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Wall Inc.

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Wall Inc. 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.
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Difficulty: Beginner | Style: Interviewer-led (McKinsey style) | Topics: Pricing, Market analysis, Competitive response

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

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Information to share” section.

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

The following framework would be a good approach:

I. Impact analysis

How will a 20% price reduction impact the client?

Share Table 1 (revenues and cost overview) if inquired by the interviewee.

Information that can be shared on the interviewee’s inquiry: The sales volume will remain the same after the price cut. The client produces one product. The client’s and the competitor’s product are similar. All “dry-wall” products in the market are similar.

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.

The interviewee should state this!

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)

Information that can be shared on the interviewee’s inquiry: The competitor is a small company. Our main customers are contractors and small business owners. They buy products directly from us. Customers usually buy based on their relationship with the suppliers. They prefer certain brands. There is no information about price sensitivity. We do NOT have no long term contracts with customers. There is not much information about the competitor. The client has a strong brand presence. The client has been in the market for a long time.

Share Diagram 2 (market share overview) if inquired by the interviewee.

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.

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Questions on this case
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Question on the case: Wall Inc.
Can someone explain this calculation?
Wall Inc.
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Hi Ameya, So what they're basically saying is, what is the reduced profit from cutting price by 20%? Then, what is the equivalent amount of change in units sold that would get you the same reduc... (read entire answer)

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 New answer on Feb 11, 2020
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4.3 5 335
Show all questions on this case (1)
Case exhibits

Case Structure

What are the impacts of a 20%-price reduction?

Revenue/costs

How much of its market share can the client lose before the option of reducing the price would yield a similar profit?

Market shares