The QVARTZcase interview

handbook

How should i use this handbook?

The purpose of this handbook is to serve as a source

of inspiration during your interview preparation. We

recommend browsing through all sections of the

handbook to ensure that you are familiar with the

various topics covered in it. At QVARTZ, case inter-

views are a part of the recruitment process for full-

time Consultants, Junior Consultants and Interns.

The contents of this handbook will, however, not be

explicitly tested during the recruitment process.

Is this handbook relevant for me?

If you are new to case interviews and you are pre-

paring for upcoming interviews, this is the hand-

book for you. If you are already a seasoned case

solver or have read other literature on the topic, the

handbook may be of less relevance for you. See the

section “Additional resources for case preparation”

for other recommended sources of information.

Should I prepare before the interview process?

Very few make it successfully through manage-

ment consulting interviews without preparation,

and we therefore strongly recommend that you take

the time to prepare, as this greatly improves your

chances of securing a job offer. The vast majority of

successful applicants across all management con-

sulting companies have prepared by reading up on

cases, practicing with friends and brushing up on

their arithmetical skills.

When you are invited for an interview, you can safe-

ly assume that your CV is good enough. What is

left to do is for you to show your personality and to

demonstrate your ability to work in a group – as well

as your analytical and problem-solving skills. One of

our consultants who recently joined QVARTZ shares

her top three preparation tips here:

1. Practice problem solving in a structured way,

but preferably without clinging too much to

specific learnt-by-heart frameworks. Make sure

you are familiar with the most common types

of cases

2. Practice calculations without a calculator

(it is usually fine to use pen and paper, however)

3. Reflect on who you are and how to best convey

yourself. Consider how you want to interact with

the rest of the group – both in group interviews

and under less formal circumstances

If you want to know more about our recruitment

process, go to www.qvartz.com/career. Here, you

can also find information about open positions and

upcoming recruitment deadlines.

Introduction

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4

QVARTZ: Nordic heritage, global reach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The case interview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Types of case questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

How to open and close a case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Frameworks for business cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Profitability framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Industry analysis framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Mergers & acquisitions framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Product strategy framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Additional resources for case preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Quantitative preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Example cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Table of contents

5

QVARTZ is a management consulting company with

a Nordic heritage and a global reach. Our civilisa-

tion counts 331 unique individuals working together

across our offices in Copenhagen, Hamburg, New

York, Oslo and Stockholm. Our biggest belief is in

people; great people who want to make a difference

and never stop moving forward. And we believe that

amazing things can be achieved by a unified, talent-

ed and prepared team.

Even though QVARTZ is firmly rooted in the tradi-

tional, professional values of high-end management

consulting, we founded the company in 2002 with

the clear intention of changing the industry “from

within”. We utilise a unique alternative to the stan-

dard consulting model, with less dependence on

standard methodologies and more emphasis on

listening and giving advice based on the client’s

specific challenges and opportunities as well as our

specific insight and experience.

While strategy development has always been the

cornerstone of our offering, QVARTZ today works

extensively within transactions, commercial and

QVARTZ: Nordic heritage, global reach

operational excellence programmes and organi-

sational transformations. Our client base covers a

range of industries, including private equity, energy,

pharma & medtech, retail, transportation and many

more. Although many of our clients are large Nordic

companies, we have project engagements in +50

countries around the globe each year.

At QVARTZ, we see consulting as a true career path,

not just a stepping stone. We offer our consultants

the opportunity to influence their own career pro-

gression and work life to the highest possible extent.

We strive to provide individualised matchmaking

between personal wishes and project opportunities

to ensure that our consultants develop and succeed.

For the same reason, we attempt to nurture and de-

velop our consultants as much as possible through

mentoring and internal academies so that we can

grow together as a company.

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The case interview

What is a case interview?

In a case interview, the interviewer will present you

with a situation or a challenge faced by a fictious

company might be facing. You are asked to analyse

and solve the problem through a discussion with

the interviewer. The majority of case interviews are

based on real client projects, and the interviewer

may therefore have additional knowledge or infor-

mation to draw upon during your discussions than

was initially presented.

Why case interviews?

Consultants solve problems. Case interviews are an

effective way of simulating the kind of problems we

encounter on a daily basis. They provide a fast and

concrete way for us to understand how you frame

and solve ambiguous business problems. In addi-

tion, they also give you an opportunity to gain a bet-

ter understanding of the work we do and consider if

a consulting career is what you want to pursue.

What do we look for in the case interview?

The case interview is designed to test skills that are

common to almost all consulting companies, though

they may be described and weighted a little differ-

ently in different places. During case interviews, the

interviewer is looking to answer at least two questions:

1. Would you thrive when solving

our clients’ problems?

The interviewer will assess your ability to combine

skills such as logical reasoning, creativity, quantita-

tive skills and business acumen as well as your ability

to put it all together and structure the problem-

solving process. The interviewer checks whether you

can insightfully think through the scenario and then

tailor your approach to the problem at hand, rather

than try to fit something into a predefined frame-

work. The interviewer also seeks to understand if

you base your conclusions on evidence rather than

beliefs, and if you “sanity check” your answers to

ensure they make sense in the context of the case.

2. Would you work well with us and our clients?

Management consulting is based on teamwork. Your

ability to interact with others and your communi-

cation and presentation skills are therefore of great

importance. The interviewer wants to learn whether

if you are tactful and approachable, and how you

handle constructive input. Additionally, he or she

wants to evaluate if you present your arguments in

a clear and concise manner that would be easy for

a client to follow. Do not be afraid to show that you

are human; a welcoming and attentive attitude goes

a long way.

