Case Interview MCK

JNJ to Consider Company-wide Cost Optimization
Case Type: reduce costs; organizational behavior.

Consulting Firm: McKinsey & Company final round full time job interview.
Industry Coverage: healthcare: pharmaceutical, biotech, life sciences; healthcare: hospital &
medical.
Case Interview Question #01290: Your client is the CEO of a leading diversified healthcare
products, pharmaceuticals, and medical devices manufacturing company – Johnson & Johnson
(NYSE: JNJ). Headquartered in New Brunswick, New Jersey, the company has more than 50,000
employees in approximately 100 countries around the world.
The company’s principal business is the discovery, development, manufacture and sale of a broad
and diversified line of healthcare products. Thinking ahead for the next 5 years, the CEO of Johnson
& Johnson wants to consider cost optimization as one of the important elements of his strategy. The
CEO of JNJ has engaged McKinsey & Company to help him with this effort. How would you go about
it?
Note: This is upfront information and not the end of the case prompt. Because this is a McKinsey-style
interviewer-led case, there are specific questions that follow.
Additional Information: to be provided to candidate upon request
• Currently, Johnson & Johnson has 4 different revenue generating business units namely
pharmaceuticals, medical devices, health foods, and specialized surgery products.
• The CEO of Johnson & Johnson wants to distinguish the firm through innovation in the healthcare
and pharmaceutical industry in the next 4-5 years.
• There are 3-4 main competitors, client firm Johnson & Johnson can be said to be #2, #3 in the
market.
Possible Answers:
Question #1. What would be the key factors that you would consider in preparation of your first
meeting with the CEO and his team?
Possible Answer:
(1) Financial Reports
Understand the company’s business, Analyze the Income Statement / Balance Sheet, Important
financial ratios, Historical
performance, Compare ratios with competitors, similar players in other industries.
(2) Value Chain / Company Business / Organizational Structure
Because we are taking an overall company view, a good candidate will bring up the concept of a
Value Chain. A value
chain helps to identify different business drivers and logically separates the individual elements of a
firm. This should also account for the different business units.
• Primary Functions: Inbound Operations, Company Operations, Outbound Operations, Marketing,

Sales, Service.
• Support Functions: Finance, HR, IT, Legal, Procurement, Facilities, etc.
(3) Competitors
Who are the competitors in the market? How is the client Johnson & Johnson different from the other
competitors in terms of value proposition, target consumer, etc?
(4) Strategy
Understand the overall strategy of the firm and also how it relates to the 4 different Business Units,
different geographies.
A good candidate will bring up the discussion of cost-based differentiation or value based discussion
and will also offer an initial hypothesis that because the client Johnson & Johnson is a pharmaceutical
/ healthcare company, the company will have to invest heavily in R&D and innovation.
(5) Market Trends
Are there any trends in the healthcare market across the world?
(6) Industry Factors / Regulatory / Patents / Other Factors
Considering the global nature of the company’s operations, we would also have to factor in regulatory
changes, Foreign relations, Taxes, Foreign Exchange implications, etc.
Question #2. Give the candidate Exhibit 1 and ask him/her to offer initial thoughts / hypotheses.
Exhibit 1. Johnson & Johnson Income Statement ($ in Millions, except earnings per share data)
Johnson & Johnson Industry

COGS (% of sales) 15,500/40,000 = 39% 40%
R&D (% of sales) 3,500/40,000 = 8.8% 12%
Business Support 12,000/40,000 = 30% 25%
Earnings per share
** $3,600/1,800 = $2.00 $2.50
* Includes interest adjustments, Forex loss, loss on extinguishment of debt.
** Ignore Preferred Dividends
Possible Answer:
• The client’s COGS number is at par with the industry. But this could be an area to explore if the
company is to create a cost advantage.
• The client’s R&D costs as compared to the industry benchmarks are lower (as a % of sales). This
could imply that the firm does not invest as much in R&D as compared to some of the other
competitors. So this could mean either that the firm is a “follower” in this industry and therefore
probably competes on costs, or, that the firm competes in a different
segment of the healthcare, nutritional segment that does not require as much R&D.
• The client’s Business support costs are significantly higher than the industry averages. Given that
the CEO wants to focus on cost optimization, this line item offers significant potential to cut costs.
• The client’s earnings per share (EPS) are lower as compared to the industry. Assuming everything
to be the same for the comparable companies, this should be a cause of concern for the CEO.
Synthesis: It is important to focus on overall cost reduction for the firm, as this will not only boost the
competitiveness of the firm, but also free up capital to invest in R&D, if the company wants to
differentiate itself in the industry based on innovation. Business Support Functions (BSF) could play a
significant role in helping to reduce costs.
Question #3. First, ask if the candidate understands what BSF (Business Support Functions) means.
Let them explain what they think about it. Then give this additional information:
BSF: Business Support Functions, functions which are necessary for running the main operations of
any firm. Typical BSFs include Finance, Human Resources (HR), Information Technology (IT), Legal,
Procurement, Facilities, Planning, Public Affairs and Communications, etc. These functions are
typically non-revenue generating functions.
Then, ask them what would they do now?
Possible Answer:
Look at the breakdown of BSFs. See which ones of those is a problem. Compare the client’s numbers
with industry benchmarks.
Then, hand out Exhibit 2 to the candidate and ask him/her to offer thoughts / hypotheses.
Exhibit 2: Business Support Function (BSF) Costs Comparison

Possible Answer:
The candidate should quickly comment on two things:
• All key BSF functions are worse for the client as compared to industry benchmarks.
• Industry benchmarks costs for BSF functions are 30-40% lower than those for the client.
Ideally, a candidate should proactively answer why he/she thinks this could be the reason. If not, ask
this question:
Question #4. Why do you think these costs are high for the client?
Possible Answer:
• The client has grown through acquisitions, each acquiree adds its own BSF full-time equivalent
(FTEs) and complexity.
• Geographical complexity / differences.
• Organizational complexity.
• No overlap of tasks between different Business Units / silo’s in the business units.
NOTE: Keep asking the candidate “what else?”, till the candidate has given 4-5 good answers.
Question #5. Assume your team does a further analysis on the type of activities within each of these
BSF functions
and they find this. (Hand out Exhibit 3). What can be concluded from Exhibit 3?
Exhibit 3. Activity Split across BSFs*
*Typical Geographical sub-unit of a Business Unit
Additional Information:
• Transactional activities: Defined as day-to-day activities, low-skill, repetitive

• Specialized activities: High skill, specific to each business unit / geography, requires involvement of
multiple people etc.
Possible Answer:
An ideal candidate will try to answer why different departments show difference in Transactional /
Specialized activities:
• Procurement / Legal are inherently localized and specialized functions – every location / Business
unit has different
requirements / laws / regulations.
• Finance and HR have a fairly large number of day-to-day activities: book keeping, payroll, time and
expense, etc.
Question #6: Can you think of ways to reduce these costs?
Possible Answer:
Typical responses include:

• Eliminate redundant activities
• Automate certain activities
• Improve efficiency – by reducing number of steps in a process
• Reduce frequency of unnecessary activities
• Outsource certain activities (Do not give this away. This is critical for the next part of the case).
At this point, ask the candidate: would you think of outsourcing differently for transactional v/s
specialized? Give the
candidate a minute to think. If he/she comes up with an answer, continue with next Exhibit. Or, just
move on to the next
Exhibit if the candidate cannot think why. (Obviously, he/she doesn’t get the brownie points!)
Question #7. (Hand out Exhibit 4) Someone on your team suggests that this is a way that the client
can think about
its outsourcing / consolidation. What do you think about it?
Exhibit 4. Suggested Outsourced Centers and Centers of Excellence
Possible Answer:
This makes complete sense. Here’s why:
a. Transactional activities can be consolidated at a global level. India / Chile make good options
because of:
• Cheap labor
• Cheaper costs
• Availability of labor
• Expertise in services outsourcing
b. Specialized activities can be consolidated at a regional level because:

• Region specific requirements
• Similarity of business
• Laws / Contracts / Regulation
• Language
Question #8. Let’s say the client company goes this route. Ships transactional work to Outsourced
centers, and specialized activities to Centers of Excellence. The client company also does some IT
rationalization efforts. How much
cost savings will these changes help the company realize? (Hand out Exhibit 5)
• IT rationalization: Centralizing databases, establishing common platforms, renegotiating with

vendors, etc.
Exhibit 5. Total BSF Costs: $12 Billion

*Facilities are local, ignore cost savings coming out of facilities.
Possible Answer:
Calcluation Formula:
• Finance Cost Savings = Total Finance Costs * (Transactional % * Outsourced Center Savings +
Specialized % * Center of Excellence Savings)
• Similarly for HR, Legal, Procurements
• IT cost savings = IT Costs * IT Rationalization %
• Cost Savings for Facilities is out of scope for this case, and can be ignored.
A quantitatively strong candidate will be quickly able to calculate:

• 16.33% = 1/6, 8.33% = 1/12, 33.33% = 1/3, 25% = 1/4
• $12B * 1/6 = $2B, $12B * 1/12 = $1B, $12B * 1/3 = $4B, $12B * 1/4 = $3B
Cost Savings Calculations:

• Finance = $2B * (70% * 40% + 30% * 10%) = $0.62B
• HR = $1B * (80% * 40% + 20% * 10%) = $0.34B
• Legal = $1B * (30% * 40% + 70% * 10%) = $0.19B
• Procurement = $4B * (40% * 40% + 60% * 10%) = $0.88B
• IT = $1B * 30% = $0.3B
• Total Cost Savings = $0.62 + $0.34 + $0.19 + $0.88 + $0.3 = $2.33B
An Excellent Candidate will go back to Exhibit 1, and reflect on what effect will this have on the
financials. Currently, BSF costs are higher by 5% as compared to the industry benchmarks (5% of
$40 Bn = $2Bn). The savings that we see above ($2.33B) are higher than $2Bn. These additional
savings can be put into R&D, given out as dividends, and also boost the earnings per share (EPS).
These are all great results from the CEO’s standpoint.
Question #9. Conclude the case, ask the candidate to prepare a final recommendation.
Possible Answer:
Sample Recommendation:
The CEO of JNJ should engage into a large-scale organizational transformation. Specifically to
optimize the BSF costs. There are three reasons for this.
• BSF Costs are higher as compared to industry benchmarks.
• They are hurting the client’s position in the market.
• And are critical for the future strategy of the firm – to differentiate itself through innovation.
One of the important highlights of this transformation should be the creation of Outsourced Centers
and Centers of
Excellence to manage the transactional and specialized BSF tasks. This could give a net run-rate
savings of $2.33 Bn in
today’s terms.
Biggest Risk:
• Downsizing repercussions
• Foreign limitations, time for implementation.
Next Steps:
• Do a cost-benefit analysis. How long will this transformation take? How much will it cost?
• Opportunity Costs
• Find out ways to manage the implications of down-sizing
Nutricia to Explore U.S. Market for Growth
Case Type: market entry; growth strategy.
Consulting Firm: McKinsey & Company first round full time job interview.
Industry Coverage: foods & beverages; healthcare: hospital & medical.
Case Interview Question #01278: The client Nutricia is a specialized $5B nutrition foods company
based in Paris, France. It is part of the Medical Nutrition Division of French multinational food-
products corporation Groupe Danone (Euronext: BN). Their products range from infant formula to
specialized nutrition for babies with specific needs and for breastfeeding mothers. It also produces
and markets special clinical nutrition, diet products and disease-specific nutrition.
The client Nutricia has a broad European Union (EU) presence and have excellent market share in
France, Germany, Italy, and Spain. They have two major lines of products:
(1) Premium Infant Products, which includes milk and solid foods for infants up to 2 years old. These
are sold through the retail channel.
(2) Medical nutrition supplements, which are for sick patients (HIV, Cancer, Diabetes, etc), and are
basically a pill or powder that help the patient recover their strength. These are sold through the Direct
Sales Channel.
The CEO of Nutricia feels that the growth potential for this company has maxed out in Europe.
Therefore, they would like to explore the US Market for growth. What are the key areas you would
explore to determine whether this is a good idea?
Since this is a McKinsey style interviewer led case, and would be most valuable given in that style, it
is written up that way so people get use to the choppiness.
Possible Answers:
Question #1. What are the key areas you would explore to determine whether this is a good idea?
Possible Answer:
I basically talked through my own personal framework for market entry (entering a new geographical
market), which included:
a. The internal aspects
• capabilities
• channel/supplier relationships
• customers: are they the same?
• profitability
b. The external aspects or overall industry things
• size of the US market

• the growth rate
• the competitors
• regulatory issues.
Question #2. Now let’s talk about the medical nutritional food supplements for the Diabetic Market.
How would you go about sizing this market in the United States? Patients take 2 supplements per
day, and they cost $1.50 per supplement. Go ahead and estimate it.
Additional Information provided if asked:

• 5% prevalence rate
• 90% compliance rate
Possible Answer:
• Population in the US = 300 Million

• Prevalence rate = 5% –> 300M * 5% = 15 M people with diabetes
• 90% of them take these supplements –> 15M * 90% = 13.5M
13.5M * $1.50/supp * 2 supp/day * 365 days/year = ~$14.8B for a market size estimate.
Question #3. How could we grow this market?
Possible Answer:
Growth in this market would be driven by:
• raising compliance (small effect);

• prevalence of diabetes in population;
• increase in dosage price or amount.
Question #4. How would the competitors in the US react to us entering the US market?
I probably missed some, but I used increase in sales force, differentiating/positioning their product as
better, blocking channels, more dollars to advertising.
Question #5. Which channel do you think makes the most sense for them to go after as they enter?
Possible Answer:
Here I was given a chart that looked like the one below.
Specialty Retailers seemed to be the right answer, but I can’t recall what I said, and to this day I am
not sure what the reasons are. He explicitly said this is not a quantitative question.
Question #6. Switching gears again to the medical nutrition products – let’s talk about Cancer
patients. How many cancer patients would we need to attract to our product to break even? We have
50 Sales Reps, $10M budget for PR, our direct costs are 80% and assume they take 2 doses per day
for 5 months out of a year.
Additional Information provided if requested:
• Sales reps salaries are $100K / year, plus $100K in benefits.

• The price of a dose is $1.
Possible Answer:
I did a breakeven that looked like:

$10M + ($200K * 50 reps) = (2 doses/day * 5 months * 30 days/month * 20% * $1/dose) * # of patients
And I ended up with # of patients = 330K
Question #7. The CEO would like your recommendation of your suggestions, based on what you
learned today, as well as any other ideas you have to add.
Interviewer’s Commentary/Recommendations:
Different interviewers, not just different firms, can have very different styles of case interviewing and
much of this comes down to mood or personality so it is definitely worthwhile making sure you are
prepared for case interviews that are more like an interrogation as well as interviews where you get to
take the lead. Remember also that, although they may be firing questions at you, you still need to be
thinking about how you can demonstrate an understanding of the complete set of issues. Don’t just
answer the question, but also think about how you can set out a structure around your answer.
The candidate’s response to the first question is a good example of this. They have laid out a set of
issues that they would want to explore in determining whether this is a good market to enter. There is
no one structure for this question and a number of different approaches would be equally acceptable.
You may want to do a Porter’s Five forces analysis of the US market and overlay a comparison of
other international markets that may be more attractive – for example, are their higher prevalence
rates in Asia? Or a greater propensity to pay?
The candidate appeared to have difficulties with question #5. This question could potentially be
approached by asking two questions:
Firstly, I would want to determine where we can get the biggest bang for our buck – that is, which
sales channel gets us the best access to the market per client. The answer appears to be
overwhelmingly the Mass Retailers where 10 chains give us access to a $10.5B market. (Note there
may be an inconsistency here as both specialty retailers and mass retailers are listed as 40% but with
very different sales numbers).
Next, I would want to consider whether there are any factors limiting or complicating access to my
preferred channel – On its face the mass retail channel looks like the best because it has a very high
sales number for a very small number of clients (10 chains). We would need to know however what
the restrictions on accessing this channel are. Mass retailers may charge a premium for shelf space
making this an extremely expensive option. Alternatively mass retailers may carry only a small
number of well known brands making it almost impossible for new entrants to gain access until they
have established a reputation in the specialty retailers that carry more brands etc.
A good answer would involve at least identifying these potential issues.

Koch Fertilizer Develops Fertilizer Supplement for Grapes
Case Type: new product; pricing.
Industry Coverage: chemicals; agriculture, farming, aquaculture.
Case Interview Question #01269: Our client, Koch Fertilizer Inc., makes agricultural soil fertilizer.
The company is a subsidiary of Wichita, Kansas based conglomerate Koch Industries. The parent
company is the second largest privately held company in the United States after Cargill, with annual
revenue of $115 billion. Its subsidiary companies are involved in the manufacturing, refining, and
distribution of petroleum, chemicals, energy, fiber, intermediates and polymers, minerals, fertilizers,
pulp and paper, chemical technology equipment, and ranching.
The client Koch Fertilizer’s research & development (R&D) division has recently invented a new
fertilizer supplement for grape production. The CEO of Koch Fertilizer has hired our consulting firm
and wants our advice on whether or not they should commercialize the new grape fertilizer
supplement. What are the key issues we need to examine?
Possible Answers:
1. Case Overview
This “new product launching” case involves some market sizing, some analysis of pricing dynamics,
and ultimately an investment decision. Candidates must be able to organize and process a fair bit of
quantitative data in addition to draw some high level insights. Judgment is particularly important when
determining how to present a summary of all the arithmetic.
2. Framework
Question #1. What are the key issues we need to examine?
This is a “new product launching” case, so we want to know:
A. Market
• How big is the market?

• What market share can we capture? What revenues can we generate?
B. Customers
• How will customers value the product? What are the drivers of demand?
C. Competition
• What are industry dynamics?
D. Profitability
• What can we charge for the product?

• What kind of sales volume can we expect?
• What are our profit margins? What are our variable costs?
• What are our fixed costs?
Additional Information: (to be provided when requested by candidate)
Koch Fertilizer would like to target the California grape market for sales of its new grape supplement.
California grapes are exclusively used for wine making, and grape companies in the industry
specialize in growing either green grapes for white wine, or purple grapes for red wine.
Grape companies in both markets (green grapes + purple grapes) average 250 acres, which they
harvest once per year. The market is fairly stable, and is growing at pace with GDP.
3. Detailed Analysis
Question #2. How big is the California grape market? What conclusions can we draw from this? Is the
California grape market big enough to justify commercializing the client’s fertilizer supplement?
Variables Source/Formula Calculations

Total Purple Grape (Average purple grape revenue * # purple grape
Revenue firms) $500K * 30 = $15M
Total Green Grape (Average green grape revenue * # green grape
Revenue firms) $100K * 200 = $20M
$15M + $20M =
Market Size (annual) Sum of revenues $35M
Question #3. What is the potential value add of the client’s fertilizer supplements?
The total potential is the combined value from extra revenue (from improved yield) and reduced costs
(from earlier harvests).
Question #4. What is the cost savings produced to grape farmers from early harvests?
In tests, the fertilizer supplements allow grape growers to harvest their grapes 16 days earlier than
with the current fertilizer product on the market. This saves grape growers approximately $5 per acre
per day costs, which normally are needed to keep animals away from crops.
Calculating cost savings from early harvests

Savings per (Daily cost savings * Harvest days reduced * Average $5 * 16 * 250 acres =
farmer number of acres per farm) $20K
Total number of
farmers Found in Exhibit #1 200+30 = 230
Total Savings (Savings per farmer * Total number of farmers) $20K * 230 = $4.6M
Question #5. What is the extra revenues produced to farmers from better yields?
Furthermore, the increase in the size of grapes directly increases the amount of grape juice produced
annually. The client’s fertilizer supplement can increase purple grape yields by 10% and green grape
yields by 15%.
Calculating extra revenues from better yields

Increased revenues for (Purple grape market size * $15M * 10% = $1.5M overall, or
purple grape farmers Increased purple grape yield) $1.5M/30 = $50K per farmer
Increased revenues for (Green grape market size * $20M * 15% = $3M overall, or
green grape farmers Increased green grape yield) $3M/200 = $15K per farmer
Total increased revenues $1.5M + $3M = $4.5M
Note: A strong candidate will question whether California grapes are a substantial piece of the overall
U.S. grape market to determine whether improved yields will reduce grape prices.
Question #6. What is the total value of the fertilizer supplement product per farmer? overall?
Variables Calculations
Early harvest savings
per farmer $20K
Increased revenue per
purple grape farmer $50K
Increased revenue per
green grape farmer $15K
Total savings for purple
grape farmers $20K+$50K = $70K per farmer
Total savings for green
grape farmers $20K+$15K = $35K per farmer
Total savings (Savings per purple grape farmer * # of purple grape farmers + Savings per
green grape farmer * # of green grape farmers) = $70K * 30 + $35K * 200 =
$9.1M
Question #7. How much of the $9.1M value can the client Koch Fertilizer capture? What will
determine this?
Candidate should identify issues of buyer power and rivalry:

• Price discrimination
• Brand value
• Consumer confidence in our marketing
• Presence of substitutes
Question #8. What will be the costs of producing enough fertilizer supplements for the entire California
market? Half the market? What kind of penetration should we expect?
• Commercializing the fertilizer supplement will require annual capital leases costing $2.2M, with
additional production costs of $4K per hectoliter.
• Purple grape fields require 5 hectoliters per 250 acres, while green grape fields require 2 hectoliters
per 250 acres.
• Candidate may inquire about the timeframe of fixed costs and recovery. The fixed cost is one time;
recovery should be based on reasonable assumptions.
Variables Calculations
# purple grape farms 30
# green grape farms 200
(# purple grape farms * Purple grape farm supplement required +
Total demand for # green grape farms * Green grape farm supplement required) = 30 * 5 +
supplements 200 * 2 = 550 hectoliters
(Total hectoliter demand * production cost per hectoliter) = 550 hectoliters
Total variable cost * $4K per hectoliter = $2.2M
Total fixed cost $2.2M
Cost of supplying to entire
market (Fixed cost + Variable cost) = $2.2M + $2.2M = $4.4M
Cost of supplying to half
market (Fixed cost + Variable cost/2) = $2.2M + $1.1M = $3.3M
Penetration analysis should return to the issues of buyer power. Candidate should identify tradeoff
between margin and initial penetration.
Question #9. What kind of penetration let us break even if we price the product at $10K per hectoliter?
What about if we price at $8K? $15K?
Variable Cost = $4K per hectoliter

Break even quantity for $10K price = (Fixed cost / Marginal profit) = $2.2M / ($10K-$4K) = 367
hectoliters
hectoliters
hectoliters
Note: Use contribution margins to solve the problem:

Quantity*Price – Quantity*Variable Cost – Fixed Cost = 0 –>
Quantity*(Variable Cost + Margin) – Quantity*Variable Cost – Fixed Cost = 0 –>
Quantity*Margin = Fixed Cost –>
Quantity = Fixed Cost/Margin
4. Case Closing
Question #10. Can you make a final recommendation to the CEO of Koch Industries?
• It would not be a good move to commercialize the product based on the California grape market
alone.
• Comparing the break even quantities and the total size of the California grape market we see that
Koch Fertilizer would have to capture substantial market share just in order to break even.
• Before deciding to commercialize the supplement it would be wise to size additional markets to see
if there is potential for additional sales elsewhere.
Question #11. What are some of the potential risks associated with commercializing the product?
• Demand for supplement is not as high as projected.

