Market entry: Disrupting the New York - Boston railway industry

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After the prompt, the candidate is entitled to ask some questions. Data to be provided to the candidate: 

• Our main target in penetrating this route is profitability. In a short-term horizon (<10 years), we want not only to break even, but also to generate profits. We don´t have a hard goal, since the client will evaluate the return of this project vs. other potential projects, and only then choose.
• Our main competitors currently are:
  • Train (currently only AMTRAK)
  • Air travel
  • Bus and private cars – usually a lower willingness-to-pay customers
• Comparison vs. AMTRAK in key aspects:
  • We are less expensive
  • We are more efficiently run (as a former “monopoly” in the route, AMTRACK hasn't invested in efficiency gains over the years)
  • We are equally convenient (same stations and tracks) vs. air travel
  • Travel time is equal

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: ​
    • ​Train tickets will be main revenue source. We must perform and P x Q breakdown (price per quantity).
      • Price: unitary prices, discounts, etc.
      • Quantity: assessment of:
        • Potential market
        • Our company´s penetration
    • Potential aids: US government, clean energy organisms, etc.
  • Cost: We must deep dive on the different costs that will be incurred:
    • Fixed: Mostly R&D investments and infrastructure investment/purchases (e.g., machinery, further CAPEX investment, etc.)
    • Variable: Maintenance, salaries, etc
• Operational approach: There are several ways to create the company and operate the route:
  • M&A (Merger & Acquisition): buying a company that operates in the region (US, Canada)
  • JV (Join Venture): partnering with a company that operates in the region
• Complemental market analysis (for routes expansion), in order to assess the market for future routes beyond Boston-NYC:
  • Market size: railway in NA
  • Market fragmentation: Who are the other players? (current and potential, other people may be thinking of doing the same as us)
  • ​Estimated market trends: both short and medium term
    • Potential number of users
    • Industry growth rate

RISKS AND OTHER CONSIDERATIONS:

• Brand perception risk when competing as a new brand with a former monopoly, that is widely known by the public
• Usage forecast: although train users for the Boston-NYC route are growing, there is uncertainly around the number (e.g., COVID impact, etc.)
• Risk of proliferation of other transportation: if there are new options for the route (e.g., a new airline that operates), it would directly impact the # of users
• Capability risks with highly specialized tech
• Government bias in concessions towards the former monopoly

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

Example of an excellent exhibit analysis:

An excellent candidate understands straight ahead that he/she doesn’t need the information about the 500 seats/train for this exercise. The multiplication of price per occupancy %, without including the 500 seats, is enough to calculate which option generates the largest potential revenue. Hence, we are looking for the largest number here. 

A very solid quantitative candidate realizes quickly that 5x8=40 > 6x6=36 and >4x9=36, hence the first and third option can be quickly discarded. 

The most profitable option is the second one: 50$ * 80% * 500 = 20,000$.

Example of a good exhibit analysis:

An average/good candidate performs the operations to find out the total potential revenues, and compares them:

• 40$ * 90% * 500 = 18,000$
• 50$ * 80% * 500 = 20,000$
• 60$ * 60% * 500 = 18,000$

Information to be shared with the candidate about our operations:

• When high-speed is introduced, the trip by train between NYC and Boston lasts ~ 3.5 hrs (per way)
• Trains run from 6am until 10pm.
• Taking into account all different factors, we can run two round trips per day (i.e., 4 trips per day)
• We will need three trains, as well as one for backup in case of breakdown (i.e. 4 trains in total)

Follow up: What other pieces of information do you need to estimate profitability?

Final information to be shared with the candidate:

• Trains purchase: 25M$ per train
• Marketing and central functions: 40M$ per year (for entire company)
• Operations and Maintenance: 10M$ per year per train

Example of an excellent calculation and conclusion:

Hence, as a conclusion:

• The project makes money every year (6.4M$/year) operationally
• It would take ~16 years (100M$ / 6.4M$/year) to break even the initial investment

• If we only have this business option, we should take it, since the project is profitable, generating 6.4M$/year
• It would take ~16 years to recover the initial investment, so we should compare it with other potential projects (if available, as initially said) to see if we can find projects that break even sooner and have a similar risk profile
• As next steps, we will focus on deep-diving on the risks cited in the structure & an analysis of the market trends, influenced by greener commuting policies and changes in the public´s preferences