The group case session

The group case session is designed to give you an

opportunity to show how you work with peers on

challenging problems. In addition to the problem-

solving approach, teamwork along with effective

communication and the ability to show respect and

empathy will be evaluated. Throughout the group

case-solving process, an interviewer will listen in on

the group’s communication to observe how its mem-

bers interact and continuously provide feedback.

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Types of case questions

Interview cases generally fall into two categories,

(1) Estimation or market-sizing cases, and (2) Busi-

ness cases. At times, the interviewer may also ask

you to include a market-sizing question as part of a

larger business case.

1. Estimation or market-sizing cases

In estimation or market-sizing cases, you are asked

to estimate a quantity that you will not likely know

in advance. Examples of estimation case questions

are: “How many gas stations are there in Sweden?”;

“How many trains are in motion in the Stockholm

subway system right now?”; or “What is the value of

all coal produced in Sweden?”.

Typically, there is no one correct answer, yet the pur-

pose of these cases is to understand how you work

logically through a mathematical problem, make

reasonable assumptions and interpret mathemati-

cal results. While you cannot prepare for the exact

problems, there are a few things to think about and

possible approaches you could consider.

Communicate your approach

Before you dig into the details, it is a good idea to

think through your mathematical approach on a

high level and then briefly communicate it to the in-

terviewer. If the interviewer understands your mod-

el and its subcomponents, he or she can be certain

that you are on the right track from the start, or po-

tentially intervene and help you before you spend

time on an approach that may not work out within

the given time frame.

Approaches

A) Extrapolation

One approach is to extrapolate a metric from one

element against an entire population. As an illustra-

tive example, you could answer the question “How

many gas stations are there in Sweden?” by extra-

polating your knowledge about the number of gas

stations in your local region against the whole coun-

try. (E.g. three gas stations per 50,000 inhabitants

in a given city would bring you to 600 gas stations

across Sweden, assuming a population of 10 million

people).

B) Segment-by-segment breakdown

An alternative approach is to isolate the estima-

tion per segment. Visually, you could do your cal-

culations in a table format, which makes your work

well-structured and easy-to-follow. As an illustrative

example, you could answer the question “How many

deodorants are sold in Sweden each year?” by seg-

menting Sweden’s population by logical age groups

and then making sound assumptions of the average

amount purchased per capita for each group.

C) Driver breakdown

A third approach that works well for many estima-

tion or market-sizing cases, especially more uncon-

ventional ones, is the driver breakdown approach.

Here, you begin with the key metric and systemati-

cally decompose it into its corresponding drivers.

Keep attempting different decompositions until you

find that the subcomponents are manageable to

make assumptions around. As an illustrative exam-

ple, you could answer the question “How many golf

balls are in the air in the US at 11 am on a Saturday

morning?” by breaking it down into its subcompo-

nents “number of golf balls in the air per course”

times “number of courses in the United States”, and

subsequently breaking those down further.

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2. Business cases

The business case interview is by far the most com-

mon type of case interview. A business case inter-

view begins with the interviewer presenting you

with a challenge or opportunity faced by a company

and asks you to analyse and resolve the situation

through a discussion with the interviewer.

Business cases are designed to simulate real life

consulting projects, and sometimes the interviewer

may even role play one or several “characters” in-

volved in the case to get as close to a real project as

possible. He or she could provide you with relevant

data upon request — or — after a given section of a

case, ask you to analyse or investigate certain top-

ics. The types of topics vary; you may for example

investigate how to make a company’s distribution

chain more effective, how to best enter the Brazilian

soda market or how to make use of overcapacity in

a car manufacturing facility.

The purpose of these types of cases is to under-

stand several of your competences: the depth of

your business acumen; how you structure and pri-

oritise issues; how you handle different types of

Strategy

• Increasing market share

• Market entry strategies

• M&A transactions

• Starting a new business

• Competitive response

• Pricing strategies

• New product strategy

Typical business cases you could be presented with

information; and your overall fit with the type of

work that we do.

You can significantly increase your chances of be-

ing successful in a business case interview by prac-

ticing. The opening and closing of the case is fairly

generic, practicing how to open will get you off to

a good start and practicing how to close will make

your wrap-up more concrete and concise. The mid-

dle part is more difficult and requires more natu-

ral talent, yet there are a number of methods and

frameworks which can help you along the way when

practicing case interviews.

The following pages contain a selection of approach-

es and frameworks which might inspire you in your

case solving. But keep in mind always to adapt your

thinking. Interviewers look for candidates with busi-

ness acumen, who are able to develop high-quali-

ty frameworks on their own, in contrast to merely

repeating rehearsed frameworks. The key takeaway

is to use frameworks as a source of inspiration, but

not to force-fit a case into one just because you are

familiar with it.

Organisation

• Incentive systems

• Organisational design

• Roles and responsibilities

• Post-merger integration

Operation

• Cost-out

• Strategic sourcing

• Supply chain optimisation

• Production capacity change

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Summarise the process and synthesise

Either the interview comes to a natural close when

you feel that you have solved the problem or when

the interviewer steers you in that direction as time

is running out. Regardless, a good close is one of

the most crucial parts of the interview. At this point

you have hopefully asked all the questions you want

and performed your analysis. So where do you go

from there?