• Willingness to pay is not high enough to make business profitable or makes breakeven quantity
unreasonable to reach.
• Supplement does not perform as expected.
Grünenthal to Acquire US-based Thar Pharmaceuticals
Case Type: merger & acquisition (M&A); math problem.
Industry Coverage: healthcare: pharmaceutical, biotech, life sciences.
Case Interview Question #01160: Our client Grünenthal GmbH is a mid-size German
pharmaceutical company headquartered in Stolberg, near Aachen in Germany. The company was
founded in 1946 as Chemie Grünenthal, and has been continuously family owned. The company has
focused on the treatment of pain, and is doing its own research and development in this field.
The client Grünenthal develops and produces exclusively chemically-derived drugs for sale in the U.S.
Recently, they are exploring options to expand their business and are looking specifically at acquiring
Thar Pharmaceuticals Inc., a Morristown, New Jersey based American pharmaceutical company that
produces exclusively biologically-derived drugs.
Your consulting firm McKinsey & Company has been engaged to evaluate this acquisition opportunity.
Possible Answers:
1. Case Overview
This is a interviewer-led case originally given by McKinsey. This mergers & acquisitions (M&A) case
has 6 structured questions that the interviewer should ask in the next section of the case. Please
familiarize yourself with all 6 questions first and then ask the interviewee one by one.
Key Requirements:
• Be structured in your answers (put thoughts/recommendations into 2 or 3 buckets).
• For brainstorming portions, be thorough and conclude confidently (don’t act stumped or grasp at
straws).
• Be creative and think outside-the-box where appropriate.
2. Information Gathering
Additional info to share with the candidates (if prompted):

• All pharmaceuticals are derived from either biological or chemical processes.
• The research methods and facilities needed for each process are different.
• The acquisition target company Thar Pharmaceuticals Inc. is private and generally profitable.
Question #1: What factors would you consider in evaluating the acquisition opportunity?
Possible Answer:
a. Deal Mechanics:
• Client company financials (profitability, cash position)
• Target company financials (profitability, drugs in development)
• Other potential bidders
b. Operational Synergies and Complementarities:

• IT, legal, marketing, administration
• Research staff – do skills transfer between chemical and biological processes?
• Facilities – can any manufacturing be consolidated?
• Logistics (transport, warehousing)
• Purchasing power from common suppliers
c. Execution and Post-Merger Integration:

• Anti-trust, legal concerns
• Time frame for completion of deal
• Corporate structure, culture, systems and processes
Question #2: What are the potential benefits from this acquisition?
Possible Answer:
Note: This sounds similar to the first question, but the candidate should go into a bit more depth and
think about how likely and valuable the various opportunities are.
a. Operational Synergies and Complementarities:

• IT, legal, marketing, administration (likely not significant due to geographic location/market
differences)
• Research staff (skills are specialized and do not transfer between processes).
• Facilities (manufacturing is specialized currently, but new facilities could benefit from consolidation)
• Logistics (here there are good opportunities, opening up cheaper distribution options and broader
access to the U.S. market)
• Purchasing power from common suppliers (not significant)
b. Future market and business risk

• Increased scale of research (more drugs in development reduces risk of individual trial failures and
increases chance of blockbuster drugs.)
• Future of biological vs. chemical drugs (indications that biological drugs will dominate future market.)
c. Regulatory experience (U.S. and Europe)
Question #3: What are the major risks to consider?
Possible Answer:
Note: candidate should return to items identified in Question #1 and look a bit deeper into how likely
and critical they are.
a. Price, Performance, and Value:

• Asking price could be too high (high recent growth, unrealistic expectations, or competitive bidding
could drive up price. Could be a concern here.)
• Risk of drugs in development (valuation is tied closely to drug pipeline, definitely a concern)
b. Execution and Post-Merger Integration:

• Anti-trust, legal concerns (not likely, both are already operating in the U.S. and not large).
• Time frame/complexity of deal (not very complex, so not a big risk).
• Culture (this could be a concern, something to look more into)
Question #4: (Provide Exhibit 1) After reviewing this chart, how much would you be willing to pay for
the rights to a drug candidate entering Phase II trials?
Exhibit 1. Drug Development Process
Provide the following information if requested:

• Cost of taking a drug candidate through trials (Phase I, Phase II, Phase III, FDA Review) is $1M per
year.
• Investment must be made now.
Possible Answer:
Calculate value backwards from market value based on yields:

• Value (Phase II) = $2B * 40% * 20% * 20% = $32M
• Cost of taking a drug through trials (6 years) = $1M/year * 6 years = $6M
• Net Value = $32M – $6M = $26M
Question #5: How much would you be willing to invest to increase the success rate of this drug
candidate in Phase III trials from 20% to 40%?
Possible Answer:
Calculate the value in both cases and find the difference (costs are a wash and can be ignored):
• Initlial Value = $2B * 40% * 20% * 20% = $32M
• New Value = $2B * 40% * 40% * 20% = $64M
• Value of investment = $64M – $32M = $32M
Question #6: What do you think of the attractiveness of the possible acquisition? Summarize your
analysis of the acquisition opportunity and provide a final recommendation.
Possible Answer:
The candidate should ignore the two calculation steps and summarize the results of Question #2 and
Question #3. He or she should balance the opportunities and risks where known and give a gut feel
for how good the opportunity looks. The candidate should also identify where more investigation is
needed to inform the decision.
A good summary will start with the recommendation, give a quick synthesis of supporting evidence,
and finish with next steps (specific further research needed, preparations for post-merger integration).
Fitness Center Chain to Target Gen X and Gen Y
Case Type: growth strategy; business turnaround.
Industry Coverage: sports, leisure, recreation.
Case Interview Question #01148: Your client is Heavy Things Fitness, a small fitness center chain
with 15 locations in a minor metropolitan area in the United States. The chain was first established
during the fitness boom in the late 1970s. After decades of continual growth, Heavy Things Fitness
has seen membership decline by alarming rates. Over the past 5 years, it has seen total membership
numbers decrease an average of 6% annually.
The client Heavy Things Fitness has asked us to determine what is causing this trend and how they
can reverse this trend to begin growing again. Based on what you know about the fitness industry,
what do you believe is causing this membership attrition?
Possible Answers:
The focus of this case is on market segmentation and determining/targeting the optimal segment. The
candidate shoulddemonstrate an understanding that profit is the ultimate goal. Various strategies will
have different implementation costs and potential revenues, and the candidate should return to these
numbers at every step.
If they ask for more information on the specific city/metropolitan area, tell them it has a population of
about 1-1.5M, similar to Providence, RI; Milwaukee, WI; or Jacksonville, FL. No other information is
relevant (such as location within the US), as this is not the focal point of the case.
Relevant Additional Information:

• Gym memberships in this city have been growing 3% each year, both in this city and in all regions of
the country.
• Heavy Things Fitness gyms offer cardio rooms, free weights, and weight machines.
• Membership prices and payment plans are in line with their closest competitors.
• Heavy Things Fitness targets serious fitness enthusiasts, believing that these are the most loyal
customers.
Question #1: Based on what you know about the fitness industry, what do you believe is causing this
membership attrition?
Possible Answer:
Potential Causes:
• Changing fitness trends, such as towards class-based fitness or high intensity training
• Negative attributes of Heavy Things Fitness, such as poor customer service or deteriorating facilities
• Competitors offer better services, such as personal trainers or basketball courts
• Shifts in city or industry demographics, away from Heavy Things’ target demographic
Unlikely Causes:
• Decreasing city population (as the rest of the city’s gyms are seeing increasing memberships)
• Competitors offer lower cost (already established that Heavy Things’ costs are comparable to
competitors
When interviewee asks for industry or client customer demographic information, provide Exhibit 1 and
2, respectively.
Exhibit 1: Local Interest in Gym Memberships, Demographic Segmentation

Question #2: Given the information in Exhibits 1 and 2, what do you believe is the source of Heavy
Thing’s declining membership?
Clarifying Note: The legend order corresponds with the Generation graphic in Exhibit 1. In other
words, the top portion of the chart represents Seniors, and the bottom represents Millennials.
Possible Answer:
Extractable Facts:
• Local gym memberships are trending towards Gen X and Y and away from Millennials, Baby
Boomers and Seniors.
• Genders seem to have shifted towards men, then back to women.
• Heavy Things’ membership is heavily concentrated in the Millennial generation.
• Heavy Things’ membership is evenly split between men and women.
Key Takeaways:
• Heavy Things’ membership gender profile parallels local industry gender profile
• Heavy Things’ membership generation profile is focused on the declining Millennial population rather
than the growing Gen X and Y populations.
Potential Conclusions:
• Target Gen X and Y customers
• Become more of a niche gym for declining millennial customer segment
Question #3: After reviewing this data, Heavy Things Fitness leadership agrees that they should
target Gen X and Y customers. What are some possible ways that Heavy Things Fitness can target
these growing demographics? What would be the risks of each of these solutions?
Possible Answer:
Good Potential Solutions:

• Marketing campaign targeting consumers aged 30-50
– Spokesperson in that age range
– Ads run in areas of interest for these consumers
– Explanation that this gym is for these consumers (a la Planet Fitness ads)
• Offer new services more to the liking of middle aged customers
• Make prices more appealing to middle aged customers
– If price is believed to be a primary concern, lower prices
– If not, raising prices would help offer more services and prevent younger customers with less
disposable income from joining.
• Make the gym an exclusive club where only those members can join.
Top level candidates will address the inherent risk of cannibalization when switching from one target
demographic to another, and include solutions that will minimize such cannibalization. If the candidate
does not mention cannibalization, lead them to it. Some such solutions would be:
• Convert some existing locations to more Gen X and Gen Y-friendly establishments, while keeping
the rest the same, enabling current customers to go to another Heavy Things Fitness gym if theirs
gets shut down.
• Develop a brand extension in brand new clubs that target these customers.
• Divide the physical space of each gym into two distinct gyms (like a combination Pizza Hut and Taco
Bell)
Question #4: We presented your findings to the client at a recent status meeting, and Heavy Things
Fitness leadership liked the idea of a brand extension of 5 facilities targeted at Gen X and Y
customers, called “Fast Class Fitness”, which will focus on the class-based fitness programs that our
client’s research has shown appeals to Gen X and Y customers. They want us to determine whether it
is more profitable to convert existing Heavy Things properties into Fast Class properties, or to expand
into new properties in which to open Fast Class centers. How would you go about it?
Pertinent Information (let the candidate brainstorm what information is necessary to calculate
revenues and costs before providing):
Revenues
• Membership dues at Heavy Things facilities = $50 per month
• Membership dues at Fast Class facilities = $75 per month
• Average memberships at Heavy Things facilities = 300
• Average memberships at Fast Class facilities = 400
Costs
• Rent of all facilities (including cost of fitness equipment), Heavy Things and Fast Class = $10K per
month
• Labor at Heavy Things facilities = 2 employees at $36K per year each
• Labor at Fast Class facilities = 4 employees at $48K per year each
• Retention of members from converted Heavy Things gyms = 33% of each gym’s membership
– This is a small city, so when a club is converted, members can simply move to a neighboring
location
– In other words, when a gym is closed, 1/3 of the members will join a different Heavy Things Fitness
gym, but 2/3 of the members will leave Heavy Things for a competitor.
• Assume Heavy Things can maintain these membership levels
Possible Answer:
Sample Calculations:
However, the fastest way to calculate this is to realize that the revenues and costs from Fast Classes
are constant, so the only necessary calculation is subtracting the additional cost to maintain the 5
heavy things locations ($80K) from the revenue gained by keeping all 15 Heavy Things locations
($50K).
Either way, the correct conclusion is that it is more profitable to convert the 5 locations rather than
expand.
Question #5: Mr. Olaf Dungren, the CEO of Heavy Things Fitness, is about to walk into this office, and
he’d like to hear our recommendation. How would you summarize our findings?
Possible Answer:
Answers may vary, but should include:

• Recommendation to convert five Heavy Things fitness centers to Fast Classes fitness centers.
• Justification based on the ability to attract new members and increase profitability at a more efficient
rate than by expanding to new properties.
• Potential risks to this suggestion that include five not being the optimal number to convert,
increasing properties serving as advertising that would generate additional memberships, the 33%
estimate of retention being inaccurate.
• Next steps, such as hiring class teachers for the new gyms, developing an advertising campaign to
build the Fast Class brand, and hiring contractors to convert the Heavy Things gyms to Fast Class
centers.
Intuit to Buy Hospital Accounting Software Company
Case Type: mergers and acquisitions (M&A); pricing and valuation.
Consulting Firm: McKinsey & Company 2nd round full time job interview.
Industry Coverage: software, information technology (IT) .
Case Interview Question #01088: Our client Intuit Inc. (NASDAQ: INTU) is an American enterprise
software company that develops accounting, financial and tax preparation software and related
services for small businesses. It is incorporated in Delaware and headquartered in Mountain View,
California. The company’s major product is accounting program QuickBooks. QuickBooks is an
accounting software package geared mainly toward small and medium-sized businesses (generally
under $1 billion in revenues) and offer on-premises accounting applications as well as cloud based
versions that accept business payments, manage and pay bills, and payroll functions.
After several strong years, Intuit is looking to make an acquisition to boost growth. The CEO has
narrowed the list of potential targets down to 3 IT companies: (1) BankWeb, (2) HospitalAccount, and
(3) Retail Inventory. Intuit has hired our consulting firm to determine which target it should pursue.
What would you recommend?
Possible Answers:
1. Case Overview
This mergers and acquisitions (M&A) case is designed so that the candidate will compare the 3 target
firms on both a financial and strategic basis. The prompt is purposefully broad; the candidate should
recognize the need to analyze both elements of each acquisition target. Ultimately, the candidate will
be asked to pick a target and then suggest a buying price.
The case can be given as interviewer-led by asking the questions, or the interviewer can allow the
candidate to lead by using the information answering the questions.
2. Additional Information: (To be provided upon request)
• If asked for more information on acquisition goals: the CEO wants the acquisition to make both
financial and strategic sense.
• BankWeb makes websites for regional banks, HospitalAccount makes accounting software for
hospitals, and Retail Inventory makes inventory software for clothing retail stores.
• If asked, Intuit does not work in web development, inventory tracking, or provide accounting software
to hospitals.
3. Suggested Framework
a. Our client
• Financials
– Cash/debt: can they afford to buy?
– Profit
• Strategic
– Market: Geography, Market size/growth/share, Customer – who are they?
– Culture
– Capabilities: Strengths/gaps
b. Target (1) BankWeb
• Financials
– Multiples
– Profit: Revenue, Cost
– Synergy
• Acquisition price: Comparable Multiples
• Strategic
– Market: Geography, Market size/growth/share, Customer – who are they?
– Capabilities: Alignment?
– Competitors: Differentiators
– Ownership – want to sell?
– Culture – match?
c. Target (2) HospitalAccount
• Financials
• Strategic
• Acquisition price
d. Target (3) Retail Inventory
• Financials
• Strategic
• Acquisition price
e. Other
• Regulatory
a. Intuit
• Strong financials; has $250 million in cash.
• Serve U.S. public companies under $1 billion in revenue.
• Across multiple industries.
• Help with reporting for SEC filings.
• Strong software development team, has offices located in both NYC and Mountain View, CA
• Considered industry leader in space.
• Culture: professional
b. BankWeb
• Makes websites for regional commercial banks.
• Currently serving 5 regional banks on east coast of US.
• Provide groundbreaking websites that have won best website award from Forbes.
• Competes with internal IT departments and other website building companies.
• For regional banks, estimated at 10% market share.
• Flat market growth.
• Started by two college grads in 2006.
• Culture: start-up
c. HospitalAccount
• Manufactures accounting software for hospitals.
• Developing software that accounts for disclosures required by new health care policies.
• Mid-tier quality.
• 2% market share
• Used to be 2% market growth; accelerated to 5% for the last 4 years.
• Has been run by the same CEO, the founder of the company, since 1995.
• Culture: professional.
d. Retail Inventory
• Inventory tracking system for clothing retailers.
• Looking to expand into other retail categories with perishable goods.
• Competes well with other inventory tracking systems created by larger companies.
• 5% market share.
• Market growing at 3% CAGR.
• PE ownership, PE purchased the company 18 months ago.
• Culture: professional
e. Other
• There are no regulatory concerns with the acquisition of any of the targets.
Question #1: From a strategic prospective, discuss the advantages and disadvantages of each
acquisition target.
Possible Solution:
BankWeb
• Pros: Industry leading, excellent quality. Rapid growth.
• Cons: Flat market growth; not core to what the client Intuit does.
HospitalAccount
• Pros: Familiar capability set, positioning for new growth with healthcare disclosures, rapidly growing
market.
• Cons: Middle of the road capabilities, small market share.
Retail Inventory
• Pros: Strong competitor with larger companies; poised for growth.
• Cons: Non-core capabilities, low market share.
Question #2: (Give Exhibit 1) From a financial prospective, which looks like the best acquisition
target?
Exhibit #1: Financials of client Intuit and acquisition targets
BankWe Retail
Company b HospitalAccount Inventory Intuit
Revenue $15M $35M $30M $100M
COGS $7.5M $28M $21M $60M
Gross Profit $7.5M $7M $9M $40M
SG&A $1.5M $7M $3M $10M
EBITDA $6M 0 $6M $30M
Sales people 15 70 30 100
Software developers 30 93 60 200
If asked:
• Do not expect synergies from BankWeb
• Do not expect synergies from Retail Inventory
• Prompt candidate to suggest synergies for HospitalAccount
Possible Solution:
Table #1: Calculations
BankWe Retail
Company b HospitalAccount Inventory Intuit
as % of sales
COGS 50% 80% 70% 60%
Gross Profit 50% 20% 30% 40%
SG&A 10% 20% 10% 10%
EBITDA 40% 0% 20% 30%
Revenue/person
Sales people $1M $500K $1M $1M
Software developers $500K $375,940 $500K $500K
• BankWeb appears to be very attractive because of its high EBITDA margin (40%).
• A good candidate will recognize that synergies from the merger & acquisition (M&A) would make
HospitalAccount’s financials more attractive.
• A superior candidate will observe that HospitalAccount has far more sales people and software
developers than necessary and will make a specific suggestion as to how those numbers could be
brought in line proportionally to Intuit’s numbers (look at Revenue/person ratios for both sales people
and developers)
• See below “Table #2: Revised Forecasts” (finding these precise answers is not necessary; the key is
recognizing that Intuit’s familiarity with accounting software development combined with its scale
should help improve HospitalAccount’s financials).
Table #2: Revised Forecasts
Company BankWeb HospitalAccount Retail Inventory Intuit

Revenue $15M $35M $30M $100M
COGS $7.5M $35M*60% = $21M $21M $60M
Gross Profit $7.5M $14M $9M $40M
SG&A $1.5M $35M*10% = $3.5M $3M $10M
EBITDA $6M $10.5M $6M $30M
Sales people 15 $35M/$1M = 35 30 100
Software developers 30 $35M/$500K = 70 60 200
Question #3: Which target should Intuit pursue and why?
Possible Answer:
See “Table #2: Revised Forecasts”. If the expected synergies are achieved, HospitalAccount will have
EBITDA of $10.5M, compared to $6M for BankWeb and Retail Inventory. Thus, HospitalAccount looks
like a much more attractive target.
Question #4: (Give Exhibit 2) What price should the client Intuit expect to pay for the target?
Exhibit #2: Recent Acquisitions (Sales, EBITDA, and Acquisition prices are in $ millions)
Acquisition
Company Market Industry Sales EBITDA Price
Clothing Tracking US Inventory software 50 10 50
Retail Counter US Inventory software 70 15 75
Restaurant Restaurant Inventory 1,50
Tracker US software 0 200 400
Japan Accounting Japan Accounting software 150 75 675
AccountMan US Accounting software 30 7 42
QuickCounting US Accounting software 48 12 72
Web Fast US Web development 30 8 96
Quick Web US Web development 5 2 30
Web Flash US Web development 40 10 120
Possible Solution:
Table #3: Calculations of comparable EBITDA multiple (Sales, EBITDA, and Acquisition prices are in
$ millions)
Sales EBITD Comparabl

Marke Sale EBITD Acquisitio multipl A e EBITDA
Company t Industry s A n Price e multiple multiple
Clothing Inventory
Tracking US software 50 10 50 1.00 5.00
Retail Inventory
Counter US software 70 15 75 1.07 5.00 5
Restaurant
Restaurant Inventory 1,50
Tracker US software 0 200 400 0.27 2.00
Japan Accounting
Accounting Japan software 150 75 675 4.50 9.00
Accounting
AccountMan US software 30 7 42 1.40 6.00 6
QuickCounti Accounting
ng US software 48 12 72 1.50 6.00
Web
developme
Web Fast US nt 30 8 96 3.20 12.00
Web
developme
Quick Web US nt 5 2 30 6.00 15.00 12
Web
developme
Web Flash US nt 40 10 120 3.00 12.00
• The candidate should use the numbers provided in Exhibit 2 to estimate an acquisition price based
on their choice of acquisition targets.
• The candidate should develop an industry average and should ignore one of the companies from
each industry.
• When calculating “Comparable EBITDA multiple”, the candidate should ignore Resturant Tracker
(too big), Japan Accounting (wrong market), and Quick Web (too small).
Acquisition Price based on EBITDA multiple

– The comparable EBITDA multiple in accounting software industry = 6
– Expected EBITDA of HospitalAccount = $10.5M
– Acquisition Price = $10.5M * 6 = $63M
Acquisition Price based on sales multiple

– The comparable sales multiple in accounting software industry = 1.4
– Sales of HospitalAccount = $35M
– Acquisition Price = $35M * 1.4 = $49M
Therefore, the client Intuit should expect to pay around $49M for HospitalAccount. If the owner of
HospitalAccount has no intention of selling, the client Intuit could sweeten the offer, but should pay no
more than $63M.
5. Conclusion
Sample Recommendation
• Based on both strategic and financial fit, the client Intuit should pursue HospitalAccount. This
acquisition will allow Intuit access to new customers while using its familiarity with the product to
reduce costs at the target.
Potential Risks
• Cultural fit – is the CEO of HospitalAccount going to retire and is he the key to the organization?
Next Steps
• Need to examine HospitalAccount’s willingness to sell of ownership.

