Practice Case 1

Question​: The CEO of a retail company has approached you with the problem that his
company is burning cash.
He wants you to provide suggestions to improve his business.

Case Discussion:

Candidate: Sir, I would like to understand the question better. By burning cash you
mean to say that the store is incurring losses.

Interviewer: Yes.

Candidate: Sir, before I analyse the reasons for this loss, I would like to understand the
business better. What kind of retailing are they into?

Interviewer: They are in apparel retailing.

Candidate: I would like to know the region of operation of these stores and the number
of stores that they have.

Interviewer: So they have 12 stores across India. Out of these 2 are profitable and 10
others are in loss.

Candidate: As I understand the market conditions in different parts of India would be

different and hence it would take different analyses for them. I would have to group the
stores region wise and understand what causes them to be in profit or loss.

Interviewer: Sounds good. Let us concentrate on the Bombay city region.

Candidate: Sir, within the Bombay region I would like to know the number of stores and
the kind of segment they are targeting. Also I would like to know the kind of competition
we have.
Interviewer: So, they have 1 store in Bombay which is situated in a suburban mall. We
are a value for money store. There are 2 similar stores in the mall which target the same
segment.

Candidate: Sir, the decline of profit may depend on external or internal factors. If the
profit of all the stores in the region is dropping then it may be due to a drop in demand
or some regulatory issues. Internal issues will consider the operation side of the
business.

Interviewer: There have been no external factors as you say. In fact the business of the
competitors has been growing steadily.

Candidate: In order to understand the loss I would like to consider the revenue and
costs aspects of the business. So, have the revenues of our business dropping?

Interviewer: Yes they have. Can you explore the reasons?

Candidate: I would like to understand the revenue streams of the business first. The
principal revenue earner would be the sale of clothes.

Interviewer: So can you think what would the revenue from clothes sales depend on?

Candidate: The sale would depend on the following factors:

1. No. of customers entering the store.
2. The no. of customers entering actually buying the clothes.
3. The pricing of the clothes.

Interviewer: That is correct. The number of customers entering is known as Footfall, and
the no. of persons buying is known as conversion ratio. What would you like to do next?

Candidate: Before I analyse the sales revenue, I would like to know if there are any
other revenue streams. Do they have a food joint/ancillary business?

Interviewer: They have a CCD running on the premises. Can you think of any other
revenue stream?

Candidate: ......(thinks)....Not really sir.

Interviewer: There is also another revenue stream from the advertisements that the
brands put up within the store.

Candidate: I think the revenue from advertisements should be more or less fixed. How
is the revenue from the CCD obtained?

Interviewer: The CCD pays a fixed lease amount to the store. There is also a variable
component which is determined by the sales.

Candidate: So, the CCD revenue would depend on the no. of customers entering the
store. The conversion ratio for the clothes would depend on the service level and the
quality of the clothes that I have. Are the two dropping?

Interviewer: Yes

Candidate: About the price, has the price of our clothes remained constant?

Interviewer: Well the average price of our clothes has remained constant.

Candidate: So, I can rule out price deviations.

Interviewer: Before you rule out price can you think of some ways about how average
price has remained constant but would still give you some ideas about the segmentation
and the nature of demand?

Candidate: The clothes will be segmented into the high price and low price segments.

Interviewer: Yes, so what has been observed is that the sale of the high price clothes
has dropped but the sale of the low price clothes has remained more or less the same.

Candidate: So, the number of customers in my store has dropped. The conversion ratio
has also dropped and the customers are not buying the high price clothes from my
store.

Interviewer: That is correct.

Candidate: I think that this has to do with the service quality of my store and the quality
of the clothes that I am having. If they are poor that would explain the low conversion
rate and also the incidence of low high price sales in my store. The perception of the
customers would be low and hence the low footfall.

Interviewer: Well the CEO does not agree. He has personally been to the competitors
store and says that our service levels are better and the quality is comparable to them.
It has to be something else.

Candidate: If that is the case, it means that customers are not coming to my store and
who are coming are of a lower income segment. What exactly is my location in the
mall?

Interviewer: Good question. Actually my store is situated in a very obscure location in

the mall right next to the bathroom.

Candidate: That explains a lot. People would not want to come there often.

Interviewer: So what do you propose to do?

Candidate: Sir, I could install things which attract people like a kids corner or an ice
cream store. I would also like to hide my store’s connectivity with the bathroom as much
as possible through banners etc. I could also make the high price clothes more
prominent inside the store.

Interviewer: Sounds good.