• If you feel you need to, take a moment to collect

your thoughts

• Try to quickly take your interviewer through the

analysis as well as your most important findings

• Answer the question! If there is a clear question

at the beginning of the interview, do not forget

to answer it. If the question is whether or not to

enter a specific market, your conclusion should

be just that, whether to enter it or not. Not all

cases are the same but focus on making your

conclusion as action-oriented as possible

• Lastly, back up your conclusion with support-

ing arguments. Try not to include too many,

but rather spend time on the ones that you find

most important to your overall conclusion

Receiving and gathering information

• Listen carefully to the question and confirm

that you have fully understood the assignment

or problem the client is facing. A good way to

check is to paraphrase the question back to the

interviewer. Take notes, especially if you are pre-

sented with data

• Ask clarifying questions if necessary. Even the

most obvious questions are sometimes appro-

priate to ask and it provides you with more time

to think

Process information and present your approach

• Ask for time to collect your thoughts and struc-

ture your analysis. Often the interviewer leaves

the room to give you some time, while at other

times the interviewer may stay in the room – in

either case, do not feel stressed and take the

time you need

• Present to the interviewer how you are going to

approach your analysis. This is very important

and often forgotten. Be a good listener, the in-

terviewer might give you hints on where to go

first or if you should rethink your approach alto-

gether. If this is the case, ask for another minute

to collect your thoughts

How to open and close a case

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Frameworks for business casesYou will quickly find frameworks if you start look-

ing around for materials on management consulting

interviews. Basically, frameworks are tools for you

to use when structuring your problem solving in a

case interview. Sometimes they could also just be a

checklist to avoid missing the most important steps

in the process. You should keep in mind that a case

question rarely turns out to fit perfectly into a pre-

defined framework – instead you will have to adapt

your approach and use the framework more as the

backbone of your analysis. In the following pages,

you will find four useful frameworks.

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In many cases, you will be expected to analyse the

profitability of a company at a more granular level.

The profitability framework helps you to systemati-

cally break down the profitability drivers. Your goal

is often to isolate significant historic developments

(e.g. the cost of raw material has been surging);

benchmark profitability drivers with competitors

(e.g. our prices are lower than our peers’); and evalu-

ate opportunities (e.g. is it possible for us to increase

profits by boosting sales of product A?). The key to

solving these cases is often to understand the under-

lying mechanics that produce the eventual anom-

alies in the numbers (e.g. our prices are lower than

Segment your analysis

Think of different ways to segment costs and

revenue. During a real project, you will have

time to investigate several different ways of

segmenting, but in case interviews the inter-

viewer often has a preferred segmentation.

• Decompose by applying appropriate segmen-

tation, e.g.

– Business units

– Customer types

– Large vs. small customers

– Geographies

– Product types

– Sales representatives

– Etc.

• Identify increases or decreases in components (e.g. has “units sold” gone up, down or stayed consistent)

• Understand if trends are company-specific or an industry-wide problem

• Decompose by applying appropriate segmen-

tation (e.g. by looking at revenue)

• Decomposing according to the value chain is

another powerful way of analysing costs, e.g.

1. Raw materials

2. Inbound logistics

3. Production costs

4. Sales and distribution costs

• Do not forget overhead costs (e.g. administra-

tive, IT and marketing costs)

PROFIT COMPONENTS

HINTS

REVENUE

(PRICE * VOLUME)

COSTS

(FIXED + VARIABLE)

Profitability framework

our competitors’ because our brand is the weakest in

the industry, but is it possible to improve it through

investment?).

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Industry analysis framework

The industry analysis framework is designed to help you gather information on a company’s external environ-

ment. At first glance, it may appear overwhelming but many of the elements are likely already familiar to you.

• Industry growth

• Business life cycle

• Is the industry cyclical, stable or counter cyclical?

Market share

Client Competitor A Competitor B ...

Financials

Product

(differentiation, packaging, prices, etc.)

Other drivers

(brands, loyalty, etc.)

INDUSTRY FACTS

COMPETETIVE LANDSCAPE

• Suppliers

– Have their costs shifted?

– Bargaining power?

• Raw materials

– Has the price changed?

– Is the economy affecting prices?

• Economies of scale

• Is there a better technology?

• Can we change our staff?

• Is outsourcing a possibility?

VALUE CHAIN ANALYSIS

OTHER FACTORS

UPSTREAM PRODUCTION

• What is the channel mix?

• Distributors

– Have their costs shifted?

– Bargaining power?

• Sales personel

– Are there large differences in competences?

– Is the right incentive system in place?

• Marketing

• New players in the market or new players entering?

• Substitute products?

• Is the market getting consolidated?

• B2B or B2C?

• Preferences

– Product

– Distribution

– Price

• Has the bargaining power shifted?

• Can we change the mode of transportation to be more effective?

• Can we manage inventory more effectively?

END USER

LOGISTICS

DISTRIBUTION, SALES AND MARKETING

CHANGE FACTORS

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Mergers & acquisitions framework

• What does the client do?

• How do your finances look?

• Potential reasons for M&A

– Increase market share or access

– Economies of scale or scope

– Learning-curve advantages

– Diversification

– Pre-empting competition

– Tax reasons

CLIENT AND PURPOSE

• Do we expect to make an exit?

• For how long are we going to hold the

company?

• How are we planning to sell the company?

EXIT STRATEGY

• Use a light version of the industry analysis

framework

DUE DILIGENCE

• Can we afford the company?

• Is the price fair?

• Are there any benchmark transactions?

• How do we finance the transaction?

• What is our expected return?

PRICE AND FINANCING

This framework is seemingly quite narrow in scope and perhaps not as important as the other frameworks.

It is, however, not uncommon for transactions to come up in business case interviews, and it is a good idea to

have thought them through in advance, especially if you have no previous experience from transaction work

or studies.

23

Product strategy framework

• How does the product and its features com-

pare to competing alternatives?

• Is there an intended price level for the product?

If no, consider

– Cost-based pricing

(Applying a margin on top of costs)

– Market pricing

(Based on prices of competing products)

– Value-based pricing

(What are customers willing to pay?)

• Is our technology protected by patents?

• Do we sell similar or competing products

today?

• Do we benefit from economies of scale or

scope?

• Is there a risk of cannibalisation?

• Do we have the capabilities necessary to in-

troduce the product? (e.g. technical knowhow,

financing, operational set-up, suppliers)

COMPETITIVE POSITION STRATEGIC FIT WITH PRODUCT

• Who are the target customers?