• Look at cultural fit.
Private Cancer Care Centers Are Booming in China
Case Type: new business.
Industry Coverage: healthcare: pharmaceutical, biotech, life sciences; hospital & medical.
Case Interview Question #01057: Our client is a major global pharmaceutical company based in the
United States with international reach. They are well known in the industry for their cancer drugs.
Recently, the pharmaceutical company has experienced a decline in sales growth and is considering
a new business opportunity.
The U.S. market has many private healthcare companies that focus solely on cancer care. The client
wants to set up and operate a chain of private cancer care centers in China. These would be “out
patient” type cancer centers where patients could come in for treatments; both long and short-term
stays are possible.
How would you evaluate the attractiveness of this new business opportunity?
Possible Answers:
a. Customers
b. Competition and Regulation
c. Cost and revenue
d. Company capabilities
2. Analysis
a. Customers
To assess the demand for the cancer care center in China, we would need to determine the number
of people in China with cancer. We can look at the number of people currently being treated through
cancer care units of hospitals, private care, etc. Alternatively, we could estimate the percentage of the
population with cancer by looking at affliction rates across various countries and then multiply by the
total population of China.
b. Competitors
There are no cancer care centers like this currently in China; it would be a new concept. Hospitals,
nursing homes, private nurses will be competitors. Also, China has a history of treating ailments
through traditional Chinese medicine, herbs and other natural substances; these old world physicians
are a major competitor.
c. Cost and Revenue
Revenues are comprised of the number of treatments and the price per treatment. Since the cancer
center would focus strictly on cancer, the quality of the service would be better than the competition.
In China the government pays for all healthcares. In fact, the government has predetermined fees that
it will pay for all kinds of treatments. They will not pay for more than that amount.
Since our client is providing premium service, their costs are higher than those of hospitals, etc. The
client may not even be able to cover the cost of the care they want to provide through the
predetermined rates.
d. Company capabilities
The client needs to assess if there is sufficient demand amongst the wealthier segments of the
Chinese population for a cancer care center. First, segment the population of China based upon
income and focus on the top income levels. Apply the percentage of cancer incident to this number to
estimate the number of potential cancer patients in the selected segments. Calculate the cost of
serving each patient and fixed costs to determine a breakeven number of patients. Compare this
breakeven number with the total potential cancer patients to determine the market share the client
needs before they can turn a profit.
3. Sample Interview Transcript

Interviewer: How would you evaluate the attractiveness of this opportunity?
Candidate: I would evaluate the market for such cancer centers in China: demand, competition and
regulation. I would also assess the profit potential of the opportunity and consider if the company can
take advantage of its strong reputation.
To assess the demand for the cancer care center, we would need to determine the number of people
in China with cancer.
Interviewer: How would you estimate that?
Candidate: Well, we can look at the number of people currently being treated through cancer care
units of hospitals, private care, etc. Alternatively, we could estimate the percentage of the population
with cancer by looking at affliction rates across various countries and then multiply by the total
population of China.
Interviewer: Ok, let’s say that this is a large number and it is growing…what next?
Candidate: Well, I want to look at the competitors in the market. You said the U.S. market already had
a lot of cancer care centers; I’d want to find out who the major competitors are in China.
Interviewer: Actually, there are no cancer care centers like this currently in China; it would be a totally
new concept. Who do you think the competitors would be for our client?
Candidate: I would assume hospitals, nursing homes, private nurses. Also, China has a history of
treating ailments through traditional Chinese medicine, herbs and other natural substances; these old
world physicians are probably a major competitor.
Interviewer: You’re right. When we worked on this project, we found that a significant number of
patients were being treated under these methods. Let’s say there is still room in the market for our
client to enter despite this. What else would you look at?
Candidate: Well, then it comes down to the profitability of the centers. Profits are comprised of
revenues and costs. Let’s look first at the revenues, which are comprised of the number of treatments
and the price per treatment. Since the center would focus strictly on cancer, I would assume the
quality of the service would be better than the competition. (Interviewer nods yes). Therefore, we
could probably charge a premium for the treatments.
Interviewer: Oh? Do you think you can? Who is paying for the treatments?
Candidate: Hmm…you have a good point. Here in the US, the patient’s healthcare plan covers the
cost of the treatment. Can you tell me about China’s medical care policies? Do healthcare companies
insure consumers?
Interviewer: Actually, in China the government pays for all healthcare. In fact, the government has
predetermined fees that it will pay for all kinds of treatments. They will not pay for more than that
amount.
Candidate: I see. So our client cannot charge a premium and expect the government to cover the
expenses. At the same time, since our client is providing premium service, I would expect that their
costs are higher than those of hospitals, etc. Our client may not even be able to cover the cost of the
care they want to provide through the predetermined rates. (Interview nods yes.) OK, so now we have
a different scenario. I think the client needs to assess if there is sufficient demand amongst the
wealthier segments of the Chinese population for a cancer care center.
Interviewer: How would you determine the size of this new market?
Candidate: Well, I think we can first segment the population of China based upon income and focus in
upon the top income levels. We can then apply the percentage of cancer incident to this number to
estimate the number of potential cancer patients in the selected segments. Perhaps we can calculate
the cost of serving each patient and fixed costs to determine a breakeven number of patients. We can
compare this breakeven number with the total potential cancer patients to determine the market share
the client needs before they can turn a profit. Hopefully, this market share is reasonable and the client
can move forward.
Interviewer: Well, you’ve covered most of the points that we looked into. Great job! Our client actually
did move forward with the opportunity and was very successful.
AbbVie to Cancel Testing of Osteoporosis Drugs
Case Type: new product; industry analysis.
Industry Coverage: healthcare: pharmaceutical, biotech, life sciences.
Case Interview Question #01040: The client AbbVie Inc. (NYSE: ABBV) is a major pharmaceutical
company in the U.S. that discovers, develops, and markets both biopharmaceuticals and small
molecule drugs. It originated in 2013 as a spin-off of Chicago, Illinois based Abbott Laboratories
(NYSE: ABT). As of December 2015, AbbVie employs in excess of 28,000 globally, and provides
products to individuals in more than 170 countries.
AbbVie currently has two new drugs in research and development (R&D), both of which are
prescription treatment-type drugs (as opposed to preventative drugs) for osteoporosis, a disease that
affects older women. The development period for new drugs is ten years, but the last three years –
which involve extensive testing and clinical trial – consume more than half of the cost. Thus, the client
AbbVie wants you to decide whether to test the two drugs, test only one of the drugs, or to abandon
the two drugs altogether.
First, however, I’d like to ask you to think through two problems for me. One is, what is the size of the
potential market for osteoporosis, and two, how do you think the markets for preventative drugs and
treatment drugs differ?
Osteoporosis is a disease where decreased bone strength increases the risk of a broken bone. It is
the most common reason for a broken bone among the elderly. Bones that commonly break include
the back bones, the bones of the forearm, and the hip. Until a broken bone occurs there are typically
no symptoms. Bones may weaken to such a degree that a break may occur with minor stress or
spontaneously. Chronic pain and a decreased ability to carry out normal activities may occur following
a broken bone.
Osteoporosis itself has no symptoms; its main consequence is the increased risk of bone fractures.
Osteoporosis becomes more common with age. It is more common in women than men.
Possible Answers:
Question #1. Estimate the size of the market for osteoporosis drugs
Assume that we’re only looking at the United States. The population of the U.S. is about 320 million,
slightly more than half of which is women. So say there are 160 million women in the U.S. I think
osteoporosis begins to be a concern in women over 50, so we need to figure out how many women
are over fifty.
Okay, well, my guess is that about 25% of the population is over 50, so that’s about 40 million
potential customers – and we should remember that as the population ages, more people will fall into
this category, so potential customers will increase. Naturally, for a treatment drug, we would then
need to get the rates of incidence (to find out what percentage of women in the correct age group
actually develop osteoporosis) and whether that is trending up or down.
The number of people willing to take a preventative drug would depend on several things. The
randomness of the disease – I don’t know much about osteoporosis, but if there’s a clear high-risk
group, and few others get the disease, then those people are likely to be customers but people
outside the group are not. On the other hand, if the disease is really random in whom it strikes, then
more people are at risk, but with a lower risk for each person.
Thus, people would make their decisions based on the cost of preventing the disease balanced
against the consequences of getting it. So, if there’s a treatment available that minimizes the
problems associated with getting the disease, then few people will take the prevention. On the other
hand, if the disease is not treatable and has severe consequences, many people will want to take
preventative measures. Then, it’ll come down to very pragmatic factors:
• Is the drug easy to take?

• Is it a simple pill taken every morning or is it several pills a day with restrictions on diet, etc?
• Will it be covered by medical insurance?
• Are there any side effects?
Question #2. Detailed differences between treatment and preventative drugs (in terms of Marketing
and Distribution Channel).
• Patients already suffering from a disease will go to a doctor, so doctors will be the ones making
choices among competing drugs.
• For a preventative drug, however, the patient will likely have more influence, because even if it’s a
prescription drug, they may or may not choose to take it, and they may find one drug more convenient
than another and thus make a choice (while patients suffering from a disease are likely to put up with
inconvenience to make themselves feel better).
• Doctors will respond most to effectiveness because they will likely be more scientific and have done
more of their own research (even if it’s just talking to colleagues) about a drug than patients. So that’s
the most important thing to stress.
• Patients, however, will be less attuned to the science behind the medicine, and will also be very
conscious of side effects, convenience, etc.
• So a treatment drug would be mainly advertised in medical journal publications and similar areas,
with a stress on the effectiveness of the medication.
• A preventative drug, however, would likely be advertised more broadly, targeting the group that
might be at risk for the disease, and stressing the awful consequences of getting the disease and how
easy and safe it is to take the prevention.
Question #3: Should the client come out with preventative or treatment drugs?
At the moment they’re treatment drugs, although they could be preventative drugs in the future. The
normal pattern is for new drugs to come out as treatments first, because longer testing is required to
prove value as a preventative. So the drug will be released as a treatment and then the company
would continue testing to see if it has value as a preventative. But consider the shorter-term
possibilities as a treatment drug.
Question #4: Should the client test the two drugs, test one of the drugs, or abandon the two drugs?
At this point, an “issue tree” or “probability tree” would be useful to diagram.
First, look at the consequences of the two choices – to test or not to test. For the decision to test,
consider the likelihood of success, to find out whether success was likely in general and whether the
two drugs had different chances of being successful. (etc. etc. for the whole issue tree).
Other issues to consider:
• Are the likelihoods of success different for the two drugs?

• Should you test one or both?
• Is the cost of the 2 tests the same?
• Decision delivery convenience (pill/shot, etc.)
• Potential market side effects
• Revenue frequency (how frequent should patients take the treatment)
• Competition
• Potential to lose share or position in market
Priority could be given to finding out about competition:
• Is the client the first company to develop a treatment for osteoporosis? — No

• If not, is this treatment significantly different? — No
• Will the client’s drugs be generic or compete on price? — No
• Does anything else distinguish the client’s drugs? More effective? Fewer side effects? — No
• How well have the existing drugs done? — Fairly well
• This will simply be duplicating the existing drugs to enter the market? — Yes
In order to be successful, the client must differentiate the product somehow.

• Advertising
• Distribution channel advantages
Question #5: During the course of the project, it was discovered that a small biotech start-up
company named “Pharmacyclics” on the West Coast (based in Sunnyvale, California) was developing
a new type of treatment for osteoporosis that would essentially make the existing treatment obsolete.
• The biotech start-up is fairly certain that their new treatment will work.
• The start-up company must get financing to undertake the expensive last three years of
development.
What would be your recommendations to the client?
1. Cancel testing of the existing two drugs immediately.

2. Buy the small biotech start-up.
3. Valuation of the small biotech start-up, how much to pay for it?
Sample Interview Transcript

Interviewer: First, however, I’d like to ask you to think through two problems for me. One is, what is
the size of the potential market for osteoporosis, and two, how do you think the markets for
preventative drugs and treatment drugs differ?
Candidate: Okay, to begin with, let’s estimate the size of the market for osteoporosis drugs. I’ll
assume that we’re only looking at the United States for the moment, so the population of the U.S. is
about 320 million, slightly more than half of which is women. So say there are 160 million women in
the U.S. I think osteoporosis begins to be a concern in women over 50, so we need to figure out how
many women are over fifty.
Interviewer: Just estimate broadly.
Candidate: Okay, well, my guess is that about 25% of the population is over 50, so that’s about 40
million potential customers – and we should remember that as the population ages, more people will
fall into this category, so potential customers will increase. Naturally, for a treatment drug, we would
then need to get the rates of incidence (to find out what percentage of women in the correct age group
actually develop osteoporosis) and whether that is trending up or down.
Interviewer: That’s good, and it leads into the next question. How would the size of the market be
different with a preventative drug?
Candidate: Well, the number of people willing to take a preventative drug would depend on several
things. First, the randomness of the disease – I don’t know much about osteoporosis, but if there’s a
clear high-risk group, and few others get the disease, then those people are likely to be customers but
people outside the group are not. On the other hand, if the disease is really random in whom it strikes,
then more people are at risk, but with a lower risk for each person. Thus, people would make their
decisions based on the cost of preventing the disease balanced against the consequences of getting
it. So, if there’s a treatment available that minimizes the problems associated with getting the disease,
then few people will take the prevention. On the other hand, if the disease is not treatable and has
severe consequences, many people will want to take preventative measures. Then, it’ll come down to
very pragmatic factors – is the drug easy to take – I mean, is it a simple pill taken every morning or is
it several pills a day with restrictions on diet, etc? Will it be covered by medical insurance? Are there
any side effects? If the side effects are severe, they will cancel out the benefits of preventing the
disease!
Interviewer: So tell me what the differences would be in marketing a preventative drug versus a
treatment
drug, and what factors would affect the sales volumes of each.
Candidate: (Here I took a minute to sketch down some items in two columns).
Okay, I’d say the first difference is going to be in whom the target for advertising is. Patients already
suffering from a disease will go to a doctor, so doctors will be the ones making choices among
competing drugs. For a preventative drug, however, the patient will likely have more influence,
because even if it’s a prescription drug, they may or may not choose to take it, and they may find one
drug more convenient than another and thus make a choice (while patients suffering a disease are
likely to put up with inconvenience to make themselves feel better).
Interviewer: Okay, how would that change the marketing?
Candidate: Well, my guess is that doctors will respond most to effectiveness – because they will likely
be more scientific and have done more of their own research (even if it’s just talking to colleagues)
about a drug than patients. So that’s the most important thing to stress. Patients, however, will be less
attuned to the science behind the medicine, and will also be very conscious of side effects,
convenience, etc. So a treatment drug would be mainly advertised in medical publications and similar
areas, with a stress on the effectiveness of the medication. A preventative drug, however, would likely
be advertised more broadly, targeting the group that might be at risk for the disease, and stressing the
awful consequences of getting the disease and how easy and safe it is to take the prevention.
Interviewer: Okay, that’s good. Let’s talk about the client’s problem. Should they spend the money to
finish developing the two drugs?
Candidate: Are they treatment drugs or preventative drugs?
Interviewer: At the moment they’re treatment drugs, although they could be preventative drugs in the
future. The normal pattern is for drugs to come out as treatments, because longer testing is required
to prove value as a preventative. So the drug will be released as a treatment and then the company
would continue testing to see if it has value as a preventative. But consider the shorter-term
possibilities as a treatment drug.
Candidate: (At this point, I drew the following McKinsey-style “issue tree.” I basically then read it off to
the interviewer
Okay, first I’d look at the consequences of the two choices – to test or not to test. For the decision to
test, I’d want to look at the likelihood of success, to find out whether success was likely in general and
whether the two drugs had different chances of being successful. (etc., etc., for the whole tree).
Decision Tree:
(1) Test (1 or both)
• Likelihood of Success
– are the two drugs’ chances different?
– is success likely?
• Cost of Test
– same for both?
• Potential Market
– delivery convenience (pill/shot etc).
– side effects
– revenue frequency (how sold per treatment)
– competition
(2) Don’t Test -> Potential to lose share or position in market
Interviewer: Okay, those are all important issues. Is there one thing you’d want to find out first?
Candidate: Yes, I’d want to find out about competition – are we the first company to develop a
treatment for osteoporosis? If not, is our treatment significantly different?
Interviewer: That’s a crucial question. No. In fact, both drugs we’re producing are essentially the same
as drugs our competitors already have out on the market.
Candidate: Are we producing generic drugs that will cost less?
Interviewer: No, we would not compete on price.
Candidate: Does anything else distinguish our drugs? More effective? Fewer side effects? Anything?
Interviewer: No.
Candidate: How well have the existing drugs done?
Interviewer: They’ve done very well. They’re the dominant treatments of the disease.
Candidate: So we’re just going to duplicate their drugs to enter the market?
Interviewer: Yes. Our drugs will work in essentially the same way as the existing drugs.
Candidate: Okay, so to be successful, we’d have to differentiate our product somehow, or maybe our
size in the market would allow us to gain share just by entering the market – because of purchasing
arrangements, brand name, etc.
Interviewer: No, the competitors are just as big as we are. How would you go about differentiating a
product that nearly duplicates an existing product in the market?
Candidate: Well, one way would be advertising, so that you could potentially make patients ask for our
drug over the others. Another way would be on cost, but we don’t want to do that. We might have
certain distribution channel advantages – contracts with hospitals, insurance companies, drugstores,
etc, to exploit to help.
Interviewer: Anything else?
Candidate: Ummmm. (I think he was looking for a specific additional point, but I couldn’t think of
anything else. So he let me off the hook).
Interviewer: Well, that is okay. What would your recommendation be?

Candidate: It doesn’t seem like it’s worth investing all the money when there doesn’t seem to be a
clear way to steal market share from the existing products. On the other hand, a big provider or drugs
may not want to be left out of a particular market, for fear of losing other markets to a competitor with
a full range of products.
Interviewer: That makes sense. What if I told you that we found out while doing our research that a
small biotech start-up company on the West Coast was developing a new type of treatment that would
essentially make the existing treatment obsolete?
Candidate: What are its chances of being a technical success? And when would it come out?
Interviewer: We are fairly certain it will work if the firm can get financing to undertake the expensive
last three years of development. We even know how the new drug works. They’re about to begin that
right now – so it’ll be at least three years until it reaches market.
Candidate: Then, first of all, I’d probably cancel testing of the existing drugs immediately even the
possibility that the drug will become obsolete adds to the problems of the crowded marketplace and
makes it a bad investment. If we’re fairly certain that the biotech startup’s drug will succeed, it’s
unlikely they won’t be able to find someone to finance the testing.
Interviewer: What would you tell the client to do?
Candidate: Well, they could do a few things. If there is a chance that the biotech start-up will get
delayed in bringing the new drug to market, we could use what we know to develop it ourselves and
beat them to market. But they’ve got a seven-year head-start on us, if our research & development
takes the standard ten-year period. We could try to hamper their development somehow – perhaps
using our size in the market – but that wouldn’t work for long anyway. They’re a small company?
Interviewer: Yes.
Candidate: And the client is a large company with lots of resources?
Interviewer: Yes.
Candidate: Well, then maybe they should buy the biotech start-up – that way, the start-up would get
its capital, and
the client would have a new drug that would trounce the competition in only three years.
Interviewer: Very good. That’s what we told them, and that’s what they did.
West Bengal to Build a Second Dedicated IT Hub
Case Type: investment.
Industry Coverage: government, public sector; software, information technology (IT).
Case Interview Question #00994: West Bengal is a state in eastern India and is the nation’s fourth
most populous state, with over 91 million inhabitants. Spread over 34,267 sq mi (88,750 km2), it is
bordered by the countries of Bangladesh, Nepal and Bhutan, and the Indian states of Odisha,
Jharkhand, Bihar, Sikkim and Assam. The state capital of West Bengal is Kolkata.
Kolkata, formerly known as Calcutta, is located on the east bank of the Hooghly River, and is the
principal commercial, cultural, and educational center of East India. Kolkata’s Sector V, located in the
Salt Lake area, is a hub for IT and ITES (Information Technology Enterprise Solutions) companies.
After the recent change in government, Miss Mamata Banerjee, the Chief Minister of West Bengal
since 2011, wants to know whether it is viable or not to build another dedicated IT hub in West
Bengal. If it is viable, how should she go about it? How would you go about it?
Possible Answer:
Candidate: I would like to discuss some major points regarding the viability of the project. Firstly we
have to take into account the revenue sharing and cost sharing model between the government and
the private investors. Secondly because of the bad reputation of West Bengal as a place to invest we
have to look into the willingness of the investors to actually invest. Thirdly since an IT hub is already
present in Kolkata we have to look into the effects the new IT hub will have on that. Also we have to
think about the possible location for the new IT hub.
Interviewer: OK. Let’s start with the revenue sharing and the cost sharing model.
Candidate: From the knowledge I have West Bengal is actually having a high debt, so it will be difficult
for it to allocate a huge sum from the government’s side. But nonetheless because other
governments, like say Gujarat, provide a lot of incentives for investors, Miss Banerjee has to ensure
that the incentives she provides are also competitive enough.
Interviewer: That’s a good point.
Candidate: So after cost I would like to talk about the revenue sharing model.
Interviewer: Let’s not talk about that for the time being. Assume that Miss Banerjee has made the
decision. Now, how would you as a consultant to the government convince the industry to invest in
West Bengal?
Candidate: Ok. For convincing investors I would like to highlight some major points that would show
West Bengal as a great place to invest in. I would like to talk about the workforce available in West
Bengal, the success of the present IT hub, the low labour cost available to set up.
Interviewer: What would you say about the workforce and the success of the present IT hub?
Candidate: West Bengal has few of the great institutions of India. In Engineering, colleges like IIT
KGP (Indian Institute of Technology Kharagpur), Jadavpur University and many more private colleges
are one of the best in India. Thus these colleges provide a big pool of highly skilled workers that the IT
industry can use. Also traditionally Bengalis like to stay close to home and hence they would prefer to
work in West Bengal itself if given the opportunity. This can further attract skilled workforce from other
parts of the country as well.
Another point to highlight is the success of the present IT hub in Kolkata. It is expanding at a rapid
rate and companies are actually happy with the infrastructure available there.
Interviewer: Then why would an investor want to invest in a new hub? Why not invest in the present
hub itself?
Candidate: That is because of the lack of space available now. The government is actually not in a
position to give space to new companies in the present IT hub and so a new IT hub has to be built.
Interviewer: So how would you decide on the location for the new IT hub?
Candidate: Well, there can be 2 approaches. The new IT hub can be placed in the main city as well as
in the outskirts of the Kolkata. Both will have its pros and cons. If the new hub is placed in the city it
will benefit from the supporting infrastructures like roads and connectivity but the cost of the land
might be high. But if an SEZ (Special Economic Zone) is built in the outskirts of the city then the cost
of the land will be low but connecting roads and other supporting infrastructure will have to be built.
We have to be careful of the land acquisition technique also.
Interviewer: Well that’s fine. Now assume you are working for Miss Banerjee and I am an investor.
Convince me why I should invest in West Bengal.
Candidate: I would like to start the meeting by highlighting the points that would help your business
grow if you invest in our new IT hub. I am sure you must know about the favorable responses that the
corporate has given to the present IT hub in Kolkata. They have spoken highly of the infrastructure
present there. We plan to provide even better facilities in the new SEZ that we are going to build.
In terms of labor availability West Bengal has one of the best skilled workforces in the country due to
the presence of great institutes like IIT KGP, Jadavpur University etc. I am sure that you will find the
workforce more than enough for your requirements.
Another point I would like to stress on is the change in government. Our new government believes
only in development and many of the malpractices that came with the communist government like
labor unions, bandhs etc will soon be abolished under us. This will ensure smooth business and
peace of mind for you as well. We want to change the image of West Bengal and we will make sure
that people who help us in the initial stages of this development will be facilitated in the future as well.
Interviewer: OK, that was a good pitch. That is all for now. Thanks. Please wait for your next round.
Bombardier Considers Entering Aircraft Leasing Business
Case Type: new business; industry analysis.
Industry Coverage: aerospace, defense.
Case Interview Question #00986: The client Bombardier Aerospace is a division of Canadian
multinational aerospace and transportation company Bombardier Inc. The company is a major
manufacturer of regional airplanes – airplanes with 100 seats or less. Its business consists of two
types of aircraft: (1) jet engine, 80 to 100-seat aircraft and (2) propeller, 20 to 30-seat aircraft.
In fiscal year 2013, Bombardier delivered 100 jet engine aircraft and 150 propeller. This represented a
unit volume increase year-over-year of 10% and 5%, respectively, and revenues of USD $730 million
and $225 million, respectively.
Although overall profitability for Bombardier in 2013 was a competitive 5% economic profit margin,
profitability varied significantly by business. The propeller aircraft business generated a stellar 30%
profit margin, while the jet engine business was unprofitable with a margin of -3%. Over the past
several years, Bombardier has experienced eroding profitability in its jet engine aircraft business. Its
propeller business, despite being profitable, has been flat in most recent years.
At a January 5th analyst conference (a meeting with the investor community) Bombardier’s senior
management team announced that the company was committed to managing for value. To this end,
Bombardier has hired you and a team of McKinsey consultants to help the company develop and
implement the value-maximizing strategies for its businesses.
For our case discussion today, please focus on the jet engine aircraft business only:
(1) How would you go about further analyzing this business?