Candidate: Sir, I think I should move on to the costs side now.

Interviewer: Go ahead.

Candidate: The costs can be divided into fixed and variable costs. The fixed costs
components would include the rent of the store if it is not owned, maintenance, lighting
etc. The variable costs would include the procurement cost of clothes and the salaries
of the employees.

Interviewer: Sounds good. The store is rented. The cost of leasing is fixed. Can you
think of something to reduce that?

Candidate: Sir, we can go for the arrangement like the CCD with a variable component
of the sales.
Interviewer: Ok.

Candidate: Sir, I can make the salaries of the employees also variable and link them to
the sales generated. That would spur sales. Also are the cloth procurement costs stable
and comparable to competition?

Interviewer: Yes they are similar. Can you think of something else that could affect this
cost?

Candidate: Sir, there might be damages related to the clothes. The clothes that are on
display get damaged generally. Is there a cost related to them?

Interviewer: Yes we do have to sell such clothes at a 20% discount.

Candidate: We can ensure that such clothes are sold off quickly.

Interviewer: Well that’s fine. I think we have had a nice conversation. Also there was a
problem of pilferage related to the store. The employees were stealing the clothes.
However, I think we have covered the major points of the case. Thank you and all the
best.
 Practice Case 2
​

Question​: A US health care provider suffered a profit decline last year. You are hired to
solve this problem.

Background Information :
● The key revenues come from commissions.
● H Health signs contracts with patients and provides medical services.
● H Health has 300 contracted physicians.
● A “referral” is necessary if certain medical treatment/service can’t be provided by
H Health’s contracted physicians.

How would you approach this problem?

Case Discussion:

Profit = Revenue – Cost

=Number of patients * (unit price – variable cost) – fixed cost

The candidate can be creative to come up with possible reasons for revenue decrease
and cost increase. Some examples:

Revenue declined:

● Number of patients dropped

● Unit price dropped
● Competition grew their market share

Cost increased:

● Variable Costs: number of visits increased (e.g. major flu), per person cost
increased (e.g. cost of the medicine), referral cost increased 12
● Fixed Costs: physician’s salary increased
Q​: Competitor analysis – why is our referral cost higher than the competitor?

Number of patients :

H Health: 300,000
Sunshine: 500,000

Referral cost :

H Health: $20 (per member, per month)

Sunshine: $15 (same)

A:​ (again, the candidate is encouraged to be creative)

● Economies of scale
● Lower administrative costs
● More contracted physicians

Q​: Assuming none of the contracted physicians have the specialty of cardiology,
estimate the number of referrals per year for cardiology based on the following
information:

● Number of patients: 300,000

● 20% of the total population is > 65 years old, and 30% of them need treatment
● For the rest of the population, there’s a 10% chance for them to require the
treatment. The treatment usually requires 5 visits to the doctor per year.

A:
> 65 years = 300,000 * 0.2 * 0.3 = 18,000

< 65 years = 300,000 * 0.8 * 0.1 = 24,000 42,000 * 5 times/year = 210,000 (times/year)

Q​: The actual number of referrals is 300,000. Why is it higher than the estimate?
A:
● H Health’s clients do not have the same weight between different ages as the
total population
● They underestimated the number of visits per year
 ● More demanding patients ask to be referred even if they don’t have such issues
● Physicians refer non-cardiology patients because they don’t want to take the risk
and are not motivated to provide services even if they are capable

Q:​ How much does the number of referrals have to decrease in order to justify the
following incentive plan to encourage contracted physicians to be more responsible?
Incentive plan:

● Bonus: $100,000 / year to top 10 physicians with the lowest referral rate Training:
$1,000,000
● Referral cost: $200 per referral , Current no. of referral: 300,000

A​:

Total cost = 2,000,000

2,000,000/200 = 10,000

Q: ​If the incentive plan can reduce the number of referrals by 5% for year one and 2%
for year two, what is the total saving?

A:

Y1 = 300,000 * 5% = 15,000

Y2 = (300,000 – 15,000) * 2% = 5,700

Total saving = (15,000 + 5,700) * $200 - $2,000,000 * 2 = $140,000

Q:​ Apart from Cardiology, how can H Health improve the number of referrals in
general?