• Are there different customer segments?

(e.g. businesses vs. consumers?)

• Is there an overlap with our existing customer

base?

• What are the customers’ key purchasing

criteria?

• Do we have an appropriate distribution set-up?

(e.g. retail sales, internet sales, direct salesreps

or distributors)

• What is the revenue potential?

• What are the corresponding costs?

• Are there any capital expenditure requirements

to consider?

• What is the break-even volume?

• What would be the expected payback period?

FINANCESREACHING THE CUSTOMERS

This framework is similar to the industry analysis framework, but with some important differences and

additional issues.

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Additional resources for case preparation

www.caseinterviews.com A recent and popular case site developed by a

former consultant.

The site includes a range of materials containing

useful and concentrated frameworks and case tips.

The materials come in the form of videos and PDFs

and are typically free of charge. However, beware

that the site is designed to encourage you to make

large add-on purchases not necessary for interview

preparation.

SOURCE COMMENTS

Case Interview Secrets

Author: Victor Cheng

Same as above, in book format.

How to Get Into the Top Consulting Firms:

A Surefire Case Interview Method

Author: Tim Darling

A book written by a VP of a large American

consulting firm.

The book offers a condensed overview of how

to create problem-solving structures and communi-

cate like consultants. It also provides ten well-

written practice cases.

Case in Point

Author: Marc Cosentino

One of the most frequently used case preparation

books.

The book contains detailed descriptions of case

interviews and samples of how a case interview

may play out.

The Pyramid Principle

Author: Barbara Minto

Almost all consultants have a copy of this book.

This is not a typical case interview preparation

book, but reading it will provide you with a solid

understanding of how consultants work with

structure and communication.

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Quantitative preparation

Most management consulting companies put em-

phasis on a candidate’s numerical capabilities, and

strive to test these in one way or another as part of

the recruitment process. Numerical skills are easy to

improve with practice, and we strongly recommend

that you set aside some time for practicing numeri-

cal accuracy and speed by repeating basic arithme-

tic operations.

Why are you tested quantitatively?

We need to be confident that every team member is

able to structure and carry out quantitative analyses.

Most client recommendations are based on quantita-

tive evidence. Being comfortable with numerical esti-

mations and arithmetics is also a cornerstone of a

consultant’s sanity-checking procedures.

How are you tested quantitatively?

Normally you will be tested on

• Your ability to make computations accurately

and efficiently without a calculator

• Your ability to develop and communicate

a numerical model

• Your ability to interpret quantitative

measures and data

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Estimates & mini cases

Estimates

1. How big is the market for home delivery of

newspapers in Stockholm?

Key: Number of households in Stockholm, Share of

households that subscribe to a newspaper (segmen-

ted on interests, education, age, income or other),

Number of subscriptions per household (segment-

ed on interests, education, age, income or other),

Frequency of delivery (magazine, journal, daily).

Delivered newspapers in Stockholm per day multi-

plied by days in a year to detect volume, multiplied

again by cost per delivery to find market size.

2. What is the market size for exterior house

paint in Denmark?

3. How much coffee is consumed in Scandinavia

every day?

4. What is the collective amount of money spent

on domestic flight travels per day in Sweden?

Mini cases

1. The Swedish prime minister has asked for a

meeting with you, inquiring what the govern-

ment can do to improve the business climate

in Sweden for life science companies for the

coming 25 years.

Key: Should be able to reason about core charac-

teristics of the industry

• Life science firms are typically protected

by patents for long periods. In countries where

patents are upheld for a longer time and easier

to attain, drug development is more attractive.

• Life science is a knowledge-intensive industry

and the key to success is having access to

skilled workforce. A necessity is strong educa-

tion or beneficial conditions for expats to work

in the host country.

• Due to long pipelines between drug discovery

and market launch, life science firms will require

much upfront cash. Access to investors for

smaller firms is essential.

2. Can you valuate 10,000 hectares of forest,

how would you do it, and on what parameters

do you base your valuation?

3. The biotechnology industry is one of the most

profitable industries, whereas airlines have

had low returns for decades. Why do you

think this is the case?

4. You are asked to do the advertising campaign

for a new best-selling action movie. You have

USD 100 million to spend. How, and through

which channels, would you market it?

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Example cases

Interviewer

Interviewer

Interviewer

Interviewer

Interviewer

The interviewer walks out of the room and returns a couple of minutes later

Candidate

Candidate

Candidate

Candidate

Candidate

Candidate

Our client, a Scandinavian private equity fund, is considering an acquisition of a Swedish

company that produces freshly squeezed juice. We have been invited to help the client

evaluate the attractiveness of such an investment. What are the key elements for us to

look at?

Just to be clear, are we talking about a retail juice chain or a wholesale juice manufacturer?

Good question, we are evaluating a manufacturer/wholesaler.

Interesting, let me think about my approach for a short while.

Sure, I’ll be back in a minute or two …

All right! On a high level, I would like to understand

1) The attractiveness of the market in terms of size and growth

2) The competitive landscape and the target company’s competitive position

3) The company’s current business portfolio and its performance

Okay, that sounds appropriate. Why don’t you start with the size and growth of the market?

How would you estimate the size of the Swedish juice market?

Okay, let me take a minute to think through my approach.

The candidate thinks for about a minute and resumes the conversation

The juice case

In order to estimate the market size in terms of value, I need to look into the drivers of

market value, which are (a) yearly juice consumption in litres and (b) price per litre. I’ll start

with the consumption.

Okay, good. It sounds like you have a good overall approach but I would like you to re-

fine your structure a bit; what do you think is an appropriate customer segmentation to

find out how much juice is consumed every year?

Hmm, we could segment the consumers into different categories both in terms of be-

haviour and in terms of age groups.