(2) What recommendations would you like to make to senior management of Bombardier?
Please see handouts #1, #2, & #3 below.
Exhibit 1. Bombardier Aerospace Profitability by Business (Fiscal Year 2013)
Jet Engine Aircraft Propeller Aircraft

% of
Amount ($MM) Total Amount ($MM) % of Total
Revenues $730 100% $225 100%
COGS $588 81% $86 38%
SG&A $84 12% $16 7%
Delivery & Other $42 6% $8 4%
Taxes (40%) $15 2% $46 20%
Net Income $1 0 $69 31%
Capital Charge
(10%) -$21 -3% -$3 -1%
Economic Profit -$20 -3% $66 30%
Note: Assume debt-to-total capital of 70%
Exhibit 2. Jet Engine Regional Aircraft Business – Per Aircraft Economics (FY 2013)
(thousands) Per Aircraft Cost
COGS $(5,880)
SG&A $(840)
Delivery & Other $(420)
Taxes $(504)
Capital Charge $(214)
Total Economic
Cost $(7,858)
Exhibit 3. Jet Engine Regional Aircraft Business – Profitability by Customer Segments (FY 2013)
Customers Who Buy 1 Customers Who Buy 3 Customers Who Buy 30

(millions) Aircraft Aircraft Aircraft
# of Customers 5 11 3
Revenues $42 $280 $408
COGS $29 $206 $353
SG&A $29 $50
Delivery & Other $15 $25
Taxes $12 0
Net Income $4 $18 ($20)
Capital Charge ($1) ($7) ($13)
Economic Profit $3 $11 ($33)
# of aircraft
delivered 5 35 60
Share by
Segment 2% 33% 50%
Possible Solution:
1. Case Summary
Bombardier Aerospace is losing money in one of its two business units: jet engine aircraft. However,
the market for jet engine aircraft is profitable. Although Bombardier has a parity offering and operating
position, it has a disadvantaged overall competitive position, driven by a pricing disadvantage in
serving its large lessor customer segment. Lessors, in purchasing large volumes of aircraft, have
been able to exert significant buying power over our client to achieve large price concessions.
2. Market Economics
An “A” candidate should seek to understand market size, growth and profitability, as well as conduct
an indirect structural assessment of the industry, e.g., suppliers, customers.
Additional Information: to be provided to candidate if asked, although some may require prompting.
• Market Size: In 2013, the U.S. jet engine, 100 seat or less aircraft market was ~$5 billion.
• Competitors: There is no dominant competitor in the jet engine, 100 seat or less market. The market
leader Boeing has 20% market share. There are 4 other competitors with market share from 12% to
18%. Bombardier has ~16% share.
• Market Growth: The market has been growing 5% (in units delivered) each year for the past 5 years
and is expected to continue to grow 5% over the next decade. In 2013, a total of 625 jet engine
regional aircraft were delivered to customers.
• Market Profitability: Ask the candidate whether he/she thinks the market is profitable, and how
he/she would go about assessing market profitability. (Answer to be provided post discussion on
structural forces below — The market is profitable with the average competitor generating 4%
economic profit margins over the past 5 years).
• Supplier Power: The supplier base for regional aircraft parts is highly fragmented and Bombardier
uses approximately 50% proprietary parts in its jet engine aircraft. Hence, supplier power is low.
• Intensity of Competition: (Direct) Fairly concentrated market with only 6 jet engine regional aircraft
manufacturers. Hence, intensity of direct competition is low-to-moderate.
• Customer Power: In 2013, there were 225 customers. Types of customers include airlines, aircraft
lessors, local and national governments, businesses and private individuals. Hence, customer power
varies by segment.
Note: Only if the candidate asks about customer power, share with him/her the following facts:
Aircraft lessors make large purchases (often 20 or more aircraft) during a buying cycle and hence
exploit their negotiating leverage over manufacturers, such as Bombardier. Hence, aircraft lessors
have high customer power. All other customers have low-to-moderate buying power, depending on
their credit worthiness.
• Intensity of Competition: (Indirect) Larger commercial jets (100 seats or greater) with longer range
manufactured by large commercial aerospace and aircraft manufacturers can be used on regional
routes. However, these larger aircraft are expensive for customers to operate solely on a regional
basis. Hence, intensity of indirect competition is low.
• Barriers to Entry: Jet engine, regional aircraft manufacturing requires significant capital investment in
production facilities and equipment, as well as strong relationships with various labor unions. Hence,
barriers to entry are high.
3. Competitive Position
An “A” candidate should seek to understand competitors and Bombardier’s offering, pricing, and
operating position.
Additional Information: to be provided to candidate if asked, although some may require prompting.
• Offering position: Overall, the client company’s offering position is at parity.
• Commonality: The company’s jet engine aircraft has a cockpit that is similar to the industry standard
and results in low switching costs for new customers (pilots and flight crew do not need extensive re-
training).
• Performance: The company’s aircraft offers a range of 500 miles, which is similar to the market
average.
• Maintenance and Asset Life: The majority of the fragmented jet engine aircraft maintenance
companies have the capabilities and parts to service Bombardier’s aircraft. For the aircraft customer,
maintenance costs over the life of the asset is in line with regional jets of the company’s competitors.
On average, the life of the aircraft is 20 years.
• Pricing Position:
Question for the candidate: Based on the discussion thus far, what do you think that the client
company’s pricing position is relative to competitors?
Possible Answer: Bombardier is pricing below the market average, since it is gaining market share
(unit volume is growing at 10% vs. market growth of 5%) with a parity offering. Hence, Bombardier is
pricing for share, i.e., in FY 2013 it had a disadvantaged pricing position.
• Operating Position: Bombardier’s operating cost per aircraft is at parity with the industry. Every jet
engine aircraft
the company delivered in 2013 cost approximately the same to produce.
Note: The candidate should recognize that achieving scale is critical to the spreading of fixed costs,
and hence, the lowering of per unit costs.
4. Bombardiers Customers
Customer Segments: Bombardier serves 3 types of jet engine aircraft customers:

• Customers who purchase only 1 aircraft in a buying cycle (approximately every 5 to 15 years,
depending on the customer)
• Customers who purchase 3 aircraft, and
• Customers who purchase 20 aircraft
At this juncture, the candidate should inquire about customer segment profitability. Provide the
candidate with the
handout: “Exhibit 3. Jet Engine Regional Aircraft Business – Profitability by Customer Segments”.
Description of customer segments:

• Customers who buy only 1 aircraft during a buying cycle are comprised mostly of small aircraft
customers with moderate-to-high credit risk.
• Customers who buy 3 aircraft are comprised mostly of medium aircraft customers with moderate
credit risk.
• Customers who buy 20 aircraft are comprised of creditworthy aircraft lessors.
Key Driver of Segment Profitability:
If the candidate has not discussed it already, at this point in the case, he/she should recognize that
the 3 aircraft lessors in making large purchases during a buying cycle exploit their negotiating
leverage over Bombardier.
The data to support this can be quickly calculated by the candidate by referencing the “Profitability by
Customer Segment” handout:
• $408M/60 aircraft = $6.8M average sales dollars per aircraft from aircraft lessors, compared to
• $42M/5 aircraft = $8.4M from small aircraft customers,
• $280M/35 = $8.0M from medium aircraft customers.
Note: Ask the candidate to compute average price by customer segment, if he/she has not done so
without being prompted.
Of course, the candidate should be able to conclude that the main driver of profitability between
customer segments is solely price without doing any math, since operating cost per aircraft produced
and delivered is the same regardless of the intended customer.
5. Overall Competitive Position
Question for the candidate: Do you think that the client company’s overall competitive position is
advantaged, disadvantaged or at parity?
Possible Answer:
Bombardier is competitively disadvantaged overall with negative profits (compared to a profitable

market) driven by a disadvantaged pricing position, particularly to the large lessor customer segment.
6. Strategy Alternative
Key Question: What are some strategy alternatives that Bombardier can pursue in order to improve its
jet engine aircraft profitability?
Potential alternative #1: Aggressively pursue new small and medium, non-aircraft lessor customers
and do not increase sales to existing aircraft lessor customers.
Ask the candidate what key questions he/she would seek to answer in the evaluation of this
alternative. Key risks may include a slow road to profitability and unlikely to result in the doubling of
the jet engine aircraft business’ value. Ask the candidate to compute how long it would take for
Bombardier to double the economic profit of the business given the company acquires new small and
medium, non aircraft lessor customers at the market growth rate of 5%.
Potential alternative #2: Aggressively pursue new small and medium, non-aircraft lessor customers
and do not serve any aircraft lessors.
alternative. Key risk may include the inability to achieve scale (currently at 100 units, with 60% of units
purchased by aircraft lessors), and hence, profitability in any customer segment.
Potential alternative #3: Bombardier to increase its negotiating leverage vis-a-vis aircraft lessors by
entering the aircraft leasing market.
alternative.
Some additional facts to share with the candidate:
• The jet engine, regional aircraft leasing market is large and growing. In 2013, the new aircraft
leasing market represented almost 50% of all new aircraft delivered (with operating leases comprising
half) and is expected to grow 5% per year.
• The aircraft leasing market is profitable with the average competitor generating ROEs of ~15% (cost
of equity ~10%).
• Three aircraft lessors (also Bombardier’s customers) dominate the market with a combined share of
65%.
• The key driver of profitability is cost of funds.
• Bombardier currently provides vendor- or manufacturer-financing on a very limited basis in the form
of leases.
• Bombardier would be at parity in terms of cost of funds.
• Bombardier has marketing relationships with all aircraft end-users who are leasing their aircraft from
the company’s aircraft lessor customers. Bombardier works with these end-users to help them
configure the plane during the front end of the sales process.
Bausch & Lomb to Sell More Contact Lenses via Doctor’s Office
Case Type: improve profitability; business competition, competitive benchmark.
Industry Coverage: healthcare: hospital & medical.
Case Interview Question #00963: Your client is a well-known contact lens provider called Bausch &
Lomb. The company is one of the world’s largest suppliers of eye health products, including contact
lenses, lens care products, medicines and implants for eye diseases. Bausch & Lomb is
headquartered in Bridgewater, New Jersey, United States, and employs more than 13,000 people as
of 2015.
Bausch & Lomb manufactures and distributes contact lenses in the U.S. Bausch & Lomb is one of the
largest players in the US market, and has been for quite some time. However, the company feels that
compared to its main competitor, it is not doing as well as it could. The CEO of Bausch & Lomb has
called in McKinsey & Company to find out how to solve this problem and to recommend a solution.
How would you go about it?
If the candidate asks for more information on the company/product, provide the following data.
• For the scope of this case, Bausch & Lomb manufactures and distributes only in the U.S.
• Demand for contact lenses has been growing steadily at about 3% annually.
The problem of the case as stated is intentionally very vague. Interviewee should clarify what is meant
by “compared to its main competitor, not doing as well as it could”, not just assume that it means lack
of growth, etc.
• Bausch & Lomb completed a benchmark study of itself versus its biggest competitor and discovered
that its profits are not growing as fast as the competitors’.
• There are only two main players in market: Bausch & Lomb and Competitor Johnson & Johnson.
Other, smaller firms exist, but for the scope of this case are negligible.
• Competitor Johnson & Johnson is also a US-only manufacturer & distributor of contact lenses.
• Market is equally divided between Bausch & Lomb and Competitor Johnson & Johnson.
• Bausch & Lomb and Competitor Johnson & Johnson are of roughly equal size.
• Bausch & Lomb and Competitor Johnson & Johnson sell the same products.
Possible Answer:
Question: How would you go about structuring an analysis of this problem?
Note: If the interviewee hasn’t clarified the purpose of the case (i.e. what problem does Bausch &
Lomb want them to solve?), push them to do so. A lot of people automatically assume that Bausch &
Lomb’s sales aren’t growing at industry rate, or that Bausch & Lomb isn’t satisfied with its market
share. If they do, I usually read back the statement of the issue in the introduction (“compared to its
main competitor, it is not doing as well as it could”) and ask them to explain to me what that could
mean. If they still don’t get it, I point out that the statement is very subjective (as in, could be
interpreted to mean many different things) and by then, they usually figure it out.
This is a profitability problem, so classic profitability framework will work: profits = revenues – costs =
(price * volume) – (fixed costs + variable costs).
The best candidates will be specific about their bullet points, giving concrete examples and eliminating
certain areas based on their communicated hypotheses.
Most candidates don’t do this, so after the framework is laid out, I usually push back and ask them.
Question: Based on the information I’ve given you so far, and based on what you know about the
contact lens industry, where do you think the problem lies?
What answer they end up with doesn’t matter, but they should concretely and rationally eliminate
certain options.
The easiest way to reason out possible problem area is by thinking about current, established major
contact lens players – Bausch & Lomb, and Johnson & Johnson.
This is an example of how to analyze the situation:
Contact lens industry is defined by high barriers to entry (since high R&D outlay necessary); also,
industry is mature (20 years plus) & dominated by two players, so can expect the two main players to
be equal in most things. Thus
(1) Cost side
• Variable costs
– Raw Material: inputs will be plastic, saline solution (water, salt), packaging (paper, aluminum foil,
plastic). These are all commodities. Any issues Bausch & Lomb has with raw material costs are likely
also experienced by the Competitor Johnson & Johnson. Thus not an issue.
– Labor: will be unskilled, wage rate probably set by minimum wage standards. Unless unionized and
competitor not, nothing here to put Bausch & Lomb at disadvantage to Competitor Johnson &
Johnson. Thus not an issue.
• Fixed costs
– Plant, Property & Equipment: given U.S. contact lens industry, probably no difference between
Bausch & Lomb and Competitor Johnson & Johnson. There should be no major difference in plant
costs or plant efficiency. Probably no major equipment differences.
– R&D: big cost factor, but probably equal between Bausch & Lomb and Competitor Johnson &
Johnson.
– Overhead (People): Again, no major differences as both companies are of similar size.
– Marketing/Distribution: Probably no differences.
– Legal issues? Possible, but Bausch & Lomb is probably big enough that even a huge class action
settlement shouldn’t affect its bottom line too much.
(2) Sales side
• Pricing
– Contact lenses are fairly commoditized. Minor differences in pricing may exist, but probably nothing
major.
– Customers may be price sensitive, but given that contact lenses are fitted to a person by their
doctor, customers do not purchase lens purely on price. Comfort/fit and compatibility is a big issue.
• Product mix: Maybe Competitor is selling more profitable mix of lenses?

• Distribution/Sales channels: Competitor may be selling through more profitable channels?
• Volume
– Substitute goods: May be substituting away from Bausch & Lomb? However, any substitutes (Lasik,
glasses, etc.) will likely hit Competitor equally.
– Competitor may capture more of market – better branding, better distribution, better price, better
products? Could be possible.
Question: After analyzing Bausch & Lomb’s cost structure, McKinsey is confident that Bausch &
Lomb’s costs are extremely competitive. Knowing this, where do you think the problem could lie?
Candidate: Sales side.
Question: McKinsey analyzed the distribution channels of Bausch & Lomb and its competitor Johnson
& Johnson, and came up with the following information. (show Customer Mix slide)
Slide 1. Customer Mix of Bausch & Lomb and Competitor Johnson & Johnson
Slide is vague. Interviewee should immediately walk through and clarify what is being shown. Most
candidates won’t do this. If they don’t, start pointing things out to them.
– Slide shows customer mix in terms of sales volume. Competitor Johnson & Johnson and Bausch &
Lomb sell equal volume annually (10,000,000 lenses per year or whatever).
–> So big takeaway is that Competitor Johnson & Johnson sells more via Doctor’s offices; Bausch &
Lomb via Optical Retailers.
• Big Box Discounter = Walmart, Target, Sam’s Club, Costco

• Doctor’s Offices = your local mom & pop non-chain doctor’s office
• Optical Retailer = Lenscrafters, etc.
–> So obviously, varying degrees of buying power. Big Box Discounter like Walmart purchases in
large volume; Doctor’s office is purchasing in small quantities, probably also not super business savvy
(no procurement department). Lenscrafter is in the middle.
In addition, different differentiation: Big Box Discounter like Walmart is known for cheap prices;
Doctor’s office is specialized & high on service. Lenscrafter is in the middle.
• Bausch & Lomb and Competitor Johnson & Johnson charge same prices for same products (as
established earlier in framework).
–> At this point, a great candidate will remember the problem at hand (less profitable than
competitor), combine it with the new information and realize that there must be a pricing difference
between the different sales channels.
Once difference in pricing is established, ask:
Question: Does this Surprise You?
The candidate should make some sort of intelligent comment about how, given the types of retailers,
no, it does not surprise him/her.
(Now show the candidate profitability by customer Slide)
Slide 2. Profitability by Customer
Per box of contacts (6 lenses) Big Box Discounter Doctor’s Office Optical Retailer
Revenue $16.50 $28.00 $22.00
COGS $8.00 $8.00 $8.00
Sales, Distribution $5.00 $2.00 $3.50
Other Fixed Costs $2.00 $2.00 $2.00
Profit (ask candidate to calculate)
Question: Can you tell me what you see here, does any of this surprise you? (show profitability by
customer slide)
The candidate should point out that prices are in line with what was expected. Walmart is lowest,
Doctor’s offices highest. Given purchasing power, it makes sense. Also, customers generally are
willing to pay a premium at a Doctor’s office, since service is more individual.
COGS: it makes sense that COGS are equal in all channels, as the same product is sold in each
channel.
Sales, Distribution: it’s interesting that Sales & Distribution Costs are different. It could be because
Walmart requires more advertising, cash for shelf space?
Fixed Costs: it makes sense that Fixed Costs are equal. Again, same product.
Question: Ask the candidate to calculate profit and percent profit margin. It’s OK to estimate on
margin.
• Big Box Discounter: $16.5-$8-$5-$2 = $1.5, $1.5/$16.5 = 9%

• Doctor’s Office: $28-$8-$2-$2 = $16, $16/$28 = 57%
• Optical Retailer: $22-$8-$3.5-$2 = $8.5, $8.5/$22 = 39%
Question: Does any of this surprise you?
Candidate: Make appropriate comment.
Question: Given this information and given the initial problem you’re solving for, what would you want
to look at now?
Candidate: How can we sell more lenses via the Doctor’s Office channel?
Excellent candidates might also comment that they’re curious as to why Bausch & Lomb is even
bothering to sell in the Big Box Channel – why not pull out and focus resources/attention on improving
sales in Doctor’s Offices, instead?
Question: Like its competitor Johnson & Johnson, Bausch & Lomb relies on sales reps to distribute its
contact lenses to the Doctor’s Offices. Currently, Bausch & Lomb has 5 reps in its call center
dedicated to reaching out to the Doctor’s Offices and doing whatever is necessary to get them to sell
as many Bausch & Lomb lenses as possible.
Interestingly, McKinsey has discovered a relationship between call frequency and sales generated:
• For every 2 calls made to a customer per month, our client sees a 5% increase in revenue from that
customer.
• For every 3 calls made, our client sees a 15% increase in revenue over revenue for 1 call.
Currently, each B&L sales person has 100 customer accounts. Each account must be called at least
once a month, as B&L does not want to lose any customers. Assume that sales per customers, when
the customer is called once a month, is $100.
Given these findings, what should Bausch & Lomb do?
Candidate:
To maximize profits, the candidate must consider how to best distribute phone calls.
Additional Information to be given if asked:

• Each sales call takes 30 minutes.
• Each sales rep works 20 days per month, 8 hours a day.
• Each sales rep spends approximately 3 hours of each work day on administrative work, lunch break,
etc.
Calculation:
8 hours a day less 3 hours a day for admin = 5 hours a day for sales calls.
5 hours divided by 30 min per call = 10 calls per day.
10 calls per day times 20 work days per month = Max. capacity is 200 calls per month per rep.
200 calls max less 100 calls necessary = 100 “free” calls.
The sales reps have already called all customers once.
– To reach 3 calls per month, they must call customer 2 more times. 100/2 = 50 customers, they are
able to call 3 times per month for 50 customers.
– To reach 2 calls per month, they must call customer 1 more time. 100/1 = 100 customers, they are
able to call 2 times per month for 100 customers.
• 1 call: sales per customer = $100

• 2 calls: sales per customer = $100 * 1.05 = $105
• 3 calls: sales per customer = $100 * 1.15 = $115
If all customers are called twice, then sales = 100 customers * $105 per customer = $10,500
Otherwise, 50 customers are called once and 50 customers are called 3 times, sales = 50 customers
* $100 + 50 customers * $115 = $10,750
3. Recommendations
The client company Bausch & Lomb should call 50 customers once and 50 customers 3 times.
4. Additional Considerations
See Above
5. Primary Takeaways from Case
• Make sure you understand what problem you’re trying to solve. If the problem is vague, clarify it
before you start your framework, otherwise, how do you know what you’re solving for?
• Don’t jump to conclusions on slides. Even if you think you understand everything on it, verify with the
interviewer to make sure your understanding is correct.
• Take every sub-conclusion back to the main question.
• Sanity check everything you conclude and/or see. Does this make sense? Is this what I expected to
see?
SuperValu Stores to Increase Deodorant Profitability
Case Type: improve profitability; math problem.
Industry Coverage: cosmetics, beauty products.
Case Interview Question #00924: The client SuperValu, Inc. is a large national retailer. The
corporation, headquartered in the Minneapolis suburb of Eden Prairie, Minnesota, has been in
business for nearly a century. It is the fifth largest supermarket chain in the United States (after Kroger
and Albertsons). In addition to grocery, food and drinks, SuperValu also sells consumer products and
household goods in their stores.
Recently, the client SuperValu has asked you to look into their deodorant category, which had sales of
$500 million last year. The deodorant category has been profitable but the client has recently learned
that their deodorant category’s profitability is below the industry average. Specifically, the client
SuperValu wants to know:
(1) Why is the client’s profitability of the deodorant category lower than the industry average?
(2) If possible, how can the client increase this category’s profitability?
Possible Answer:
1. Note to the interviewer
The trick to this profitability case is that the client has the same profitability per deodorant brand it
sells compared to the competition, but the client gets majority of its sales from the least profitable
brand (Axe). The client also does not have a Private Label deodorant, however the Private Label
typically has a high profitability. Everything else in the discussion with the candidate can be made up
but it needs to be aligned with the insights below. For example, the competitors are growing
deodorant sales at 5%/year just like the client does.
If the candidate asks if the client wants to match the profitability of the other competitors, answer that
we do not know the profitability of each competitor.
If the candidate asks if the client wants to match the average profitability of the deodorant category
that the rest of the market has (this can be calculated from the Exhibits), answer that the client is most
interested in growing the profits fast instead of matching some targeted profitability.
2. Case Opening
After the candidate structures the case, ask some probing questions as appropriate. Look for
connection to the Hypothesis he/she stated.
Part 1: ask the candidate to study the data in Exhibit 1 and share what he/she observed.
Exhibit 1, Vendor sales mix – % of revenues
Axe Degree Old Spice Gillette Right Guard Private Label

