Problem Definition
Your client, Wall Inc., is a dry wall manufacturer. A new competitor has just entered the market. Since the competitor charges low price company, Wall Inc. is thinking about reducing its price by 20%. The client wants us to evaluate this plan.
Comments
Since this is an interviewer-led case, the interviewer should guide the interviewee through the interview. The questions in the big boxes should be read out to the interviewee.
Short Solution (Expand)
Detailed Solution
The following framework would be a good approach:
I. Impact analysis
How will a 20% price reduction impact the client?
Before performing calculations, the interviewee should have asked about any potential changes in sales volume.
Total fixed cost
Current situation
After the 20% price cut
Impact
How much market share can the client lose before reducing the price by 20% becomes an option?
Let the new volume of sales be equal to x.
New formulas
Profit equivalent to price cut
Loss in market share
The client can afford to lose 33.3% of its market share before reducing the price by 20% becomes an option.
II. Competitors / Market / Customers
What additional information do you need before you can give a solid recommendation?
The interviewee should find the main factors for solving the problem.
A well-structured plan would include:
- Market (number of competitors and their market share)
- Customer (preferences and price sensitivity)
- New competitor (size, advantages, disadvantages)
- Client (position in market, time in the market, brand)
Main conclusions
- The client is a relatively big player in a very fragmented market.
- The competitor seems to be only a small player.
- On average the new competitors market share will be around 60/21 = 2.85%
- The new competitor may take 2.85% of our client’s volume or compete with the other small-sized companies.
III. Conclusion
The interviewee should sum up his/her findings.
The client should NOT reduce the price because it will lead to a loss in profit that is equivalent to losing 33% of market share.
So far, it seems that the new competitor will take a maximum of 3% of the client’s market share.
There are two possible risks though:
- We could have underestimated the size of the new competitor.
- One of our bigger competitors could reduce their price in response to the new competitor’s low prices.
Difficult Questions
After the new competitor has entered the market, how can our client retain market share?
There are several possible solutions:
- Strengthen its client base
- Create barriers of entry (long term contracts, …)
- Maintain the current price but provide extra services
- Reduce the price to some extent (less than the 20%)
More questions to be added by you, interviewer!
If the interviewee solves the case very quickly, you can come up with more challenging questions to ask them.