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Interviewer

Interviewer

Interviewer

Interviewer

Candidate

Candidate

Candidate

Candidate

Sounds good!

Let’s start with the behavioural parameters. Since we’re only focusing on the wholesale

market, I’ll look at the consumption of pre-bottled juice. This is more or less the same as

breakfast consumption, according to my experience. Let’s create three types of breakfast

juice drinkers; a) everyday drinkers, b) occasional drinkers and c) non-drinkers. I assume

that the weekly consumption within the three groups is: a) 7 glasses (1.5 litres), b) 2-3

glasses (0.5 litres) and c) nothing.

Great, then you mentioned that you were going to analyse age groups. How?

In addition to the behavioural aspects, I believe that age is relevant due to different life-

styles. I think that the share of people who belong to the different behavioural groups

(a, b and c) varies with age. I would like to start off by defining the age groups: 0-20 years,

20-40 years, 40-60 years and 60-plus.

Okay, tell me why you chose those age groups?

Hmm, I get your point; I need to explain the rationale for defining different age groups

which has to be connected to the different lifestyles I was talking about.

That’s right!

OK, so 0-7 is the first group and I assume they do not drink juice at all. The next group is

7–20 as they typically live at home with their parents and are not buying juice themselves.

Based on my experience, half of these people do not drink juice at all, in fact many of them

don’t even eat breakfast. I assume 1 out of 4 drinks every day and the rest drinks a couple

of times per week. The next group is 20-65, which is basically the working population. If

I look at my friends and family, there are about 50% who do not drink juice at all. Then I

think there is a slightly higher share of everyday drinkers than in the 7-20 age group. Based

on my experience, I assume 30%, leaving us with 20% drinking occasionally. Finally, in the

group 65-plus I think the share of everyday drinkers goes down a bit due to lower income,

I assume 20% and I think the non-drinkers are still about 50%, leaving us with 30% occa-

sional drinkers.

Behavioural distribution

Occassionally Never Everyday Occassionally Never Total week Total yearly consumption

EverydayAges

0-7 700,000 0% 0% 100% 1.5 0.5 0 - -

7-20 1,300,000 25% 25% 50% 1.5 0.5 0

20-65 4,500,000 30% 20% 50% 1.5 0.5 0

65-plus 3,500,000 20% 30% 50% 1.5 0.5 0

650,000 33,800,000

2,475,000 128,700,000

1,575,000 81,900,000

4,700,000 244,400,000Total 10,000,000

Number of people

Weekly litres/behavioural type

33

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The candidate runs the numbers based on an assumed retail price and calculates

backwards to find out the wholesale price

Excellent, what do you do next?

Let’s continue with (b), price per litre. Based on my experience from ICA, a package of

juice is about SEK 18 per litre …

Okay, but before you do the calculation I would like to ask you – there is an element

you’re missing, can you think of what it is?

Ah! Yes, since we’re talking about a wholeseller, my price includes a retailer mark-up which

should not be considered in the wholeseller market.

Yes, that’s it. There’s also another consideration. What do you think that is?

We are only talking about one juice type here. Maybe we should consider different types

of juices?

Yes, what would that mean?

That we get different prices for different juices; I would say that there are three basic types

with different price levels; high-end, low-end and private-label.

Exactly, I’ll help you out and give you some numbers.

Okay, so given these price levels, I arrive at approximately SEK 3 billion in wholesale value.

In terms of weaknesses of the estimation I would say that the consumption assumptions

are the ones that I’m least comfortable with. If I had more time I would dig deeper into that.

What do you think of SEK 3 billion? Is it realistic?

Well, a simple sanity check is to find out how much that would be per person per week,

and it is about SEK 6 plus retail mark-up across the entire population. To me, that sounds

reasonable, which would make 3 billion a realistic estimate.

Share of saleVolume in

litres Retail price VAT Retail mark-upPrice/litre to

retailer Total value

Brand high-end 10% 24,440,000 30 25% 20% 20.0 488,800,000

Brand low-end

65% 158,860,000 18 25% 20% 12.0 1,906,320,000

Private-label 25% 61,100,000 20 25% 60% 10.0 611,000,000

Total 100% 244,400,000 3,006,120,000

34

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Okay, it sounds like you have thought this through. Assume for the rest of the case that

your estimate of SEK 3 billion is correct. So what’s next?

Next I would like to look at the market growth and if we have any information on whether

it is set to grow in the next years.

Okay, you can assume that the market has been declining by 4% per year over the past

five years and is set to continue to do so over the next five years.

Is that 4% in real decline or nominal decline?

Good question, assume it is 4% in nominal decline.

Okay, so is it fair to assume that we can expect even more than 4% real decline in the next

five years?

Yes. So where do you want to go next?

Next I would like to analyse (2) the competitive landscape and the target company’s com-

petitiveness to see if it might have some kind of unique position in a particularly attractive

subsegment because overall, the market does not seem very attractive.

We will wrap up the case example at this stage. We do, however, encourage you to try and think what your

approach would have been in mapping the competitive landscape, and how you would have proceeded in

analysing whether we should recommend to the private equity fund to acquire the company or not.

35

The candidate takes around three minutes and then resumes the conversation

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After years of engineering work, you finally have the world’s first commercially viable

spacecraft. It cost you EUR 50 million to build. From its launching pad outside Paris, it

can take a load of up to 12 passengers into space, orbit earth and then return safely eight

hours later. There are no safety concerns whatsoever. The spacecraft can do three trips

per week and the operational costs related to each trip (salaries, fuel, maintenance) are

EUR 75,000. There are no competing products, and the design is effectively protected

by patent rights for the next 25 years. It will take you three years to build an additional

spacecraft.

My question to you is: how would you take the product to the market in the next three

years, before you could have another spacecraft?

So we’re talking about a commercial spacecraft here? Our goal is to push this thing to the

market, right? Okay, let me make sure that I caught all the details in the data.