Client’s Stores 55% 10% 17% 10% 8% 0%
Rest of
Market 35% 20% 25% 10% 3% 7%
Insight 1: the majority (55%) of the client’s sales in this category comes from a single brand (Axe).
Insight 2: the client does not have a Private Label deodorant as the competitors have.
Insight 3: apart from these two, often the client has a different percentage of sales (often substantially
different in relative terms, e.g., Degree, Right Guard) coming from the rest of the brands compared to
the rest of the market.
This should lead the candidate into asking for profit margins for each brand which is essentially
Exhibit 2.
Part 2: ask the candidate to study the data in Exhibit 2 and share what he/she observed.
Exhibit 2, EBIT as a percentage of sales
Private Old Gillett Right

Label Degree Spice e Guard Axe
Client’s Stores and Rest of
Market 35% 40% 16% 27% 38% 15%
Insight 4: Axe brand has the lowest profitability (15%) while it represents 55% of the client’s sales.
This is not good for maximizing profit from the deodorant category.
Insight 5: the key to the client’s problem is the sales distribution between different brands. The client
should decrease the sales of the less profitable brands and increase sales of the more profitable
brands.
Insight 6: two brands that the client has a lower percent of sales when compared to the rest of the
market are Degree and Private Label; however, these are the two brands that have very high to
highest profit margins.
Note: Private Label would be the client’s own label which the client would need to start selling after
some homework on how to make/source it and introduce it to the market. This could be a good point
of discussion with the candidate.
Ask the candidate: How to start selling its own Private Label deodorant? What needs to happen? For
example: find a manufacturer that wants to supply deodorant to the client for the Private Label sales,
hopefully find a manufacturers that is already making popular smells for other brands (since often
there are a few manufacturers that make most of the deodorants and other brand names simply
source the material from them), make the new product introduction plan, where to do it first since the
client is a large national retailer, promotions, shelf space and positioning, etc.
Insight 7: Right Guard also has a high profit margin but the client already has a higher percentage of
Right Guard than the rest of the market so the client should likely not focus on this brand as it might
be hard to increase its percentage of sales further. Better focus on the low hanging fruit. However,
increasing sales of Right Guard could be an interesting point of discussion with the client.
Insight 8: the other two brands (Old Spice and Gillette) also have lower margins so it is better not to
focus on them at this point, especially not the Old Spice.
Average weighted profit margin

Client’s
Stores 55%*15% + 10%*40% + 17%*16% + 10%*27% + 8%*38% = 20.71%
Rest of 35%*15% + 20%*40% + 25%*16% + 10%*27% + 3%*38% + 7%*35% =
Market 23.54%
Insight 9: Just as FYI, the average weighted profit margin for the deodorant category for the Rest of
Market is about 24%. The Client’s average weighted profit margin, that is, average profit margin for
the whole Deodorant category is about 21%. This is not expected to be calculated by the candidate
and it does not provide additional valuable insight than what was obvious from the qualitative
assessment of the same (see Insight 5). The candidate should recognize that this somewhat complex
calculation would burn his/her valuable time but would not change the direction of the case analysis.
Part 3: if the candidate did not select to calculate an increase in profitability for some scenario in
Exhibit 2, ask him/her to pick one and do it.
One way to set up the analysis for this case after studying the two Exhibits could be: Impact of shifting
product mix from Axe products to Degree and Private Label.
Let’s say the client shifts 15% of sales from Axe to Degree (10%) and Private Label (5%).
Impact to shift from Axe to Degree: $500M * (40% – 15%) * 10% = $12.5M
Impact to shift from Axe to Private Label: $500M * (35% – 15%) * 5% = $5M
Total Impact in profit increase: $12.5M + $5M = $17.5M
If the candidate also calculates the profit for last year (i.e., $103.5M), then this would roughly
represent a 17% increase in profitability.
Profit for last year = $500M * (55%*15% + 10%*40% + 17%*16% + 10%*27% + 8%*38%) =
$103.55M
$17.5M / $103.55M = ~17%
Ask the candidate: is $17.5M (or whatever else the candidate calculates) a minor, medium or major
profitability increase in this category? Ask the candidate how else to determine this if he/she gets
stuck in calculating current profitability for the client and the rest of the market (see Insight 9).
Ask the candidate: How to achieve increase sales of Degree and Private Label (or whatever else the
candidate selected as the optimal approach)? For example: promotions, positioning on the shelf
space, advertisement, etc.
Andover to Switch from Direct Sales to Service Contract Model
Case Type: merger and acquisition (M&A); organizational behavior; industry analysis.
Industry Coverage: oil, gas, petroleum industry; industrial equipment.
Case Interview Question #00902: Our client is the CEO of Andover Compressor, a company that
produces natural gas compressors. A compressor is used to pump gas out of a well, compress it, and
move it to a pipeline. Andover is preparing to merge with Bellspan, a compressor company of
approximately equal size, to form CompressCorp. Both companies produce similar products and both
manufacture, sell, install, and service their compressors. The two companies are almost identical.
Investment bankers involved with the merger have assured Andover’s CEO that the merger will
“create significant value”, and Andover Compressor’s CEO has hired McKinsey & Company to
investigate how value will be created and what CompressCorp can do to best take advantage of the
merger.
We have a meeting with the CEO tomorrow morning, and we want to be effective with his time, so
what would you want to investigate to approach this case?
Possible Answer:
Behind the Scenes: The candidate should structure an approach to identify value creation
opportunities. In general, the structure should address how the changes resulting from the merger can
be leveraged to create a competitive advantage for the merged firm. A good structure might include:
• Market – How will the merger create a better market position for the combined firm?
• Company / Operations – Investigate how new revenue opportunities and/or cost savings will spur
increasing profitability in the future.
• Financial Strength – Will CompressCorp have easier access to capital due to the merger that will
allow the company to expand more effectively?
Part 1: Market Position Analysis

Interviewer: (Encourage the candidate to look at market positioning first). From a market positioning
standpoint, what are some possible benefits of the merger? What are some possible concerns?
Possible Answers:
a. Benefits
• Increased market power could allow combined firm to charge a higher price.
• If geographies and/or customer segments are different, combined firm will have an expanded market
with more product variety and channels.
• More effective competitive position if combined firm’s technology is a market leader or their financial
position is stronger.
• Economies of scale advantage in U.S. market.
b. Concerns
• Ability to leverage market power to raise price could be restricted by anti-trust regulation and/or due
to offering commodity type product.
• Reduced competition may leave customers resentful as they have reduced options and feel trapped
by ‘big player’
• Reduced competition may stifle further drive for innovation.
• Potential response by competitors in other markets (either geographic or product-based).
• Impact on corporate identity/brand perception in the market.
• Government/regulatory restrictions on new firm’s activities.
Behind the Scenes: Anti-trust and customer responses to the merger are the primary concerns that
the candidate should list. Share the following information with the candidate when he/she asks
relevant/insightful questions:
• Lawyers have determined that the merger will go through but that CompressCorp will not be able to
raise prices on customers based on anti-trust regulation.
• Andover and Bellspan currently each have about 40% of the U.S. market (i.e. the combined firm
CompressCorp will have about 80%).
• International markets are much more fragmented, and both companies have small market shares in
various locations globally.
• Customers include both large oil and gas multinationals and small independent operators.
Interviewer: I think this is a good list of benefits and concerns. Based on your market analysis, can
you give me a few recommendations you would make to at our meeting with the CEO tomorrow?
Candidate:
• The merger will give us a dominant position in the U.S. market with 80% market share and we
should first focus on integrating the companies and strengthening our U.S. position.
• We will need to actively address the concerns of our U.S. customers about reduced competition in
the market.
• We should consider how the merger will relay into a new strengthened brand and positioning in the
market.
• We should look for opportunities to leverage our newfound scale in international markets in order to
grow market share and seek to grow that business organically or through further acquisitions.
Part 2: Customer Concerns

Interviewer: Good. Let’s look a little bit more at the concerns of our customers. (If customers weren’t
brought up in the earlier exercise, bring them up now. It is best if the candidate creates a “mini-
structure” to identify customer concerns. He/she should also remember that our client offers services
across the entire value chain).
Possible Answers:
Customer concerns include:
• Customers may be concerned that we will raise prices.

• Customers may be concerned that we will try to service everyone with fewer resources and that
service quality will suffer.
• Assuming we will only offer one line of compressors, some customers will have to switch
technologies and re-train their staffs.
• Customer concerns about maintenance on discontinued models.
Interviewer: Good. What would you do to address customers’ concerns?
Possible Answers:
Communication is key! Since most of our customer base is comprised of the large oil and gas
companies, we can communicate directly at the C-level. We should emphasize these points: We will
not raise prices (given regulatory constraints this isn’t an option anyways) and we will offer the same
level of service as before. We will also add more value by using the best technology and capabilities
of both companies.
Part 3: Company Operations and Synergies

Interviewer: Let’s take a look at the companies now. How will the merger create value from an
operational standpoint?
Behind the Scenes: The candidate should structure their response. One option is to create a structure
based on cost reductions and revenue opportunities. Another option is to consider value creation
throughout the value chain.
Possible Answer:
a. Revenue Growth (Should focus on Quantity)
• Being the clear market leader (in U.S.) may attract additional customers.
• Being market leader may give more flexibility in launching new, creative sales models/product types.
• Any differences between the firms in their product portfolios (e.g. service packages, warranties, add-
ons) could provide new cross-sell opportunities to the customers from other firm.
• • Identify added value resulting from the combination of technologies and service capabilities.
Leverage market leader position in U.S to build international market (gain access to multinational
accounts).
.
b. Cost Reduction
• Procurement: Increased purchasing power with suppliers.

• Production: Shift production to less expensive plant / expand plants / improve asset utilization.
Generally take advantage of economies of scale. Simplify product offering to discontinue less
profitable products.
• Sales: Lower sales and marketing cost by reducing sales force where clients or geographies
overlap. Integrate customer relationship management processes.
• Service: Servicing a reduced product line will be more efficient.
• SG&A: Leaner management structure, eliminate redundancies and consolidate functions such as
procurement, IT, HR, logistics, finance, etc.
Part 4: Sales Model Analysis

Interviewer: The CEO would like to simplify operations by focusing on one of three current sales
models for CompressCorp’s machines. Take a look at this sales data and tell me what method should
be pursued? (Show Exhibit A, and let the candidate keep it.)
Exhibit A: Sales Methods for Andover and Bellspan
Andover Bellspan
Revenues Revenues Margin
Direct Sales: Customers buy a compressor and operate it
themselves. They also provide maintenance in house. $700M $400M 30%
Leases: Customers lease the equipment and pay for a
service package. $75M $50M 15%
Service Contract: Customers sign a service agreement
and the company handles all operations needed to get
gas from the well to the pipeline. $425M $600M 40%
$1200M $1,050M
Key Insight: Since “Service Contract” is the highest margin method, CompressCorp should clearly
focus on this type of sale. CompressCorp also needs to exit its leasing business quickly, since the
margins are significantly less attractive.
Interviewer: Let’s say that at our meeting with the CEO we suggest moving to the Service Contract
sales model and he responds that he thinks we should pursue Direct Sales instead because the
Direct Sales method will improve CompressCorp’s Return on Assets (ROA). The CEO’s justification is
that selling the compressors will result in lower assets on the balance sheet and more income, which
will in turn increase ROA. The CFO responds that the Service Contract creates more value, which is
more important than ROA in the long run. What would your input be into this discussion?
Behind the Scenes: The candidate needs to give a confident answer and ultimately should stick to the
initial answer of the higher margin method.
Candidate: Even though the ROA may be lower under the Service Contract model, it will create more
value for CompressCorp in the long run which is the more important metric. We could also look at
other relevant ratios such as the leverage or the current ratio, which would be improved by focusing
on Service Contract sales (extra points for this last insight!)
Interviewer: That seems like a good answer, but the CEO says he needs some numbers to be
convinced. What would you need to show him which method is more valuable to CompressCorp?
Candidate: We can use the information we have to determine the value created by each type of sale
and then compare amongst them. Let’s try to see what profits each method generates for
CompressCorp.
Interviewer: Good. How would you value each option? What information would you need? (Offer the
following information as the candidate works through the problem and asks for it).
• A Direct Sale generates $1M in revenue.

• A Service Contract generates $300,000 in annual revenue.
• Service Contracts are very long term (should use a perpetuity)
• Margins can be used from the previously revealed Exhibit A. (The candidate should get this on
his/her own.)
• Assume a discount rate of 10%.
Candidate: We need to compare the profit generated from each type of sale to see which creates
more value.
a. Direct Sales: Can be calculated using the 30% margin and a sale price.
Profits = 0.3 * $1,000,000 = $300,000
b. Service Contract: This is a long-term agreement, so we should do a NPV (net present value)
calculation to compare
it to the Direct Sales method. We’ll need to know the cost of producing a compressor (initial
investment), the annual profits from the service contract and the length of the contract.
• Since the margin on a $1M direct sale is 30%, we can infer the cost is 70%. Cost = 0.7 * $1,000,000
= $700,000
• Annual Profit: Can be calculated using the $300,000 annual revenue and a 40% margin. Annual
Profit = 0.4 * $300,000 = $120,000
• Present value for a perpetuity = Annual Profit/discount rate = $120,000 / 0.10 = $1,200,000
• Subtract cost of compressor from discounted profit to get profit value today. Profit = $1.2M – $0.7M
= $500,000
We can see that the Service Contract is significantly more profitable ($500K vs. $300K, 66% more
profitable) than Direct Sales, and these numbers should allow us to make a more affective argument
to the CEO.
Interviewer: OK. So what would you do if a customer wasn’t interested in a Service Contract and only
wanted to buy a compressor?
Possible Answers:
This depends on our relationship with the customer and whether or not we are at capacity. In general,
we wouldn’t want to walk away from a 30% margin when faced with no other option. Transitioning to a
Service Contract might be a long-term effort with each client. Angles to consider:
• If we are not at capacity, then we should sell the excess compressors directly while considering the
effect and perception by other customers.
• If we are at capacity, and the customer is a small or infrequent buyer, then we should either not sell
them the unit or charge $1.2M for the sale (in order to receive the same $500K profit that we would
have received under the Service Contract model).
• If we are at capacity and the customer is a large, high volume buyer like Exxon, then we will have to
consider the customer relationship more closely in decided to sell them the compressor. We may not
be able to afford to lose this business, and, in the long run, selling many compressors to this client will
likely be more profitable than servicing fewer compressors to other clients.
Part 5. Recommendations
No formal recommendation is necessary in this case, but if the candidate offers one it should be
concise and well-structured.
Here’s one good sample recommendation:
This merger will create value by giving CompressCorp a dominant position in the U.S. Market which
they can leverage to create value through significant cost reductions resulting from economies of
scale and their greater geographic presence. In addition, they can utilize their strength to pursue
increased market share in international markets. In order to optimize their profitability, CompressCorp
should focus on servicing contracts through the Service Contract model which is 66% more profitable
over the Direct Sales model.
Carpet Manufacturer to Adopt New Production Technology
Case Type: new product, new technology; investment; math problem.
Industry Coverage: textiles.
Case Interview Question #00895: Your client is a leading carpet manufacturer based in the United
States. They sell carpet to both commercial and residential customers. Their current production
process is as follows:
(1) Buy dyed/pre-colored yarn, (2) Load yarn spools in a specific order onto machine (3) Weave yarn
into carpet (4) Run carpet through carpet backing machine (5) Cut, roll, and store the finished carpet
Your client is considering investing in a new technology that will cost USD $25M (initial investment).
With the new technology their carpet production process will change to the following:
(1) Buy un-dyed yarn (2) Spool yarn (3) Weave yarn into carpet (4) Die carpet through a printing
process, much like an inkjet printer (5) Cut, roll, and store the finished carpet
The client wants to know if they should invest in the new technology or not. What would you
recommend?
Possible Answer:
Part 1: Differentiating current carpet from new carpet (if asked)
Candidate: If I may clarify, will the carpet made with the new technology be different in any way from
the current product?
Interviewer: We can assume that the new carpet will have a better texture and can therefore be sold
at a higher end offering.
Part 2： What do you expect would be the likely impacts on our costs?
Possible Answer:
• Yarn costs decrease –> only buy un-dyed yarn

• Ink costs increase
• Labor decreases on spool loading
• Maintenance costs of new machine
• Electricity costs increase
• Training costs for operating new machine
• Warehousing costs decrease from ability to quickly make to order
Part 3: What would you take into account to decide if this was a good investment?
Note: Focus on the costs; look for an answer of valuing the cost savings. However, could you also
increase your revenue by selling the carpets at a higher price point?
Interviewer: “We have aggregated the changes in costs, and it turns out that we will save 25 cents per
finished yard of carpet. How would you value the investment?”
Additional Information: Provide the following data when asked
• We produce 10 Million yards of finished carpet per year.

• The machine has a 10 year useful life.
Possible Answer:
10M yards * $0.25 savings = $2.5M savings per year.

$2.5M per year * 10 years = $25M total savings.
Recognize the time value of money, so this wouldn’t really break even in today’s dollars just based on
cost savings. Not to mention that we’re not taking into account the maintenance costs of the machine,
as well as the ink itself.
Interviewer: “So what would you have to believe in order to justify this investment?”
Possible Answers:
• We would be able to sell for a higher price, and increase revenue.

• We would be able to win market share from our competitors, and increase revenue.
• We would be able to serve new markets, and increase revenue.
• We would be able to be more flexible in our product offerings, since we can dye the yarn on
demand, instead of forecasting which pattern will be the most successful.
Part 4: It turns out we can sell the new, higher quality carpet for $20/yard, which is a 25% premium
over the standard carpet. We would still be able to produce and sell the standard carpet as well. What
types of things would you think about in this scenario?
Possible Answers:
• Cannibalization of old customers

• New customers that you couldn’t previously serve
Part 5: It turns out we have done market research, and now we know that 30% of our existing
customers would upgrade to the new carpet. Also, there is a 70M yard/year market for higher quality
carpet that we couldn’t sell to previously. We estimate that we could capture 5% of that high end
market. What would the incremental revenue be given we start selling the high quality carpet?
Possible Answer:
• Standard carpet price must have been $20/(1+25%) = $16 per yard
• We’re told that we produce 10M yards of finished carpet, so we will assume that all 10M yards are
sold –> 30% are cannibalized, so we now will sell only 7M yards of the standard carpet.
• New carpet sales: 3M + 3.5M (5% of 70M higher quality carpet) = 6.5M
• Old revenue: 10M * $16 = $160M
• New revenue: 7M * $16 + 6.5M * $20 = $112M + $130M = $242M
• Incremental revenue = $242M – $160M = $82M
Part 6: Given this new information, what would you say about the net incremental revenue from this
new technology?
Possible Answer:
We are now selling 3.5M yards more than before so there would be an additional production cost.
This would be the difference between the production cost of 10M yards of standard carpet, and 7M
standard and 6.5M new carpet.
To calculate the NET incremental revenue, they will need cost figures. When prompted, provide the
candidate:
• The cost per yard of the original carpet was $10/yard
• The cost per yard of the new carpet is $10 – $0.25 = $9.75/yard
Old production costs: 10M * $10/yard = $100M
New production costs:

• Standard carpet: 7M * $10/yard = $70M
• New carpet: 6.5M * $9.75/yard = $65M – $1.6M (roughly) = ~$63.4M (exactly $63.375M)
• Total costs: $70M + $63.4M = $133.4M
Therefore:
• Net incremental costs: $133.4M – $100M = $33.4M
• Net Incremental Revenue: $82M – $33.4M = $48.6M per year
Part 7: Wrap-up: Ask the candidate to make a final recommendation

Possible Answer:
I would suggest going forward with the acquisition of the new machine. We can definitely tap into a
new high-end market, and can make additional $48.6M net revenue per year. I would look into the
expected maintenance costs, and verify the cost trend for the ink itself.
Mack Trucks to Unveil New Truck with Maxidyne Engine
Case Type: new product; pricing & valuation.
Industry Coverage: automotive, motor vehicles.
Case Interview Question #00894: Our client is the CEO of Mack Trucks Inc., an American truck
manufacturing company headquartered in Greensboro, North Carolina, United States. Mack Trucks is
a subsidiary of Swedish automobile manufacturer AB Volvo which purchased Mack along with
Renault Trucks in year 2000.
Mack Trucks sells mostly to logistics services companies. Mack Trucks’ main current product is a
truck called Evolution. Now they came up with a new Maxidyne high-torque rise engine, and they want
to start selling another type of truck, called Revolution, that will use this new Maxidyne engine. The
only difference between Revolution and Evolution is the engine and Mack Trucks’ plan is to have both
Evolution and Revolution in the market. The CEO has hired McKinsey & Company to help him find out
a pricing strategy for Revolution.
Possible Answer:
Part 1: Brainstorm on customer needs
Behind the scenes: Try to get as many good customer needs as possible, so keep asking what else
until you have a good list. The candidate should use a clear structure, e.g. Driver Needs, Purchaser
Needs, Maintenance Needs (user change).
Interviewer:
What do you think customer’s main considerations are when comparing the two models? When
deciding which one to buy?
Possible Answers:
Price, Fuel efficiency, Durability, Maintenance costs, etc.
Part 2: Pricing – qualitative analysis

Behind the scenes: Let the candidate mention different pricing strategies. If they say “Let’s see
competitors’ price”，tell the candidate nobody has a similar model and ask for other methods.
Interviewer: How would you come up with a price for the new truck?
Possible Answer:
• Analyze competitors’ price: In this case nobody has a similar model, so N/A.
• Cost-based pricing (cost + mark-up)
• Value-based pricing (customers value): Paramount to understand how much value we are bringing
to the customer.
Part 3: Pricing -quantitative analysis

Behind the scenes: Don’t give all information upfront. Hold the information about price of fuel until the
candidate asks for it. Candidate may assume zero cost of capital, but can’t do math simplifications.
Interviewer: Our current truck, Evolution, sells for $100,000. Here is a quick comparison between the
Evolution and the Revolution trucks:
Evolution Revolution
Fuel efficiency: 5 km/L Can do 20% more kilometers with same fuel.
Useful life: 4 years 4 years
Same for
Salvage value: both
• On average, logistics services companies trucks drive 150,000 km per year.
• Price of fuel: $1.50/L
How much do you think we could sell Revolution for?
Possible Answers:
In four years, the expected fuel costs for customers are:
• Evolution: 4 * (150,000 km / 5 km/L) * $1.50/L = $180,000