A:

● Increase training to improve physician’s capability

● Extend the incentive program to other departments
● Improve the quality of relationship with the patients and build up the trust
● Improve/remove physicians who are outliers with extremely high referral rate
● Increase the no. of contracted physicians
 ● Partner with other health care provider to lower referral cost

Conclusion:

According to the example of cardiology, H Health should improve its profitability by

lowering the referral cost. H Health can

● reduce the number of referrals, and/or

● reduce the cost per referral
 Practice Case 3
Question​: Our client is a major global oil company that owns the whole value chain: oil
rigs, refining, distribution, and retail. Our direct contact is the CEO of the global retail
operation. His operation consists of 1) gas sold at the pumps and 2) the convenience
stores at the gas station. Profitability of the retail operation has declined, and the CEO
would like us to help figure out why and to come up with a plan for the next five years.

Case Discussion:

Q:​ Over the past fifteen years, the number of gas stations worldwide has declined by six
percent. What might be the causes of this?

A: ​Possible answers include

● Consolidation
● Increase in dollar volume per station
● Changing population patterns (fewer rural stations)
● More stations open 24 hours (so fewer stations needed)

Q:​ Which market trends might influence gas station profitability, and what is their
comparative profitability?

A:​ It turns out there have been two other changes in the market. One, the number of
gas stations with convenience stores attached has increased. Two, a major new entrant
has begun taking market share. Supermarkets have begun opening gas stations in their
parking lots. This is not yet a major competitor in the US, where they only have ten
percent of the market, but supermarkets have 30% of the gas market in the UK, and
60% in France.
The next task is to understand whether the supermarkets have a better business model
than the gas stations in this market, and if so, why. We’ll use the metric of return on
invested capital (operating profit / invested capital).
The numbers for the UK supermarket are as follows: they sell ten million litres of gas
per year at 72 cents/litre. Their cost is 20 cents/litre. They pay 45 cents/liter in tax. The
convenience store’s operating profit is 500,000 pounds per year. Overhead in the
industry is typically ten percent of fuel sales, and that’s accurate here. The capital cost
is two million pounds.
We’ll compare it to one of our typical gas station locations: downtown, one of our
busiest locations. This location sells six million litres per year at 75 cents/litre; its cost
and tax per litre are the same as the supermarket. Convenience store profit is 20%
lower than the supermarket’s. Overhead is still ten percent of fuel sales, and capital
costs are four million pounds.

Q​: What is the ROIC of the supermarket?

A:​ 24% - it also may come out here that the convenience store is responsible for all the
profits.

Q:​ Without running the numbers, what do you think our client’s gas station’s ROIC will
be? Why?

A:​ Much lower – because of the cost of capital.

Q:​ What do you think causes that high cost of capital?

A: ​Downtown location – supermarkets typically in the suburbs.

Q:​ So, given that, what other things that drive ROIC might we be able to affect?

A​: Likely can’t change cost or tax – could lower price to sell more gas – could move out
of the city – could attempt to increase convenience store profitability.

Q:​ What is your client recommendation?

A:​ The client agrees with our recommendation to focus on the convenience store, and
decides to set a pilot program in 1,000 stores.

Q:​ What type of new products should he introduce? How would you think about what
products to introduce?

A​: The interviewee was required to come up with eight answers – near the end he was
helped along with “Think about what we’d ask if he came to us with product A and
product B – what would we ask to be able to decide between those two.”
Some factors we could use to decide were:
● What does the existing customer want?
● What products have high margins?
 ● What can we (and the supplier) support logistically?
● What can we get from existing suppliers?
● What can we link to products that already sell well?
● What products are needed frequently / will drive visits?
● What products are durable?
● What products require little shelf space (space at a premium in these stores)?

In the end the decision was made to introduce hot and cold food – high-margin, low
shelf-space, high- frequency (but low durability). McKinsey was running an
implementation project in Europe at that time.
 SOLVE YOURSELF:

GROCERY CHAIN LOW PERFORMANCE

Our client is a grocery chain having 200 stores spread all over the US. They have been
enjoying good profits and great results, though in the last 2 years they have seen a
slowdown in the growth of the market share and the profits and same store sales have
gone down.
As a matter of fact, Wal-Mart has opened a store exactly 2 years ago and 3 more in the
past two years in the client geography.
Our client also started, 5 years ago, to open smaller stores closer to where there is a
high density of people.
We have the task to help them overcome their current issues.

Question 1. : What can be the reasons behind their low performance lately?

Question 2. : How can they address the threat of Wal-Mart and the other competitors?

Additional information to be provided upon request :

● Wal-Mart carries 75% of the grocery items our client has at much lower prices
● Studies have showed that consumers perceive the prices in our client store as
being higher than both the ones in Wal-Mart and the ones in another close
competitor
● The reality is that they are 20% higher than the ones in Wal-Mart and equal to
the ones in the other competitor