• In terms of costs, we have invested EUR 50 million, and each

round trip costs us approximately EUR 75,000.

• We can do three trips per week, so basically 150 trips per year,

and each trip can carry 12 passengers.

• Our technology is completely protected for the next 25 years.

Did I get all that right?

Yes, that’s right. What I want you to start with is deciding on a couple of areas that you

would like to investigate further.

Okay, give me a minute and I’ll collect my thoughts a bit.

All right - there are a couple of areas that I would like to explore, which fall into three main

categories

1) What is the market for commercial space trips?

2) What are the finances behind the operation?

3) How do we market the space trip?

My primary concern with area (1), the market, is that I want to understand the product and

situation a bit better. My hypothesis is that the demand is rather high in relation to our

supply …

Well, the demand would depend on the price, right?

The space case

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The candidate takes about half a minute to think before he proceeds

Yes, of course you’re right. I would like to explore the dynamics of the market

by understanding:

(1.1) Who are our potential customers? What are the segments? What are their

considerations when buying a ticket?

(1.2) How big is our market? What I would like to figure out is whether we can fill our

capacity or not.

(1.3) What is the competition like? I.e. are there any substitutes?

For (2), finances, I would like to do a break-even analysis to understand whether it is a

profitable idea, and if yes, how much room do we have left for marketing?

For (3), marketing, I don’t have a clear idea yet. But we’ll dig deeper into that later.

Good. I would like to hear your thoughts on topic (1.3), competition, what do you think?

Well, I don’t know of any other space trips, and I guess it is safe to assume that no one else

will develop such a concept in a three-year period?

You are right, and in addition, I did mention that there are no competing products,

remember?

You are right, I forgot to note that down.

No problem, so what about substitutes?

Good question, the closest thing I can think of is different types of leisure trips, which

aren’t really comparable to this, if you ask me. My hypothesis is that there are no real sub-

stitutes. I mean, what compares to travelling to space?

I agree. Let’s assume there are no substitute products either, so effectively there is no

competition of any kind for the remainder of the case.

Okay, then I would like to continue with the first branch of the analysis: (1.1), customers,

who are they in this situation?

Well, what do you think?

This is a bit tricky, because I would assume that the vast majority of the human population

would be interested in travelling to space – but, as we concluded, this depends on the tick-

et price. For example, I would definitely go for EUR 100, but maybe not for EUR 1 million

in my current situation. The key takeaway here is that: the higher the price, the fewer the

people who would be interested in a ticket.

37

The candidate writes down his calculations on a piece of paper

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Yes, of course. Can you look at the customer group and price issue from another angle

perhaps? Let’s assume we are looking at the market for the next three years.

Ah, yes, we could look at how many tickets we could possibly sell per year, and divide this

by the number of inhabitants in the world. I think this can give us a clue as to how much

we can charge for the tickets.

Okay, let’s explore that.

We have around 150 trips per year, with 12 passengers each, which adds up to 1,800 seats

per year to fill. Considering a world population of 7 billion people, this corresponds to less

than one person in a million. Given that, I think it is safe to assume that we could charge a

lot for these tickets. I mean, one person in a million is quite a small group of people.

That sounds reasonable, with that in mind, I would like you to go into issue (2), the

finances, and run some numbers on the break-even price for the first three years.

All right, we have two cost components that I noted down during the introduction of the

case, the initial investment cost and the round trip cost. I’m not completely sure of whether

we should consider the initial investment as a sunk cost or use it in the break-even analysis.

My suggestion is that we should include it.

Great! Do that.

Okay. I will translate both costs into costs per seat, so given that and assuming that there

are no additional costs, the investment cost of EUR 50 million will be EUR 16.7 million per

year, and a little less than EUR 10,000 per seat, let’s assume EUR 9,500. The round trip cost

of EUR 75,000 becomes EUR 6,250 per seat since we have 12 seats. So in total we have a

cost per seat of around EUR 16,000, which would be our price if want to break even after

three years.

Okay, what does that tell you? That we should charge at least EUR 16,000 per ticket?

It completely depends on the circumstances. If the useful life of the spacecraft is three

years we would have to charge significantly more to make a good profit but if the useful

life is longer it could be a viable option to charge the 16 thousand.

Good thinking, unfortunately we don’t have any information on the useful life right now

so let’s leave it at that. But what about EUR 16,000, how do think that ticket price

sounds?

Well, since we are looking at the “one-in-a-million-most-willing-to-pay-person” as our cus-

tomer group, I think that it is safe to assume that we can charge at least that. EUR 16,000

is a lot but I am confident we could sell the tickets at least at that price. As I mentioned

before, however, I think we should make a large marketing campaign to build some mo-

mentum around the demand so we might want to add a bit of a margin on top of that EUR

16,000 if we are to break even including that in three years.

Candidate

38

That is true. We should probably try to make a splash before the launch, but at the same

time, a big attraction like this might almost sell itself, don’t you think?

Well, yes, you might be right, but we should still ensure that the word gets out there so we

don’t risk not filling the seats during the first weeks before the word spreads.

Okay, so what are your ideas on marketing?

Candidate

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We will wrap up the case example at this stage of the case. We do, however, encourage you to consider

what your approach would be for a marketing campaign for the first commercial space trip.

39

Our client, the Swedish window manufacturer “Vertical Windows”, is considering enter-

ing the German market. The company has an annual revenue of EUR 600 million and is

currently the market leader in Sweden and one of the top three in Denmark and Norway

– 90% of its sales are within the Nordic region. Vertical Windows also has sales and pro-

duction facilities in the UK.

What aspects do we need to look into in order to evaluate whether entering the German

market is an attractive opportunity for Vertical Windows?

Ok, let me think about how to approach this issue for a moment.