• Revolution: 4 * (150,000 km / 6 km/L) * $1.50/L = $150,000
So the difference is $180,000 – $150,000 = $30,000
Therefore, assuming everything else is the same, we could charge up to $100,000 + $30,000 =
$130,000 for the new Revolution truck.
Part 4: Market survey

Behind the scenes: Let the candidate ask for the costs, don’t give them upfront. If candidate forgets,
remind him that Evolution sells for $100K.
Interviewer: In order to get a better sense of the market, Mack Trucks did a survey and came up with
the following results as an estimate for demand in the next years:
If Revolution was sold at a price $115

of: $100K K $130K
% customers buying Revolution: 90% 80% 40%
% customers buying Evolution: 10% 20% 60%
Assuming the survey is representative, which of these three prices would you choose for Revolution?
Behind the scenes: Here the interviewer should stop for a while and wait to see what the candidate
does. Candidate could try to analyze, but he/she must ask about costs because the goal is to
maximize profits, not revenues.
Fixed costs are the same for both Revolution and Evolution, but because Revolution has a more
complex engine, it costs Mack Trucks $10,000 more to produce each Revolution truck.
Possible Answers:
We wouldn’t sell for $100K. Since there is a $10K extra costs associated with producing Revolution,
at $100K it’s better to only sell Evolution.
At $115K, extra profits from selling Revolution would be 80 * ($115K – $100K – $10K) = $400K per
hundred trucks sold
At $130K, extra profits from selling Revolution would be 40 * ($130K – $100K – $10K) = $800K per
hundred trucks sold
Therefore, it is better to sell Revolution truck for $130K.
Observation: It’s not necessary to know the market size in order to conclude that $130K is the better
choice.
Part 5: Final brainstorm

Interviewer: Why do you think some people would still buy the old model even if the price was the
same?
Possible Answers:
• Logistics companies don’t want to change all their new fleet before they test the new truck and
confirm what the producer says about fuel efficiency.
• Customers may fear that it would not be easy to find mechanics to fix the new engine when it broke.
• There are no old Revolution engines available, so repair/replacement by third parties could be
harder.
Observation: The fact that the 150,000km figure is an average is not a valid reason given that the
price is the same. Regardless of the annual usage, it would always be better to have the engine that
is more fuel efficient.
Part 6: Wrap-up
Interviewer: The CEO of Mack Trucks is coming and you need to tell him what your conclusions are.
Luxembourg Healthcare Cost to Jump 70% over 10 years
Case Type: reduce costs; math problem.
Industry Coverage: healthcare: hospital & medical; government.
Case Interview Question #00891: Luxembourg is a small landlocked country in western Europe. It is
bordered by Belgium to the west and north, Germany to the east, and France to the south. With an
area of 2,586 square kilometers (998 sq mi), it is one of the smallest sovereign states in Europe
(about the same size as the state of Rhode Island or the English county of Northamptonshire).
Luxembourg has a population of about 1 million.
Our client is the health minister of Luxembourg. Luxembourg is small and on the upper end of the
GDP spectrum for countries of its size. The country’s health system is completely free to its citizens,
and is funded by taxpayer money. The way that the health care system works is that patients can visit
one of 30 clinics spread throughout the country for a primary care visit, and then get referred to one of
2 larger hospitals if more intensive procedures are required. There are a few private systems for the
richest citizens, but they are so small in comparison to the public system that they won’t be
considered at all in our study. The GDP, and thus the tax returns for the country have been growing at
a 5% rate. However, the healthcare budget has required 10% growth to keep up with demand. The
health minister of Luxembourg is concerned that at this rate, the healthcare system will become
unsustainable. The Luxembourg health minister has hired McKinsey & Company to figure out why the
healthcare budget is requiring this level of growth and what can be done to reduce it.
Possible Answer:
Part 1: Examining possible reasons for budget growth
Interviewer: What factors do you believe are going into the budget growth?
Possible Answer:
The candidate should come up with a framework that explores:
a. Demand-driven growth reasons such as
• demographic changes leading to a larger number of people visiting hospitals.

• changes in health perception or awareness in the population such that citizens go to the doctor in
response to problems for which they formerly stayed home.
• the incentive systems of doctors and hospitals who may be encouraging-patients to come in so that
they get paid more for more visits or who may be referring more patients to the 2 bigger hospitals than
is necessary.
b. Supply-side effects such as
• shortage of doctors or resources bidding up prices for the same services.

• a lack of preventative care services making patients less healthy and thus needing of more
healthcare when they actually do get ill.
Interviewer: Now that you have identified some reasons for budget growth, let us address how we can
cut costs. What are some of the things they could do and what would be the potential risks associated
with those?
Possible Answer:
Possible solutions that the candidate can come up with include:
• Transparency: if physicians don’t currently know what various treatments cost, making them aware
and helping them take that information into account would be a first step.
• Quotas/Rules: We can require that physicians prescribe a certain amount of generic drugs rather
than branded, or that simpler, outpatient procedures be used when possible rather than allowing
people to stay several nights in the hospital.
• Risks: We need to ensure that the rules don’t reduce the quality of care overall, so physicians need
to be involved in crafting the rules.
Part 2: Forecasting Healthcare Needs Growth

Interviewer: The client’s census bureau has printed out some information. What do you make of this?
Age % of population % of population in 10 Average healthcare cost per person

group today years per year
0-21 20 10 $1000
22-65 70 70 $500
65+ 10 20 $4000
Possible Answer:
The candidate should come to the conclusion that the population will be redistributed with a larger
percentage becoming older, and thus, costing more money to the healthcare system. This means that
it seems like the healthcare spend will increase by an even greater rate than it currently is, which
spells bad news for the Luxembourg health minister. It would be helpful to figure out how bad the
problem will become.
Interviewer: Could you figure out how much the country currently spends on health care, and how
much they are projecting to spend in 10 years?
Possible Answer:
To calculate current spending, a weighted average of the average spend per citizen can be taken
from today’s data. The calculation of future spending needs to factor in change due to shifting
demographic as well as the greater number of citizens in the future due to increase in population.
Do not give the candidate the information about population change unless they ask for it. If they do
not realize it and include it in their calculations, guide them to it. The population is currently 1 million,
and the census estimates see it growing by 30% in 10 years.
Calculation of current average spending:
[ 0.20 (0-21 years) * $1000 + 0.70 (22-65 years) * $500 + 0.10 (65+ years) * $4000 ] * 1 million
(population level) = $950M in current spend
Calculation of future average spending:
First, the population change needs to be taken into effect: (1+30%) * 1M = 1.3M
Next, this must be incorporated into a weighted average
[ 0.10 (0-21 years) * $1000 + 0.70 (22-65 years) * $500 + 0.20 (65+ years) * $4000 ] * 1.3 million
(population level) = 1.625B in future spend
Finding out the percent change:
$1.625B (future spend) – $950M (current spent) = $675M
Divide $675M by the current spend $950M yields a 71% increase in spending, which is a huge
increase. It is also OK if the candidate rounds $950M to $1B and then the percent increase becomes
62.5%, which is equally significant. (Note to Interviewer: Ensure that the candidate calculates the
percent change in spending and reacts to it.)
Part 3: Copayment Idea

Interviewer: Before we started on this project, the Luxembourg health minister was toying with the
idea of beginning a $5 per visit copayment. This would cover all individual visits regardless of
specialty. Currently, the average citizen goes through the healthcare system 5 times a year, at an
average cost of $50 a visit. What do you think would be the impact of the copayment?
Possible Answer:
The candidate should theorize that first, with $5, the cost would go down to $45, and then also, if the
visits are no longer free, patients will be choosier about when they go to the doctor and there will be
fewer visits per citizens. When the candidate gets to that point, let them know that the estimate is that
there will be 4.5 visits per year as a result. The candidate should now realize, or be coaxed into
figuring out what percent of the budget will be saved by this change:
First, the candidate should figure out the current cost to the healthcare system for all of the visits:
5 (visits per year) * $50 (per visit) * 1M (citizens in the country) = $250M
Then, under the plan:
4.5 (visits per year) * $45 (per visit) * 1M (citizens in the country) = $202.5M
Subtracting the two gets a difference of roughly $50M saved with the copayment, which would reduce
the total cost of routine visits by roughly 20% (Make sure the candidate remembers that total health
care spending is $950M, so this plan would constitute a 5% reduction off of the total).
Part 4: Copayment Risks

Interviewer: Although the copayment seems like a good idea, do you think that there are any risks to
the idea? How could those risks be alleviated? Are there any other ideas that come to mind aside
from a copayment that could help out the situation?
Possible Answer:
Here are some suggestions. Importantly, the candidate should remain structured:
a. Risks:
• Looking out for the poorest citizens – perhaps they can’t afford the $5 copay. Care should be taken
to make sure that it’s affordable for all, and perhaps, there can be a sliding scale based on per capita
income.
• Public unhappiness in response to the copayment – The public will probably be unhappy with this
change, which could have political repercussions for the health minister’s party. Perhaps a survey
could be taken to gauge how unpopular this idea would be.
• Will the copayment be enough to affect anyone who may abuse the system – Is $5 enough of a
deterrent for people who go to see the doctor for superfluous visits? Perhaps there should also be a
sliding scale based on acuity or visit type.
• Emergency attention – Could the $5 copayment make it difficult to obtain care in an emergency?
Perhaps the fee should be waived in emergency situations.
b. Alternatives to copayment system:
• Limiting types of visits – Some regulation could be put in place for types of visits that really only
need to take place once a year, like eye exams.
• Increasing spending on preventative care – If people lead healthier lives, they will need less
healthcare. More attention could be placed on encouraging preventative care habits for the general
population.
Part 5: Recommendation
Interviewer: OK, wrapping up, what should we tell the Luxembourg healthcare minister?
In this answer, the most important thing is for the candidate to be structured and concise.
Possible Answer:
We’ve looked at the healthcare spending situation, and we estimate that there will be a 70% increase
over the next 10 years, driven by two factors
• Population increase
• Population aging
Copayment is a good place to start to immediately address the healthcare spending situation as it
could decrease costs this year for starters by roughly 5% from initial estimates. However, more
analysis needs to be done to make sure that the copayment will not have adverse effects quality of
care delivered, and that it will be politically feasible.
From a long-term perspective, the population’s healthcare needs will grow substantially, and more
thought must be taken to figure out how to maintain the system’s sustainability. Initiating visit type
regulations and focusing on preventative care are two good places to start to make sure that the
healthcare system can continue to meet the needs of the population at a reasonable cost.
Sonic Drive-In to Launch Pilot Restaurants with Seating Areas
Case Type: growth; improve profitability; math problem.
Industry Coverage: restaurant & food service.
Case Interview Question #00890: Sonic Corp., more commonly known as Sonic Drive-In or simply
just Sonic, is an American drive-in fast-food restaurant chain based in Oklahoma City, Oklahoma. The
chain has over 3,000 stores in the United States, mostly concentrated in the South. Sonic restaurants
are structured as old-fashioned drive-ins: each store has 20 to 30 drive-in spots where patrons can
order and receive their food while seated in their cars. The stores have no seating areas. The menu at
Sonic’s menu can be broken down into 3 categories:
(1) Main courses: Burger, fried chicken, corn dogs, chili dogs and toaster sandwiches, etc.
(2) Sodas: Over 300 varieties, some of which are proprietary.
(3) Desserts: Milkshakes and other ice cream desserts.
During the first 20 years of its operations, Sonic’s business grew steadily. Last year, however, Sonic’s
business declined significantly. Their CEO has hired McKinsey to determine a growth strategy for the
business.
Possible Answer:
Interviewer: Given this information, brainstorm some initial ideas on a growth strategy for the client.
Candidate: I would look first at the big picture of store placement and profitability. Next, consider the
option of opening more stores, closing unprofitable stores, or adopting a franchise model.
Next, analyze the revenue and cost sides of the business.
Under revenue we could look at growing the customer base, or targeting the most profitable
customers. For products, you could look at their product pricing, product mix, and differentiation. My
first impression is that having more than 300 kinds of sodas is a bit too much and will cost the
business in terms of distribution and inventory costs. We should definitely do some consumer
research and see what items in each category the customers really want and what differentiates the
brand from other chains.
In terms of costs, Sonic should look at their fixed and variable costs. The first thing I would want to
look at is the cost of raw materials. This company has such a high variety of products offered at each
restaurant; I’m wondering how much they are spending for food and drinks? Also, with all of these
sodas distribution costs may be high with multiple suppliers. Storage costs may be high given the
product mix.
I’m also curious about competition. How are stores doing in high-density areas with lots of
competition, versus areas with low competition?
Interviewer: Okay, these are some great ideas. Let’s move on. The client Sonic has also launched
some pilot restaurants that have seating areas. I have some data on the performance of these pilot
stores as compared to the standard stores (show the candidate the following charts).
Chart 1. Standard Restaurants
Category Price Quantity Sold Profit Margin

Burgers
etc. $2.00 15,000 15%
Sodas $2.00 10,000 10%
Milkshakes $4.00 5,000 20%
Chart 2. Pilot Restaurants
Category Price Quantity Sold Profit Margin
Burgers
etc. $2.00 25,000 15%
Sodas $2.00 15,000 10%
Milkshakes $4.50 10,000 25%
Interviewer: What are some of your initial impressions of this data? Can you talk about some of the
benefits and drawbacks to the pilot model?
Candidate: Immediately I see that the price for milkshakes has increased along with the margin for
milkshakes, while sales have doubled. This is interesting. Doubling sales while putting an item at a
higher price point is a great move – I’m wondering if Sonic’s standard restaurant has room to increase
their price or if something about the store format is increasing milkshake sales.
Thinking about the buying process in the pilot stores, perhaps people buy their food and a soda first,
and then go up to the register again and buy a milkshake. Since they are sitting around enjoying their
food with their family, they then have the option of buying a round of milkshakes for everyone (if they
aren’t completely full). In the standard store format, people might just have one transaction and drive
away while they are still eating, so they are already home when they decide they want a milkshake.
It is interesting the pilot stores don’t have higher prices for main course food and sodas. This data
suggests that they might have some mark-up potential. This is a possible revenue strategy. Also,
these pilot restaurants are doing a higher volume overall. We might want to explore the opening of
more pilot restaurants or converting some stand locations to this model.
Interviewer: Okay, let’s get into some calculations on the standard restaurant model. The client Sonic
thinks their milkshake business has a lot of potential. They are wondering how many soda sales they
would have to convert to milkshake sales at an average store in order to increase their profit margin to
18% total for all sales.
Candidate: Okay, so the client wants to subtract X sodas from 10,000 and add X milkshakes to 5,000
in order to reach a 20% profit margin at an average store. I have to start by figuring out what the profit
margin is overall at a store.
Revenue = Price * Quantity
Burgers: $2 x 15,000 = $30,000 @ a profit margin of 15% means that profits are $4,500
Sodas: $2 x 10,000 = $20,000 @ a profit margin of 10% means that profits are $2,000
Milkshakes: $4 x 5,000 = $20,000 @ a profit margin of 20% means that profits are $4,000
Overall revenue = $30,000 + $20,000 + $20,000 = $70,000

Overall profit = $4,500 + $2,000 + $4,000 = $10,500
profit margin = $10,500 / $70,000 = 15%
Looking at the sale of a soda and then of a milkshake:

• Soda: $2.00
• Milkshake: $4.00
• The difference between the 2 sales is $2.00
• Converting X number of Soda to Milkshake will increase the total revenue by X * $2.00
Then, looking at the profit on an individual sale of a soda and then of a milkshake:
• Soda: $2.00 at 10% margin = 20 cents
• Milkshake: $4.00 at 20% margin = 80 cents
• The difference between the 2 profits is 60 cents ($0.60).
• Converting X number of Soda to Milkshake will increase the total profit by X * $0.60
So, letting X = required number of conversions from sodas to milkshakes.
New overall revenue = $70,000 + X * $2.00

New overall profit = $10,500 + X * $0.60
New overall profit margin = ($10,500 + X * $0.60) / ($70,000 + X * $2.00) = 18%
Solving for X, we get X = 8,750
Interviewer: Alright, so summarize your recommendations for the client.
Candidate:
• Recap case: We were hired by Scottie’s to determine a growth strategy for a declining business.
• From the data analyzed, shifting from the standard drive-in model to the pilot model (with seated
areas) should boost both revenues and margins per restaurant.
• If we maintained some standard restaurants for reasons of branding nolstagia, we should shift
consumer beverage purchases from sodas to milkshakes, to drive up margins further within existing
standard restaurants.
• There are also other big-picture strategies we have not yet explored, such as franchising, but please
speak to my Director of Client Services if you wish to extend this engagement and keep the team on
for another month. (tongue in cheek!)
Treasure Island Communications to Deal with Deregulation
Case Type: business competition, competitive response; math problem.
Industry Coverage: telecommunications.
Case Interview Question #00889: Barbados is a sovereign island country in the Lesser Antilles, in
the Americas. It is situated in the western area of the North Atlantic and 100 km east of the Windward
Islands and the Caribbean Sea. Our client is the CEO of Treasure Island Communications (TIC), a
telecommunications company on Barbados Island which has enjoyed a govemment protected
monopoly for many years. The client TIC provides mobile services as well as fixed-line services for
both intemational and domestic lines.
In about a year’s time, the Barbados government will deregulate the telecommunications industry and
invite other companies to enter the Barbados market. Our client TIC has engaged McKinsey &
Company to discuss ways to deal with this new environment.
If the candidate asks: “Why does the Barbados government want to deregulate the
telecommunications industry?”
Interviewer input: “Two main reasons: (1) Government collects more revenues in the form of spectrum
licensing fees; (2) More competition will reduce prices which is better for consumers”.
Possible Solution:
Question 1: Our client TIC would like help in drawing up some possible scenarios. What information
would you need in order to flesh out realistic scenarios?
Possible Answer:
The candidate may outline the following high-level issues:
• Market Size / Structure: Given the market size and the number of customers, is the market more
likely to remain a natural monopoly or evolve into a duopoly/oligopoly/monopolistic competition?
• Characteristics of Potential Competitors: What are their capabilities and which segments (mobile,
domestic/international fixed) are they likely to target?
• Entry Barriers: What entry barriers can TIC use or muster?
Natural barriers include high set-up costs, high fixed costs, etc.
Artificial barriers: TIC could lobby government to set higher spectrum-licensing fees etc.
Question 2: Could you tell me more about the financial information on the client TIC that you’d like?
Possible Answer:
The candidate should cover the basics of revenue and cost information. Suggested answers include:
Revenue: How is pricing done for the different service segments? What are the usage volumes? What
are the trends across time?
Costs: What are the set-up costs, recurring fixed costs, and variable costs?
Question 3: I will give you some data on the international fixed-line services.
Latest revenue (year 2015) = $90M
Total costs = $30M (all annual fixed costs)
Assume that with new entrants and competition, prices will drop 50% but usage volumes do not
change. What market share does TIC need to maintain in order to break even?
Possible Answer:
Candidate’s answer should walk through the following logic:
New Market Size = 50% * $90M = $45M
TIC’s break-even revenue = $30M
TIC’s required Market Share = $30M/$45M = 2/3 = 66.7%
Implication: the client TIC can afford to lose only 1/3 market share to competition.
Question 4: Let’s use more realistic assumptions this time. Assume that volume of usage does
increase when prices fall 50% due to competition. Please take a look at the following data and tell me
what you see. Then tell me what market share is needed in order for the client TIC to break even.
International Fixed Lines
Usage Revenues ($) Total User Minutes

2015
(latest) $90M 90 million
2014 $120M 60 million
2013 $120M 60 million
2012 $160M 40 million
Possible Answer:
Candidate should use the information to (1) calculate prices charged in the past and (2) derive price-
volume (demand) relationship.
Usage Revenues ($) Total User Minutes Price ($/user min)

2015 (latest) $90M 90 million 1
2014 $120M 60 million 2
2013 $120M 60 million 2
2012 $160M 40 million 4
Based on the data, the candidate may draw a demand curve (Total User Minutes vs. Price curve).
If the candidate tries (too hard) to extrapolate the demand curve to predict volume based on a price of
$0.50, guide him/her to the simpler heuristic that each time price dropped 50%, volume increased
50%.
Therefore:
New Price = $0.50/user min

New Volume = 90 million * (1 + 50%) = 135 million user minutes
New Market Revenue = $0.50 * 135M = $67.5M
Break-even TIC revenue = $30M
Required Market Share = $30M/$67.5M = 44.4%
Implication: With more competition, user volumes will also rise and TIC’s required market share to
break-even is not as high as initially assumed (44.4% vs. 66.7%).
Neue Galerie Saw Reduced Revenue from Membership Fees
Case Type: business turnaround; increase revenue.
Industry Coverage: leisure & recreation; non-profit organization.
Case Interview Question #00887: Our client Neue Galerie New York is a small art museum located
in the William Starr Miller House at 86th Street and Fifth Avenue in New York City. Established in
2001, it is one of the most recent additions to New York City’s famed Museum Mile. Neue Galerie
New York specializes in 17th and 18th century European art, especially German and Austrian art and
design.
The collection of the Neue Galerie is divided into two sections. The second floor of the museum
houses works of fine art and decorative art from 17th and 18th century Austria. The third floor exhibits
various German works from the same era. They usually put $150,000 into a fund every year, with
money in the fund going towards various future expenses. Last year, however, revenues decreased,
and the client could only put 50% of what they normally put into the fund. They have asked McKinsey
to figure out how to turn this around. What would you suggest?
Possible Solution:
Question 1: What are some potential reasons for this decrease?
Possible Answers:
Lay out revenue sources: membership fees, museum admission fees, sponsorships/grants
Possible sources of revenue decrease:
• Membership fees: lapsed renewals, reduced number of new members.

• Admission fees: lower visitor volume, increased competition from other museums.
• Sponsorships/grants: budget crunches in sponsor organizations.
Question 2: If we lower the membership fee by 20%, what is the increase in membership volume
needed to bring the fund’s annual deposit back to its original levels?
Additional Information: (to be provided upon request)
• Assume, as a simplification, that all revenues come from membership fees
• Current membership fee is $150/year
• 25% of membership fee is used to cover costs (Candidate should deduce that this means that 75%
of each membership fee is put into the fund)
Possible Answer:
With current membership fee ($150/year), current number of members = (50% * $150K) / (75% *
$150) = 667
With future membership fee = 80% * $150/year = $120/year,
Amount per member entering the fund = 75% * $120/year = $90
Number of members required for annual deposit of $150K into fund = $150K/$90 = 1,667
Therefore, required increase in membership = 1,667 – 667 = 1,000
Key insight: 1,000 new members are needed for the membership fee reduction to be sufficient in
helping us achieve our revenue goal.
Question 3: What do you think of that?

Possible Answer:
It is hard to imagine that a mere 20% drop in membership price will cause member numbers to more
than double (from 667 to 1667). This strategy cannot stand alone.
Question 4: What are the pros and cons of this strategy?

