on average) will die

A very solid quantitative candidate realizes quickly that no complicated calculations are needed since you have the number 70 both in the denominator (1/70 people die yearly) and in the numerator (70% of people prefer coffins to cremation).

Number of purchased coffins per year

9,000,000 people x 1/70 people * 70% of people = 90,000 coffins purchased / year

Number of produced coffins per year

90,000 coffins purchased / year * 10% M.S = 9,000 coffins / year is our client´s current production

Example of a good exhibit analysis:

An average/good candidate performs the operations step by step:

Number of people that die per year

9,000,000 people x 1/70 people = 128,571 people die per year

Number of purchased coffins per year

128,571 * 70% of people = 90,000 coffins purchased / year

Number of produced coffins per year

90,000 coffins purchased / year * 10% M.S = 9,000 coffins / year is our client´s current production

Question 3 – Math

What our client´s business profitability is both with and without the new technology?

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Example of an excellent exhibit analysis:

This is a HARD problem with lots of information, in which being very diligent and following clear steps is key:

1. Prepare a table with the info that we have:

Price = $5,000
COGS= $4,800, of which:
- $480 (10% of $4,800) is material cost
- $4,320 (90% of $4,800) is labor
- *TIP*: it´s easier to calculate the 10% of 4,800 first (since it´s only removing one zero), and then to the subtraction of 4,800-480 to obtain the other 90%

2. Calculate contribution margin (in $)

$5,000 - $4,800 = $200

3. Calculate gross margin (%)

$200 / $5,000 = 4% - We know this will be constant

4. We know from previous calculations that our client sells 9,000 coffins per year (10% of a 90,000 total market).

5. Calculate the total contribution

9,000 coffins * $200/coffin = $1,800,000

The total contribution (i.e., what you obtain "clean" from each ALL SALES deducting COGS) is $1,800,000.

6. Calculate the total profit (in $)

$1,800,000 - $1,500,000 = $300,000

The total profit is $300,000, obtained by subtracting $1,500,000 of Fixed Costs from the total contribution.

See Figure 2 for the table and explanations

Now, let´s calculate profitability figures if the client were to adopt the new industrialized method:

1. Let´s start with the costs, that change in the new model:

Material costs are the same: $480
Labor costs will be reduced to 1/3 of what they currently are: $4,320 / 3 = $1,440
Hence, total new COGS is $1,920

2. Gross profit is the same = 4%.

3. Since we know that Gross profit = (Price - COGS) / Price, we solve for the new price (profit = 1 - COGS/price ; price = cost / (1-margin) = $1,920 / (1-4%) = $2,000

4. Contribution margin is $80, calculated as price - COGS

5. Since our market share is now 20% instead of 10%, total sales are 18,000 coffins/year

6. The total contribution (i.e., what you obtain "clean" from each ALL SALES deducting COGS) is $1,440,000, obtained as 8,000 coffins * $80/coffin

7. Total profit is -$60,000, obtained subtracting $1,500,000 of Fixed Costs from the total contribution - And we haven´t subtracted the CAPEX investment yet

Example of an extraordinary exhibit analysis:

An extraordinary candidate realizes that, for this operation to be worth it, the price drop needs to be less than 50% (since we would increase sales x2 because we double our market share). Since we will keep the gross margin equal (which means that the decrease in costs would translate directly into a decrease in price), we are told that the most significant cost (labor cost is 90% of all COGS) is reduced to 1/3 to what it is now, we can already see that it´s not going to be worth it.

Very few candidates see this from the beginning, but it´s not difficult, once you have done enough of these problems! If you have the overall picture in your mind, it´s a couple of multiplications that can save you LOTS of trouble and mathematics.

See Figure 3 for the complete table

As we can see, the new method would yield fewer profits than the original one ($300,000 vs. -$60,000 yearly profit), despite the increase in market share. It´s not worth it to adopt the new technology since the price drop would be so significant that it wouldn´t compensate for the extra sales.

Final question – Executive summary

You are the business analyst who worked in this project, and who is currently guiding the client to the ExCom meeting with the partners. In the elevator ride (1 minute), she asks you to provide her a quick note on what the conclusions are.

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Further Questions

Extra question I - Value of the business in perpetuity: Now that we know that it´s not worth implementing changes, we would like to understand the value in perpetuity of the business (i.e., what the value is worth if we took into consideration all the future cash flows). What would we need to know about this? What is the perpetuity value?

Note for Interviewer

The candidate must know that we need the discount rate to calculate the value in perpetuity. In this case, the discount rate is 10%.

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Extra question II: What would be the value of the company if it were shut down and its assets sold?

Note for Interviewer

Information to be shared with the candidate:

Book Value of Land: $20,000
Book Value of Improvements: $80,000
Years Owned: 48
Avg. Real Estate Appreciation: 6% per year

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Swiss Coffins – The Death Business i

Case Prompt:

Question 1 – Structuring

Question 2 – Math

Question 3 – Math

Final question – Executive summary

Further Questions

Swiss Coffins – The Death Business