No problem. I will grab a coffee and be back in a couple of minutes.

The interviewer returns to the room after a short break.

To assess how attractive it would be to enter the German market, I would start by looking at:

1) The size of the German market

2) Market growth – to better understand the dynamics

3) Current profitability in the industry, if information is available

4) Vertical Windows’ product offering versus current market demand

Good, it sounds like an approach that can provide useful insight to get us started. How

would you estimate the size of the German market for windows?

First, I would start by estimating the number of households in Germany, to get an idea of

the total number of windows sold. I know that the population in Germany is roughly 80

million. Assuming that each household counts, on average, two people, this would give us

a total of 40 million households.

The assumptions you have made so far are fairly accurate, but maybe we should slow

down a little bit and try to structure our approach a bit more, so that we do not miss

out on any important details? For example, would private households represent the only

potential market for a company selling windows?

Yes, of course. In addition to the residential market, we also have to consider the non-resi-

dential market. Maybe I should set up an issue tree to make the analysis more structured?

I think that is a good idea!

Vertical Windows

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40

Candidate sketches a simplified issue tree on his paper

I use the four elements initially mentioned as the base of my issue tree, and I will continue

down the “market size” branch first. I would like to complete the analysis of residential

property before moving on to non-residential.

That is fine.

So, if we have 40 million households, these can be split into flats and houses. Is it fair to say

that the split could be 50/50 between family houses and apartments?

Sounds fair, so let us go with that.

Great, obviously houses would have more windows than apartments, so this has an in-

fluence on our total number of windows. I would say houses have, on average, twice the

number of windows compared to those of apartments. Perhaps 10 windows per house and

5 windows per apartment are reasonable estimates?

I agree that those numbers sound reasonable.

Then that would give us a total residential market size of: (20 million apartments x 5 win-

dows) + (20 million houses x 10 windows) = 300 million windows in the residential market.

I think the residential market is larger than the non-residential market by a decent margin.

Perhaps 2/3 of all windows are residential and 1/3 is non-residential?

Sounds reasonable. Anything else we need to consider here? Would this be the total

market size – and what does this number actually imply?

Given that we have estimated the residential market to 300 million windows, the total

market would amount to about 450 million windows. However, windows are normally not

changed every year, so annual sales would not be 450 million windows. I do not know too

much about windows, but is it fair to say they are changed, on average, every 20 years?

Do not worry! This is not a test of your knowledge of the lifetime of windows, but I would

say your number is a bit low and that a better estimate would be 30 years. What else do

you need in order to get an idea of the total annual sales?

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Attractiveness of the German market

Market size

Residential market

Market growth

Non-residential market

Profitability

Product

41

Thanks! So, this would give me a number of 15 million windows sold in Germany every

year. To estimate annual sales, I would need the average price of a window. Does EUR 400

sound like a fair guess?

EUR 400 per window sounds like a good estimate.

Great! Then that would give us total annual sales of 15 million windows times EUR 400,

which makes the annual sales worth EUR 6 billion.

Does that number make sense to you?

Vertical Windows currently has revenues of 600 million from sales in the three Nordic

countries. Altogether, the Nordics are about one quarter of Germany in population size;

following the same reasoning as before, this means that the total Nordic market should

be about 1.5 billion. With a market share of 40%, Vertical Windows could be making 600

million in sales. So, given this, I would say the estimate is within the ballpark.

That was a good approach to check your estimate. Let us use 6 billion as the market size

for Germany. What should we look at next?

Next, I would like to look at growth: How has the market developed historically, and are

there available predictions for the upcoming years?

The market has been, and is predicted to remain, stable.

Ok, then I think it is safe to say that there will be no change in market size. Next, I would

like to look into the profitability of the industry – do we have any data on this?

Yes, we do. Looking at the largest players in Germany, they are currently operating at a

lower profitability than that of the Nordic countries.

Ok, I would need to continue my investigation into whether Germany would be a good fit

for our client’s company.

I think that is a good idea. How would you do that?

First, I think it would be interesting to look at the competitive landscape to see if the mar-

ket is fragmented or consolidated. Second, I would ideally like to see if the company has

any kind of competitive advantage it can benefit from.

We actually have some data on the competitive landscape.

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The interviewer hands over the following diagram to the candidate.

It looks like the German market is much more fragmented than the Nordic markets, indi-

cating that there are no large players dominating the market but rather a lot of smaller

players. This might actually be good for our client, since there is no player that can easily

start a price war to keep our client out of the market.

Given that the current competitive landscape looks fairly good, I think we should look into

our client’s product portfolio to see if there are any pockets in the market that look obvi-

ous for it to take advantage of.

Let’s do that!

Interviewer provides data.

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Candidate

The European vertical windows market split by market share

The European vertical windows market split by market material

European vertical window material

100% – total market size

Wood/Aluminium

100%

Aluminium

Wood

PVC

Sweden

40%

47%

6%

7%

Denmark

50%

4%

4%

42%

Norway

3%3%

4%

90%

Germany

17%

5%

41%

37%

37%

10%

53%

Vertical Windows

Sweden Denmark Norway Germany

European vertical window market

100% – total market size

Market share of top-3

players in the market

10%

100%100%100%100%

45%

55%

60%

40%

80%

20%

90%

43

My first observation is that Vertical Windows currently does not offer windows in the seg-

ment that is the largest in Germany, PVC. This is an immediate concern, as it reduces the

addressable market by 41%, unless Vertical Windows would be able to broaden its port-

folio to also include PVC windows.

I agree that it reduces the addressable potential of the German market, but do you per-

ceive it to be a reason not to enter the market?

No, I would not dismiss the German market based on this information, since Vertical Win-

dows’ strongholds are “wood” and “aluminium”, which still account for 54% of the German

market. Furthermore, Vertical Windows has a somewhat similar situation in Denmark and

Sweden, where woods/aluminium represents roughly 50% of the market but constitutes

only 10% of Vertical Windows’ total sales.