Possible Answer:
Pros: Low cost strategy; if successful in increasmg membership strength, this strategy will lead to
sustainable revenue increases (recurring renewal fees, other complementary revenue streams like
sales of special tickets or merchandise to members and discounted rates driving volume sales etc.)
Cons: Risky; if demand for memberships is price-inelastic, it can backfire horribly. Also, certain
beneficiaries/donors of the museum may be strongly opposed to a low-cost strategy.
Question 5: What other strategies can the museum employ?

Possible Answer:
Revisit original structure. Suggested answers include: revisit each alternative revenue source in a
systematic fashion, and lay out ways to boost revenue and therefore annual deposits into that fund.
a. Membership fees
• Investigate real source of reduced membership revenues.
• Are new members’ joining rate declining? If so, boost advertising for new members (and increase
perks which are low-cost), without necessarily lowering fees.
• Are existing members letting their memberships lapse? Release early bird renewal specials, to
encourage more renewals.
b. Admission fees
• Analyze visitor patterns, and employ creative promotion and price discrimination strategies (e.g.
weekend special rates, family specials, co-promotions with other museums or nearby
entertainment/restaurant spots)
• Boost other revenues associated with admission, such as food and merchandise sales on museum
premises. Improve gift shop and cafeteria operations to attract more dollars.
c. Sponsorships and grants
• Court sponsors more aggressively, and persuade them that 17th/18th century European art is the
right artistic cause to invest in for the betterment of New York cultural life!
d. Other potential sources
• Rent out museum grounds after-hours for private parties/functions
• Loan art pieces to other museums
Question 6: What is your final recommendation?

A strong candidate should present a short and concise conclusion based on their findings.
Spain to Build Madrid–Barcelona High-speed Rail Line
Case Type: new business; investment.
Industry Coverage: railroads & trains; transportation.
Case Interview Question #00886: The national railway company of Spain (RENFE, acronym of Red
Nacional de los Ferrocarriles Españoles—National Network of Spanish Railways), a former monopoly,
is now opening to competition. On January 1, 2005, RENFE was divided into two separate
companies: RENFE-Operadora (train operations) and ADIF (Administrador de Infraestructuras
Ferroviarias—Railway Infrastructure Administration, a company that manages the tracks, train
stations and traffic control).
A friend of yours has just inherited $100 million and has approached you for advice on starting a new
train operation company to compete against the new RENFE-Operadora. In particular, he wants to
start by opening a new high speed train route between Madrid and Barcelona (621 kilometers or 386
miles). Should your friend go ahead and launch the new business?
Possible Answer:
Part 1: Industry Overview
Behind the scenes: Let the candidate to lay out his/her framework and start brainstorming about the
current situation in the industry: competitors, and competitive situation. Give the following information
when asked the proper question. Let him or her focus on competition, and the differences between
this new venture and the competition.
Main competitors: RENFE and air travel. Evaluate price, time and convenience
Us vs. RENFE:
 We are less expensive.

 We are more efficiently run (as a former monopoly, RENFE is very inefficient!)
 Equal travel time.
 We are equally convenient (same stations and tracks).
Us vs. air travel:
 We are less expensive than air travel.

 Equally efficient.
 High speed train takes slightly longer than air travel.
 We are more convenient (no need to travel to/from the airport)
Key Insight: As a result of this high-level analysis, it is possible that we have a chance in this market.
Now let’s evaluate profitability.
Part 2: Business Overview

Interviewer: Now that we have identified the main issues in the market, it is time to see whether we
can be profitable. How would you evaluate the viability of your friend’s business? What do you think
the main costs and revenue streams are?
Possible Answers:
Possible forms of revenues: tickets (main revenue driver), ads in trains, food and drinks, and any
others are good for the brainstorming but should be ignored for the calculations.
Costs: Marketing, Operations and maintenance, trains, personnel, IT, etc.
Interviewer: Great. Now, before moving on let me tell you about operations. You can travel by high-
speed train between Madrid and Barcelona in under 3 hours. Trains run from 8 am until 10 pm. Taking
into account all different factors, we can run two round trips per day. We will need three trains, as well
as one for backup in case of breakdown, i.e. total 4 trains and 4 trips per day.
Part 3: Break even Calculations

Interviewer: What do you need to calculate expected profits? Keep in mind that the company only has
10 years to pay back the investment.
Behind the scenes: The candidate should ask specifically for all the costs needed.
• Trains: $30M per train (tell the candidate to think of this only at the end)
• Marketing: $15M per year
• Operations/Maintenance: $10M per year
Train fares: Trains have a capacity of 500 people

• If tickets cost $40, then 95% occupancy
Interviewer: Given this data, how much do you think the tickets should cost?
Candidate:
• $40: (0.95 * 500) * $40 = $19,000 per trip

• $50: (0.8 * 500) * $50 = $20,000 per trip
• $60: (0.6 * 500) * $60 = $18,000 per trip
Key Insight: It is most profitable to set prices at $50.
Interviewer: Now figure out the profits per year (assuming above costs are per train)
Calculations:
$20,000 per trip * 4 trips per day * 365 days = $29.2M in revenue per year
$29.2M – $25M (marketing and operations) = $4.2M profit per year per train
Because we on average operate only 3 trains we disregard the costs in operations and maintenance
for the fourth train. Total estimated operating profit is therefore $4.2 * 3 = $12.6M.
Key Insight: This does not look great – it would take almost 10 years to recoup the $120M investment
in 4 trains.
Recommendations
Interviewer: What would you recommend your friend? What options could you consider to make the
business more profitable?
Possible Answer:
He should not invest under the current circumstances, but may also explore options such as leasing
trains, additional revenue from onboard sales and advertising, joint venture (JV) with a foreign
operator with excess capacity, etc. (ask for brainstorming ideas)
Ruby Tuesday Sees Cost Increasing & Revenue Declining
Case Type: improve profitability.
Consulting Firm: McKinsey & Company 1st round full time job interview.
Case Interview Question #00885: Our client Ruby Tuesday Inc. (NYSE: RT) is an American
multinational foodservice retailer that owns, operates, and franchises a number of fast food restaurant
brands. They are headquartered in Maryville, Tennessee, and operate more than 700 locations
worldwide between their various concepts.
The majority of Ruby Tuesday’s fast food restaurants are on the East coast. 40% of their restaurants
are located in service centers on highways, often in clusters of three to five. The client Ruby Tuesday
has recorded astounding growth historically. In the past five years, however, costs have been
increasing and revenues declining. Your consulting firm has been hired to determine how to address
the problem. What would you do?
Possible Answer:
Note: This is a interviewer-led “pressure” case. Do not allow the candidate to formulate a structure.
Rather than deliberating and answering, the candidate should be pushed to answer quickly.
Interviewer: Let’s start with a simple question related to costs. In 2014, our cost structure was 20%
Property, Plant And Equipment (PP&E), 20% labor, 30% Cost of Goods Sold (COGS), and 30%
miscellaneous. In 2015, PP&E has doubled, labor has stayed the same, COGS has dropped by two
thirds (due to the use of beef substitutes) and SG&A has tripled. What percent of our cost structure is
labor in 2015?
Candidate: Consider the problem in absolute values rather than percents. PP&E moves from $20 to
$40, labor remains at $20, COGS changes from $30 to $10, and SG&A shifts from $30 to $90. The
new “total cost” is $40+$20+$10+$90 = $160 now. Labor ($20) is 12.5% of $160.
Note: If the candidate cannot answer the question, remain silent for ten seconds. And then offer
minimal clues. If the candidate produces the correct answer, ask him/her if he/she is sure. Force the
candidate to declare he/she is sure before moving on.
Interviewer: OK. Let’s forget about costs. Let’s talk about revenues. Over the past fifteen years, the
number of fast food restaurants owned and operated by the client has declined by 20%. Why do you
think this is?
Candidate: Possible answers include: consolidation, changing demographics that do not cater to fast
food consumption, or the emergence of other low cost options stealing share.
Interviewer: Even more concerning, in addition to fewer storefronts, our client’s revenues have
declined by 30%. Take a look at the table below and tell me what you think. These are our four most
prominent restaurant brands.
Miguel’s Big
Jen’s Fresh Burger Taco Nate’s Fat Dogs Rya’s Gourmet Pizza Pie
# of stores (2014) 16 28 20 20
# of stores (2015) 12 24 20 12
The candidate should see that while the total number of stores has declined, some stores have fared
better than others. Notably, Nate’s Fat Dogs has maintained the same number of stores. The
candidate should surmise that the new mix of storefronts may account for the more precipitous drop in
revenue (when compared with the decline in store fronts). That is, some stores generate more
revenue than others. If the candidate does not see that store mix is key, prompt him/her.
Interviewer: Yeah, you’re right about that. Rya’s Gourmet Pizza Pie generated the most cash when
compared against the other restaurants. Why do you think this is?
Possible answers include higher average revenue per sale or a higher number of sales.
Interviewer: Actually both. We found that although customers spent more time eating in Rya’s than
any other restaurant, later hours more than compensated. So why do you think the client closed
storefronts rather than opening them?
The candidate should first note that high revenues are distinct from high profits. It could be the case
that costs increased disproportionately. If the candidate does not realize this, prompt him/her.
Interviewer: What costs do you think were most relevant?
The candidate should recall the changing cost structure for all the stores. Although Rya’s is only one
brand within the portfolio, the candidate should ask about PP&E and SG&A.
Interviewer: Actually PP&E costs were quite high. Rya’s uses an unusual type of coal oven capable of
cooking pizzas very quickly. The service on the ovens was extremely expensive and they broke down
all the time. Abruptly ask the candidate: how many pizzas do you think Rya’s prepares on a daily
basis?
This is a generic market sizing and estimation question that can be approached in any number of
ways. One approach is to begin with the number of restaurants in the chain, number of customers
drawn by each (which will vary based on the day of the week and the number of individuals traveling
on highways) and then speculate what fraction of a pizza each customer buys.
Interviewer: Great. Thanks for coming in! No formal recommendation is necessary.

Pennzoil Builds Strong Presence in Oil Change Business
Industry Coverage: automotive, motor vehicles; oil, gas & petroleum industry.
Case Interview Question #00840: Your client Pennzoil is a seller of motor oil headquartered in
Houston, Texas, United States. Motor oil, engine oil, or engine lubricant is any of various well-
developed lubricants that are used for lubrication of internal combustion engines. The motor oil and
the oil filter need to be periodically replaced. While there is a full industry surrounding regular oil
changes and maintenance, an oil change is a fairly simple operation that most car owners can do
themselves.
Your client Pennzoil has historically made significant profits, but recently it has come under threat and
we have been hired to address three concerns.
1. Over a few previous years consumers believed that they needed to change their oil every 10,000
miles. They have started to realize that in fact they can get away with only changing their oil every
20,000 – 30,000 miles.
2. Historically in the U.S., 80% of the oil change market is in DIY (Do it yourself) and 20% in DIBSE
(Do it by someone else). This has started to shift in favor of DIBSE. Our client Pennzoil has a 2nd
position in the DIY market but only a 10th position in the DIBSE market.
3. The CEO of Pennzoil has promised his shareholders a 200% increase in profits over the next 5
years.
What do you suggest the client do?
Additional Information: to be provided to candidate after relevant questions

The DIBSE outlets can be broken down as follows:
• 35% of the market is “Quick Lube”, of which 60% is owned by one of our major competitors such as
Jiffy Lube.
• 20% of the market is OEM related dealerships.
• 15% is small “mom and Pop” auto shops.
• 10% are small regional chains.
• 5% are owned by Wal-Mart who are entering the oil change market.
Our major DIY customer is Wal-Mart, where we are the price leader.
The margins in DIBSE are half the margins in DIY.
The client Pennzoil expects to charge $25 for an oil change and the variable costs for an oil change is
$20.
Each DIBSE garage has three bays. Each car oil change takes about 15 minutes. Car owners drive
their cars themselves onto the bay.
Additional data for DIBSE market entry:
Fixed Costs
• Marketing: $45,000
• Rental of garage: $36,000
• Equipment: $15,000
• Utilities: $14,000
• Fixed Labor (ask how much they expect): 5 mechanics at $40,000 each
Possible Solution:
Note to Interviewer: Push the candidate not to draw a framework. Just outline and discuss the issues.
Candidate: First, I would like to explore partnering with Wal-Mart to sell to their DIBSE business.
Interviewer: Why would Wal-Mart want to source from us?

Candidate: I think we can leverage our relationship to Wal-Mart, pointing out that people are buying
our product in the DIY segment because of our value proposition, our brand name and their trust in
us. We will continue to advertise our product and people are going to ask after it. Secondly as
WalMart is new to the DIBSE business – and this is not necessarily a logical progression for them –
using a premium lubricant in their garages will help inspire confidence.
Interviewer: How would you structure a deal to protect your margins in the DIY business?
Candidate: I think we should be able to negotiate either a volume agreement, or a supply location
agreement to protect our DIY business.
Interviewer: OK, what else?
Candidate: I think we should look at tying up a deal with the OEM garages, by focusing on the OEM
producers and advertising with them we can link our brand to their cars.
Interviewer: That is not going to work. In the US each OEM garage has the right to sell what cars he
wants to and to use whatever lubricants he wants in his garage. The OEMs have no power over the
individual garages.
Candidate: OK, in which case we will need to use our brand presence in the DIY segment to create a
pull effect onto the garages. For example we can co-advertise at auto shows such as the Detroit Auto
show to create demand for our lubricants when they get their new, expensive, cars oil changed. This
will create an incentive for individual garages to stock our product.
Interviewer: Good. Now the client has been thinking about vertically integrating into the DIBSE
business. Do you think that is a good idea?
Candidate: It will depend on how much margin is available in that business, how easily we are able to
cross sell to our existing customers and whether there are any synergies with our existing business.
Interviewer: The client expects to charge $25 for an oil change and the variable costs for an oil
change is $20. Each DIBSE garage has three bays. Each car oil change takes about 15 minutes. Car
owners drive their cars themselves onto the bay.
And we have the following data on the fixed costs associated with the DIBSE business:
 Marketing: $45,000
 Rental: $36,000
 Equipment: $15,000
 Utilities: $14,000
 Fixed Labor (ask how much they expect): 5 mechanics at $40,000 each
Candidate: In that case, the variable contribution per car oil change is $5. The total fixed cost is
$310,000. Hence we need to process $310,000/$5 = 62,000 cars per year to break even. Assuming
we are open 300 days a year, we need to process around 200 cars per day to break even.
200 cars per day – assuming a 10-hour working day, means that we need to process 20 cars per
hour. Because each garage has three bays and oil change takes about 15 minutes, our capacity is
only 3 * (60/15) = 12 cars per hour.
Hence, this does not make sense.
Interviewer: So, what do you suggest?
Candidate: Well, what we could do is to see whether we can use this opportunity to cross sell other
products to the car owners while they are at our garage for oil change.
Interviewer: Good. If we go with that strategy, our price will go up to $48 and our variable costs will
increase to $28, but it will take 45 minutes to process each car.
Candidate: OK, so our variable contribution has now increased to $20, which is 4 times higher than
our previous case. Hence the number of cars we need to process to break even will drop to around 5
cars per hour per garage. Our capacity has, however, also dropped to around 3 * (60/45) = 4 cars per
hour per garage, hence we still can not break even.
Interviewer: Good. You just bump into the CEO of Pennzoil in the lift, he asks you for a summary
update, what do you say?
Candidate: The reason you are loosing profits is a shift in the industry from DIY to DIBSE. We believe
we can capture some market share in DIBSE through a partnership deal with Wal-Mart, and have
investigated the possibility of vertically integrating into the DIBSE garage industry – but do not
currently believe that the returns justify the investments.
Over the next couple of weeks, my team is going to work further to identify further opportunities to use
your strong brand name to build your presence in the DIBSE segment.
Interviewer: Excellent!
The British Museum to Cut Budget by £5 Million
Case Type: reduce cost; investment.
Industry Coverage: leisure & recreation; non-profit organization.
Case Interview Question #00822: Your client is the British Museum which has an “encyclopedic”
range of attractions. Established in 1753, the British Museum is a museum dedicated to human
history, art, and culture, located in the Bloomsbury area of London. Its permanent collection,
numbering some 8 million works, is among the largest and most comprehensive in existence and
originates from all continents, illustrating and documenting the story of human culture from its
beginnings to the present.
The British Museum is a not-for-profit non-departmental public body sponsored by the U.K.
Department for Culture, Media and Sport. And as with all other national museums in the United
Kingdom it charges no admission fee, except for touring exhibitions loaned to other museums. On
average they receive 5 million visitors a year and currently break even with £50M of revenues and
costs.
Due to budget cut, the British government has just told them that they are withdrawing £5M of funding
next year and the museum has hired McKinsey & Company in to look at some of their costs and
revenues streams.
Additional Information: to be provided after relevant questions

1. Touring Exhibits
• One revenue stream is touring exhibitions. Each year the British Museum sends on average 12
exhibitions to another museum. The average cost per exhibition is £60K.
• Revenues for touring exhibits over the last seven exhibitions: £80K, £70K, £70K, £60K, £40K, £40K
and £50K.
• Variable costs comprise most of the exhibits cost (insurance, traveling curator, transportation, etc)
2. Capital Investments
• Each year they get £6.0M the government to invest in capital projects and they want us to determine
their returns.
3. Previous year investments
• £1.5M in building maintenance.

• £3.0M in fixing the main courtyard and advertising that it was fixed (most of it was spent on
advertising).
• £1.5M on installing security cameras.
4. The additional advertising brought in an extra 10% of visitors.
• Each visitor brings in £3 in contributions from fees and £3 contribution from profits in the gift shop.
• Assume visitors will not come again and will not tell any friends.
5. The security cameras are part of a 5 year project where the same amount of money will be invested
each year.
• The British Museum saves £500K on security guards for the first 5 years and £1M per year
afterwards.
Possible Answer:
Interviewer: First, let’s talk about their revenues streams. What are your thoughts?
Candidate: Well, the total income over the last 7 exhibitions is £80K + £70K + £70K + £60K + £40K +
£40K + £50K = £410K and the total cost is £60K * 7 = £420K. Hence on the average we lose money –
ignoring any discount factor.
Interviewer: OK, What do you propose?
Candidate: An number of options:
• Focus on the big exhibits (e.g. £80K and £70K exhibits) which make money and cut out the small,
less profitable ones.
• See if we can send exhibits to more than one location.
• Only do exhibits in the good years, and store them during the bad years.
Interviewer: OK, let’s focus on sending them to more than one museum. What do you think the costs
are?
Candidate: Obviously there will be some fixed costs to get each exhibit ready, but the main costs will
be variable, in particularly insurance and specialized packing/transportation. So it may only be
profitable to send to more than one location if the additional transportation costs are smaller than the
net revenues.
Interviewer: Excellent, they also send a curator along with each exhibit. The museum asked us to look
at their capital budget. Each year they get £6M from the government to invest in capital projects and
they want us to determine their returns.
This year they invested 1/4 of the £6M in building maintenance, 1/2 in fixing the main courtyard – but
actually when we dove into the costs we found that the majority of the courtyard money was spend
advertising to people that they had fixed the main courtyard – and 1/4 on installing security cameras.
Let’s look at the three projects one by one.
Extra Information:
The building maintenance is fixed and hard to calculate a return on.
The additional advertising brought in an extra 10% of visitors. Each visitor brings in £3 in contributions
from fees and £3 contribution from profits in the gift shop.
The security cameras is part of a 5 year project where the same amount of money will be invested
each year. We expect that during the installation we will save £500K on security guards and after the
project is complete we will save £1M per year on security guards.
Candidate: 5 million visitors * 10% = 500K extra visitors, 500K extra visitors * £6/visitor = £3M
additional revenues.
I was told to assume that these extra visitors will not come back and that they will not tell their friends.
So, the courtyard project has an expenditure of £3M, and brings in £3M additional revenue. Hence,
it’s a zero NPV project.
I also suggested looking at other ways to better spend their advertising money to increase their NPV.
However, the interviewer told me that on the whole as museums will be stewarded towards
maximizing the number of people that come through so this advertising investment makes some
sense even if the NPV is negative.
Interviewer: OK, now let’s look at the security cameras project.
Candidate: During the building of the security cameras the net costs are:
Year 1-5, £1.5M (capital expenditure) – £500K (savings on security guards) = £1M net costs
Then from Year 6 onwards the museum saves £1M per year on security guards.
Assumed a 10% cost of capital and a perpetuity for the savings, although stated that (a) the cameras
will need annual maintenance and (b) they will need to be replaced every 10 – 20 years or so.
However, it can approximate to a perpetuity of savings.
 Perpetuity of security guards savings is £1M/10% = £10M in year 6.

 Present Value of savings (I had to estimate) is £6M
 Present Value of net costs is (again estimates) at £4M
 Thus, the net present value (NPV) is £2M.
Hence, the security cameras is a positive NPV project and should be encouraged. (actual NPV
calculation is £1.8M)
Then, the Interviewer said that all these capital investments are sunk costs and what we also needed
to look at was future investment plans for the museum.
TD Bank to Charge Monthly Fee for Checking Account
Industry Coverage: banking.
Case Interview Question #00819: Our client TD Bank, N.A., is a United States national bank
headquartered in Cherry Hill, New Jersey. It offers retail banking services in 15 states and
Washington, D.C. TD Bank has a large retail footprint and offers a mix of services to end customers
(checking, debit cards, credit cards). They also have loan centers to sell mortgages in the same
markets. The bank currently serves 15 million customers.
Our client TD Bank has historically been very profitable, but increased regulation from the Federal
Government and the recent downturn in the U.S. economy have caused the bank to see a sharp
decline in profitability. The client has engaged McKinsey & Company to help determine the next steps
for its business and has asked us to assess ways they can increase profits within the next 12 months.
How would you go about this case?
Additional Information: to be provided upon request
Ensure the candidate is familiar with how a bank earns its profits (e.g. the spread between what they
lend money out at and borrowing costs, fees on various services).
Note that this is a typical McKinsey style interviewer-led case. There are eight questions that the
Interviewer will ask the Interviewee.
Question #1: What are some of the ways the bank can increase profits in the next 12 months?
Possible Answer:
A good answer is structured and contains a comprehensive set of ideas to both reduce costs and
boost revenues as well as clear examples. The interviewee should use a Profitability framework
(Profits = Revenues – Costs) to approach this problem. Answers include but are not limited to:
I. Reduce Costs
a. Fixed Costs
 Reduce under-performing branches (close branches, lease branches to other banks)

 Reduce workforce (e.g., push greater use of online channels for banking, outsource functions)
 Consolidate the branches and the loan centers
b. Variable Costs
 Reduce costs associated with transactions (paper free, decrease error rate)
II. Increase Revenue
a. Quantity
b. Current Customers
 Cross-sell different products (home purchase mortgages, refinancing, credit card, debit card,
money market, advisory services)
 Change product mix to higher revenue products
 Get rid of unprofitable customers
c. New Customers
 Increase Number of customers

 Product Mix
 Launch new products
d. Price
 Increase bank fees (Debit card fees, ATM fees, call center fees)
 Raise rates charged
Question #2: We have worked with our client TD Bank to narrow down their options to two choices.
The first is shutting down unprofitable retail locations, the second is a better customer segmentation
strategy. Let’s explore both. First, what are some of the risks with shutting down branch locations?
Possible Answer:
There are a number of ways to think this through – look for the structure in how the candidate
responds. A good answer includes, but is not limited to:
a. Near Term
 Poor PR
 Legal/contractual complications
 Extra costs (severance)
 Lose a portion of customers who bank through that branch
 Selling off assets could scare investors
b. Long Term
 What happens when the market rebounds?

Question #3: The second option the bank is considering is a better retail segmentation strategy: What
segments do you think a retail bank has?
Possible Answer:
This response could have a lot of answers. Look for clear delineation between customers who are
profitable and unprofitable and then list characteristics of each (i.e. Segment 1 is mass affluent and is
highly profitable, uses checking accounts, has a money market account, and has a mortgage with the
bank; they are low cost as they generally use ATMs and the internet to manage their transactions;
Segment 2 is lower income, keeps a small balance in checking, uses tellers and call centers often)
etc.
Note: Ensure the candidate does not spend too long on this question.
Question #4: Can you take a look at the below chart and walk me through what the bank is
experiencing? Please walk the interviewee through any questions they have on the chart in Exhibit 1.
* 15,000,000 customers
Possible Answer:
Key insights include, but are not limited to:
 Only 30% of the bank’s customers are currently profitable

 20% of the banks customers have low revenue potential and could be eliminated
 Our client needs to change the mix of products from group 1 and 2.
Question #5: What is the average annual profitability of a customer?
Possible Answer:
Profit
Category ($) Percent of clients Weighted profitability
Group 1 -5 30% -$1.50
Group 2 -25 20% -$5.00
Group 3 -5 20% -$1.00
Group 4 15 10% $1.50
Group 5 45 20% $9.00
Total N/A 100% $3.00
Average annual profitability of a customer = $3.00
Question #6: What is the annual bank profitability?

Possible Answer:
Total Customers = 15,000,000
Average Profit per customer = $3.00
Total Profit = 15M * $3.00 = $45M
Note: If the interviewer decides to calculate each group out individually, push them to look for
shortcuts.
Question #7: Our client has decided to institute a $0.85 fee each month for all checking accounts. We
have advised them that they will lose a number of customers. We expect the following % of customers
to remain (read this chart to interviewee):
Percent of customers that remain
 Group 1: 60%
 Group 2: 40%
 Group 3: 20%
 Group 4: 60%
 Group 5: 50%
What is the new annual profitability per customer?
Possible Answer:
Profit per
group Profit from Total profit
Profit % of % customers # of remaining (without fees (@$10 per
Segment ($) Customers that will stay customers fee) per year) segment
15M*0.3*0.6 =
Group 1 -$5 30% 60% 2.7M -$13.5M $27M $13.5M
15M*0.2*0.4 =
Group 2 -$25 20% 40% 1.2M -$30M $12M -$18M
15M*0.2*0.2 =
Group 3 -$5 20% 20% 600K -$3M $6M 3M
15M*0.1*0.6 =
Group 4 $15 10% 60% 900K $13.5M $9M $22.5M
15M*0.2*0.5 =
Group 5 $45 20% 50% 1.5M $67.5M $15M $82.5M
Total N/A 100% N/A 6.9M $34.5M $69M $103.5M
New average Profit per Customer = $103.5M/6.9M = $15
Note 1: If the interviewee is running out of time, help them along to ensure they get to conclusion, e.g.
ask them for their approach.
Note 2: Feel free to let the interviewee round off numbers here, e.g. suggest $0.85 per month should
become $10 per year.
Question #8: You are walking down the hall and run into the CEO of TD Bank, he wants to know your
recommendation. What would you tell him?
Possible Answer:
A good answer includes, but is not limited to:
Conclusion: The client TD Bank should institute a bank fee in order to meet the initial goal of
increasing profits. This is the quickest way to earn new streams of revenue, while segmenting out the
unprofitable customers. By instituting a fee the client will be able to increase profit by 5x per customer
on an annual basis.
Note: The interviewee should include a detail or two on each group and how they are able to increase
profits (e.g. Group 3 was losing $3M per year we are now earning $3M in profit from them on an
annual basis).
Risks
 Bad PR
 High transaction costs as people try to figure out if they are affected
 Estimates could be off
 Lose customers that could become profitable in the future
Next steps
 Move forward with instating the fee

 Look at exempting certain groups from the fee.
Indian Copycat of Netflix to Enter U.S. Market
Case Type: market entry; math problem.
Industry Coverage: entertainment; mass media.
Case Interview Question #00816: Bollywood is the nickname for the Hindi language film industry,
based in Mumbai, Maharashtra, India. Bollywood is one of the largest film producers in India and one
of the largest centers of film production in the world. Therefore, the term “Bollywood” is sometimes
used as a synecdoche to refer to the whole of Indian cinema.
Our client, BollyFlix Inc., is an Indian media company providing DVD rentals by mail, as well as movie
and TV streaming services, to the Indian market, both under a subscription model. The company
serves content made in India for the Indian market (known as “Bollywood” content), and currently has
no international operations.
Recently, driven by the explosive growth of Indian immigrant and Indian American citizen populations
in the United States, as well as the increasing popularity of Indian movies among non-Indians around
the world, BollyFlix began to consider launching operations in the United States.
Should the client company BollyFlix enter the U.S. DVD rental market, the online streaming business
in the U.S., neither, or both?

 The client BollyFlix provides only movies and television content made in India (Bollywood) for the
Indian market.
 Major U.S. competitors (like Netflix, Blockbuster, etc.) do not serve any Bollywood content.
BollyFlix does not serve any non-Bollywood content currently.
 There are outlets, in both traditional retail and online, that sell such content, but none offering a
rental /streaming model in the US at this time.
 BollyFlix operates their DVD and streaming businesses separately.
 BollyFlix’s only goal is to establish a profitable business.
 Note that this is a longer case in terms of time.
Possible Answer:
1. Market Sizing
A good candidate will recognize that a proper market sizing is an essential first step to this “market
entry” problem. If they do not, steer them toward this exercise with a question like “Who do you think
might be the target customers for such a business?”.
Let the candidate brainstorm as to what inputs they would like.
Good answers might include (but are not limited to) requests for data on:
 Size of the American and Indian American population

 Segments within these populations
 Data on non-Indian consumption of Bollywood content
 Data on current patterns of non-Bollywood content among target populations
Next, the interviewer should provide them with the data below and ask them what the market for both
their DVD subscription service and video streaming subscription service would be.

 The population of the US is about 300M, and about 1% (~3M) claim Indian descent.
 70% of those who claim Indian descent were born outside of the US. 30% were born in the US.
 Based on demographics and market research, we believe that of those born outside the US, 30%
would be likely customers. Of those born in the US, 10% are likely customers. These numbers
hold for both lines of business.
 0.1% of non-Indian US residents are interested in Bollywood content and are likely to become
customers.
 BollyFlix plans to charge $100/year for their DVD rental subscription service, and $50/year for a
subscription to their online streaming service.
Market Sizing Calculations:
Market sizing calculations are shown in the table below. Tell the candidate to assume that we capture
100% of likely customers. Suggest to round to 1M customers and $150M in revenue if they do not
ask.
U.S. Population = 300M

Indian descent population within U.S. = 3M
Segment Population Likely Customers Total

Indian descent US born 900K 10% 90K
Foreign
born 2.1M 30% 630K
Non-Indian population 297M 0.1% 297K
Total market (population) 90K + 630K + 297K = 1,017,000
Total market (DVD) 1,017,000 * $100 = $101.7M
Total market (Streaming) 1,017,000 * $50 = $50.85M
Total market size $101.7M + $50.85M = $152.55M
2. Cost Analysis
Having established a market size, the next step is to determine what it would cost to operate in the
U.S. market.
Ask the candidate what sorts of costs a company like BollyFlix are likely to encounter.
Good Answers may include:
 Content rights fees (streaming)

 IT infrastructure/bandwidth (streaming)
 Shipping & postage
 Costs to establish and operate distribution centers
 Purchase of DVDs
 SG&A
 Marketing
 For DVD customers, our variable costs would be: $60/year/customer to purchase DVDs and
cover overhead; $20/year/customer to cover shipping costs.
 It costs $4M/year to lease and operate a Distribution Center in support of the DVD rental
business.
 Nationwide coverage for DVD distribution would require 6 distribution centers.
 Rights to stream Bollywood content in the U.S. would cost the client $20M.
 IT Infrastructure, bandwidth and other overhead within the streaming business would cost $8M.
Cost Calculations:
The candidate should compute roughly the numbers below. They should conclude that given available
information, the DVD rental business is not viable, whereas the online streaming business has very
high margin.
Table 2. Projected Profits
DVD Streaming
Projected Revenues $100M $50M
Cost of DVDs $60M $0
Cost of Shipping $20M $0
Cost of Distribution Centers $24M $0
Content License Fee $0 $20M
IT Infrastructure $0 $8M
Projected Profits -$4M $22M
3. Regional Analysis
Next, tell the candidate that we have engaged in a market segmentation study, and come to realize
that concentrations of our target population vary considerably by region within the United States.
Show them Exhibit 1 and ask for their immediate takeaways.
If the candidate does not suggest such an analysis on their own, ask them to determine if the DVD
business might be viable on a regional basis, if not a national one. To ease calculations, you may
remind them that 80% of DVD revenues are immediately eaten up by variable costs (cost of DVDs
$60/customer + cost of shipping $20/customer), leaving $20/customer in potential profit, and that the
cost to serve a region is $4M (the distribution center cost).
Given time, a strong candidate should be able to produce roughly the following calculations.
Regio Likely Total Total Marginal Profit per

n Population Customers Customers Revenue Cost Region
Non-
1 Indian 60M 60K 276K $5.52M $4M $1.52M
Indian 1.08M 216K
Non-
2 Indian 70M 70K 126K $2.52M $4M -$1.48M
Indian 280K 56K
Non-
3 Indian 70M 70K 196K $3.92M $4M -$0.08M
Indian 630K 126K
Non-
4 Indian 40M 40K 64K $1.28M $4M -$2.72M
Indian 120K 24K
Non-
5 Indian 10M 10K 16K $320K $4M -$3.68M
Indian 30K 6K
Non-
6 Indian 50M 50K 230K $4.6M $4M $0.6M
Indian 900K 180K
Total 908K $18.16M $24M -$5.84M
If serving only Region 1 and Region 6, total profits = $1.52M + $0.6M = $2.12M
Note to Interviewer: Revenue here assumes $20 per customer (what is left over after subtracting $80
in per-customer fixed costs). General population numbers are rounded.
The candidate should recognize that it is profitable to serve Regions 1 and 6, and very close to
profitable to serve Region 3. Ask them what might change in region 3 that could effect this in the
future.
Good Answers could include:
 A reshaping of the region so that it better encompasses target populations.

 Growth in the Indian population, either organically or via immigration.
 Growth in demand for Bollywood content among either the Indian or non-Indian population (either
natural or spurred by increased marketing).
 Pricing changes that drive revenue or volume.
 Consumption via DVD could increase (or decrease) overall.
4. Recommendations/Risks
The candidate should conclude that the client BollyFlix should enter the streaming business in the
United States immediately, and enter the DVD rental business on a regional basis.
Potential Risks
 Changes in demographics or consumer preference could have a large effect on this business.
 The business may be easily copy-able by competitors.
 Slim DVD margins could disappear overnight.
 High margins in the streaming business could attract competition, driving up content prices and
pressuring consumer pricing power.
Next Steps
 Begin setting up infrastructure to open the content streaming business.

 Move to open warehouses and begin marketing DVD rental business in Regions 1 and 6.
 Examine potential levers to move Region 3 DVD rental business into profitability.
Rovio to Maximize Revenues from Angry Birds
Case Type: increase revenues; new product.
Industry Coverage: software, information technology (IT).
Case Interview Question #00784: Our client Rovio Entertainment Ltd., previously known as Relude
and Rovio Mobile, is a Finnish developer, publisher, distributor of video games and entertainment
company headquartered in Espoo, Finland. The company was founded in 2003 as a mobile game
development studio named Relude, and was renamed to Rovio Mobile in 2005.
The year is 2009. Our client Rovio Entertainment has recently developed a simple, yet addictive
puzzle game for mobile devices called “Angry Birds”. In the game, players use a slingshot to launch
birds at pigs stationed in or around various structures with the goal of destroying all the pigs on the
playing field. As players advance through the game new types of birds become available, some with
special abilities that can be activated by the player. The Angry Birds game reached No. 1 spot in the
Apple App Store paid apps chart after six months, and remained charted for months after.
Angry Birds is the 52nd game released by the client Rovio. Rovio is considering how to maximize their
revenues from Angry Birds in the next few years. Mobile video games tend to have short life cycles. A
game receives the vast majority of its revenues within the first year of release. What would you
recommend to the client in order to maximize their revenues from Angry Birds?
Possible Answer:
Question 1: There are several types of business models for mobile games. Considering the brief
descriptions of each model below, can you list the pros and cons of adopting each model?
 Traditional: charge a one-time fee for players to download onto their mobile device.
 Free-to-Play: free for players to download, pay for micro-transactions (small payments) for extra
lives, special items, etc.
 Freemium /Advertising-Based: free for players to download, displays advertising in game.
 Subscription: free for players to download, pay monthly fee to continue to play (subscription
usually starts after first month)
Suggested Solution:
Model Pros Cons
 Upfront revenue does not
depend on how long players
continue to play after buying.  Revenue tends come only at the
 More reliable sales forecasts. beginning of the product cycle.
 Possibility to change model if  Less players will download due to
Traditional sales are lower than forecast. upfront cost.
 Free game leads to more  Players will look for ways around
downloads and potentially paying for content even if they enjoy
micro-transactions. the game.
 Highest revenue potential if  Hard to get the balance between useful
game is a hit, as players get in game items for sale and frustrating
Free-to-play addicted to buying content. players by forcing them to buy items.
 Players do not like advertising.
 Free game leads to more  Must focus on getting advertisers as
downloads. well as players.
 Advertising provides a steady  High need for retention means
stream of income if players are continuous teasers required to entice
Freemium retained. players to remain (higher costs).
Subscription  Players like ad-free content and  Higher drop-off rates as players do
lower upfront cost. continue to pay if they are not playing
 Steady income stream from regularly.
subscription.  Need to have discounts/free trial
periods at the beginning which
decreases revenues (revenue leakage).
Question 2: What metrics could be used to help estimate revenues for these models?
Suggested Solution:
Model Metrics
 Number of downloads;
All  Player drop-off rate
Traditional Price of a download
 Average number of micro-transactions per player;
Free-to-play  Average price per mico-transaction
Freemium Revenue from advertisers (cost per view? Cost per click?)
 Cost of subscription – monthly? Discounts for longer periods?
 Average length of subscription per player;
Subscription  Number of players that buy subscription after trying game.
Question 3: The client Rovio has estimates for downloads and pricing strategies for each business
model. Calculate the potential revenues for each option and suggest the most attractive option for the
client.
a. Traditional
 Downloads: 15 million.
 Price: $2.99
b. Free-to-play
 Downloads: 30 million within first month

 Price/Micro-transaction: $0.99
 The first month has the most downloads, then the number of players using the game drops
steadily and consistently over a year.
 Light Players (10% of players): Buy an average 1 item/month
 Heavy Players (1% of players): Buy an average 10 items/month
 If game is a hit, then revenue is tripled.
 Chance of a Hit: 20%
c. Freemium
 Downloads: 30 million within first month

 Revenue from Advertisers: 15 cents a month per user (number of users averaged over the
month)
 The first month has the most downloads, than the number of players using the game drops
steadily and consistently over a year.
d. Subscription
 Downloads: 30 million total

 Subscription Price: 0.99 cents per month
 Percentage of Players that start subscription: 15%
 Average Life of Subscription: 5 months
Suggested Solution:
Overall, the life cycle of a game, especially a mobile version, is very short compared to other
products. Therefore, except for a few huge hits (like Candy Crush Saga), the vast majority of revenue
will be captured within a year. Make your calculations with this in mind.
a. Traditional
Revenue: $2.99 * 15M = $45 million

b. Free-to-Play
 Average # of Players per month: (30m at start of year + 0 at end of year)/2 = 15 million
 Revenue from Light Players: 15m * 0.10 * $0.99 * 12 months/year = $17.8 million
 Revenue from Heavy Players: 15m * 0.01 * $0.99 * 10 * 12 months/year = $17.8 million
 Revenue: $17.8m + $17.8m = $35.6 million
 Total Weighted Revenue with potential for hit: $35.6m * (1 – 0.2) + ($35.6 * 3) * 0.2 = $50 million
c. Freemium/Ads
 Average # of players per month: (30m at start + 0 at end)/2 = 15 million

 Revenue: $0.15 * 12 * 15m = $27 million
d.Subscription
Revenue: 30m * 0.15 * 5 * $0.99 = $22 million
Conclusion: Judging by the calculated (expected) revenues, Free-to-Play is the most attractive
option for the client.
Note: Bonus points to the candidate if he or she uses the hit probability to determine the Free-to-play
revenue potential ($50 million vs. $35.6 million). An outstanding candidate will also need to point out
that choosing the Free-To-Play model depends on the client having a higher risk tolerance, as the
revenues are only greater if the game is a hit.
South Beauty Restaurant Converts Open Seating into Small
Rooms
Case Type: improve profitability; math problem.
Case Interview Question #00763: Our client South Beauty 881 is an upscale Chinese restaurant
located in the city of Shanghai. The restaurant mostly serves government officials and high-level
business customers. Its monthly revenue is RMB 1.2 Million Yuan, but profit is not very high. The
manager of South Beauty 881 recently hired McKinsey & Company to help them increase profits. How
would you go about this case? What recommendation would you give to the client?
As China’s economy is booming, the upscale dining market is growing at 20% every year.
Customers for high end dining are generally price insensitive.

All competitors are earning money. Competitors’ price and value proposition are similar.
Variable costs across industry is 50% of revenue. Assume there are no fixed costs.
On weekdays, there is always a line of customers waiting for individual rooms at dinner time. As a
result, the South Beauty 881 restaurant has to turn away half of its weekdays dinner customers due to
capacity constraint.
The client South Beauty 881 has two kinds of seating in their dining area: 10 small private rooms with
2 tables per room, one big room with 20 tables.
a. Individual Room: 20 tables
Week Day Weekend

Occupancy: 80%; Price per person: 150; Occupancy: 30%; Price per person: 100;
Lunch Party size per table: 4 Party size per table: 4
Dinne Occupancy: 100%; Price per person: 300; Occupancy: 50%; Price per person: 200;
r Party size per table: 6 Party size per table: 6
b. Big Room: 20 tables
Week Day Weekend

Lunch Party size per table: 4 Party size per table: 4
Dinner Party size per table: 4 Party size per table: 4
Question #1: What do you think are the possible reasons for the client’s low profits?
Possible Answer:
The main reason for the client’s low profits: Government officials and high end business customers
prefer individual rooms to big room seating because of their requirement for privacy. Currently our
client is not meeting customer demand.
Question #2: What are potential solutions for this situation?

Possible Answer:
 Raising price.
 Turning big room tables into individual private rooms.
Question #3: Through market research, we have determined that if we raise weekday individual
private room price by 33%, we will lose 10% of customers. How will it change our profitability?
Possible Answer:
For weekday lunch, raising the price will result in 10% customer loss.
Previous Now
Customer 4 x 20 x 80% = 64 64 x (1 – 10%) = 58
Price 150 150 x (1 + 33%) = 200
Revenue 64 x 150 = 9,600 58 x 200 = 11,600
9,600 x 50% =
Profit 4,800 11,600 x 50% = 5,800
Incremental Profit 5,800 – 4,800 = 1,000
For weekday dinner, the underlying demand is 200% of current capacity, so raising price won’t reduce
volume.
Previous Now
Customer 6 x 20 = 120 120
Price 300 300 x (1 + 33%) = 400
Revenue 120 x 300 = 36,000 120 x 400 = 48,000
Profit 36,000 x 50% = 18,000 48,000 x 50% = 24,000
Incremental
Profit 24,000 – 18,000 = 6,000
Total Daily Incremental Profit: 1,000 + 6,000 = 7,000 Yuan
Question #4: A second solution is converting half of the big room into 5 individual rooms. It will take 2
weeks for the restaurant to finish the decoration, during which time the restaurant has to be
completely shut down. The decoration will cost RMB 100K Yuan. What is the total cost of this project?
Possible Answer:
Costs
 Capital investment: 100K

 Opportunity Cost: ~300K** (2 weeks of profits = 1.2Million/4 weeks * 2 weeks * 50%)
** Note: The observant candidate will quickly calculate this from the initial revenue info given at
beginning of case rather than making heavy calculations involved with calculating it from the table of
data.
Total Costs = 100K + 300K = 400K Yuan

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JNJ to Consider Company-wide Cost Optimization

Case Type: reduce costs; organizational behavior.

(1) Financial Reports

(2) Value Chain / Company Business / Organizational Structure

• Primary Functions: Inbound Operations, Company Operations, Outbound Operations, Marketing,

(5) Market Trends

(6) Industry Factors / Regulatory / Patents / Other Factors

Johnson & Johnson Industry

Then, ask them what would they do now?

Exhibit 2: Business Support Function (BSF) Costs Comparison

The candidate should quickly comment on two things:

Exhibit 3. Activity Split across BSFs*

*Typical Geographical sub-unit of a Business Unit

• Transactional activities: Defined as day-to-day activities, low-skill, repetitive

Question #6: Can you think of ways to reduce these costs?

Typical responses include:

Exhibit 4. Suggested Outsourced Centers and Centers of Excellence

b. Specialized activities can be consolidated at a regional level because:

• IT rationalization: Centralizing databases, establishing common platforms, renegotiating with

Exhibit 5. Total BSF Costs: $12 Billion

A quantitatively strong candidate will be quickly able to calculate:

Cost Savings Calculations:

a. The internal aspects

b. The external aspects or overall industry things

• size of the US market

Additional Information provided if asked:

• Population in the US = 300 Million

Question #3. How could we grow this market?

Growth in this market would be driven by:

• raising compliance (small effect);

Additional Information provided if requested:

• Sales reps salaries are $100K / year, plus $100K in benefits.

I did a breakeven that looked like:

And I ended up with # of patients = 330K

A good answer would involve at least identifying these potential issues.

Question #1. What are the key issues we need to examine?

This is a “new product launching” case, so we want to know:

• How big is the market?

• What are industry dynamics?

• What can we charge for the product?

Additional Information: (to be provided when requested by candidate)

Variables Source/Formula Calculations

Additional Information: (to be provided when requested by candidate)

Calculating cost savings from early harvests

Variables Source/Formula Calculations

Additional Information: (to be provided when requested by candidate)

Calculating extra revenues from better yields

Variables Source/Formula Calculations

Candidate should identify issues of buyer power and rivalry:

Additional Information: (to be provided when requested by candidate)

Variable Cost = $4K per hectoliter

Note: Use contribution margins to solve the problem:

• Demand for supplement is not as high as projected.

Additional info to share with the candidates (if prompted):

b. Operational Synergies and Complementarities:

c. Execution and Post-Merger Integration:

a. Operational Synergies and Complementarities:

b. Future market and business risk

c. Regulatory experience (U.S. and Europe)