I think you are right that we should not dismiss the German market simply because Ver-

tical Windows cannot address the entire market. To help you in the continuation of your

analysis, we have also been provided with some data on the price levels of the different

window types. Does this new data cause you any further reflection regarding the attrac-

tiveness of the market?

Well, Vertical Windows sells mainly the slightly more expensive windows, which indicates

that its value proposition is that of a premium brand rather than an economy brand. As

a premium brand, you will typically have greater margins and be less dependent on high

volumes, making the fact that Vertical Windows currently can address only 54% of the

German market less troubling. In fact, this convinces me that the German market does

have an attractive pocket that Vertical Windows should address by trying to enter the

market as a premium brand.

Exactly. So how would you sum up the analysis at this point?

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PVC Aluminium Wood Wood/Aluminium

Price level by window type

Price levels by material

Indexed

100

300

44

Based on the provided information and the conducted analysis, I would say that entering

the German market is a potential next step for Vertical Windows. This conclusion is based

on the attractiveness of the market in terms of its size and competitive situation. Further-

more, Vertical Windows’ main segments constitute 54% of the German market, which

represent a significant pocket to tap into.

Vertical Windows actually reached the same conclusion that you did in your analysis.

They have started to develop a market entry strategy for Germany, and they have also

started talking to a German window manufacturer, which they think may represent an

interesting acquisition target

We will wrap up the case example here. We do, however, encourage you to reflect on what your approach would

be in order to analyse the potential acquisition as a means for supporting Vertical Windows’ market entry.

Interviewer

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A Swedish newspaper company has approached us to assist them in improving their

profitability. They are currently operating at a break-even level of SEK 200 million per

year and would like to reach a 10% margin by the end of next year. You have been as-

signed to determine whether there are any cost savings to be made.

OK! So if I’ve understood this correctly, I am to evaluate the cost structure of a Swedish

newspaper company to potentially improve its profitability from its current break-even

level to a 10% profit margin within a year?

Sounds like you caught it all!

Great! I just have one more question before I begin to sketch an approach. I’m not an

expert on the news industry, but I’ve heard some newspapers outsource the production

of the actual newspapers and manage only the marketing and content creation, whereas

others do all the work internally. What kind of newspaper company is this one?

That’s a great question! You’re right, some firms outsource production, but this parti-

cular firm prints its own newspapers and take care of all other parts of the business too!

Alright, if you allow me to take a moment to collect my thoughts on how to approach this

issue…

Sure!

*Moment goes by*

Ok, I thought it would be a good idea to look at what costs are currently the biggest for the

newspaper by breaking its SEK 200 million cost base into its different components, and

then assess which costs can potentially be reduced and how. To do so, I’d like to under-

stand the value chain for the newspaper company and what costs each step contains.

That sounds like a good approach!

I imagine the value chain of a newspaper company could be divided into a five-step process

including: purchasing, content creation, production, selling and distribution.

Could you elaborate?

Sure! I assume the process of making a newspaper would start with purchasing the materi-

als necessary to produce the newspaper. As I have understood it, larger companies typical-

ly have purchasing units that take care of acquiring the materials necessary to produce the

goods they sell. To fill the newspaper with newsworthy articles, I suspect the firm would

also need to have journalists, editors, proofreaders and copywriters. This would constitute

its content creation. Once the content has been written and the necessary materials ac-

quired, the newspaper would have to be printed. Then comes the task of selling the news-

papers. I’m not sure, but I imagine that newspaper companies sell their newspapers both

The newspaper case

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through direct sales and through convenience stores? Either way, I suspect the newspaper

is sold before it’s delivered. Perhaps you could tell me?

You’re absolutely right! The bulk of sales for this newspaper is through subscriptions that

are delivered directly to the end customer, but a sizeable portion is also sold through

convenience stores and newsstands. Go on!

Ok! So, once the newspaper has been sold it will have to be delivered to either the custom-

er or to a convenience store. I imagine the whole process something like this:

*Shows chart*

*Inspects the chart*

It looks like you’ve laid out the value chain in an orderly fashion, how about assigning

how big a share of the costs each component constitutes?

No problem! I think that production would have to be the most cost intensive part of the

value chain. I know that the machinery is very expensive and it requires a lot of paper and

energy to produce a year’s worth of newspapers, so let’s say 30% of the SEK 200 million

comes from production.

Actually, it’s closer to 40%, but I like how you are reasoning, go on!

Ok, so we adjust the production cost to 40%.

The next item would probably be distribution. Since the bulk of our client’s sales are to

the end customers, I suspect they would need more cars with smaller loads of paper than

if most of the magazines were sold to convenience stores. That means they would need a

lot of trucks and drivers, and I suspect the gas for the cars costs a lot too. Let’s say 30%

of the SEK 200 million.

That’s about right, so let’s stick with that!

Next we have purchasing, selling and content creation. I actually have no idea how much

journalists, editors or purchasers are paid or how many of each are necessary, but I suspect

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Purchasing Content creation

SellingProduction Distribution

Cost

Cost

Cost

Cost

Purchasers Journalists DriversSales peoplePaper

Editors EnergyEnergy

Copywriters Transportation vehicles

Machinery

Production workers

47

their salaries are roughly equal, because the qualifications they require to do their job

properly are about the same, and I guess that the newspaper company roughly needs the

same amount of people for each of the three parts of the value chain. Against that reason-

ing I’d like to assign the each 10% of the SEK 200 million.

Good reasoning!

That means we have the following cost structure:

Against this backdrop, I would like to look into potential cost savings in production, since

this represents the greatest portion of the total costs, so efficiency improvements would

have a bigger impact on the total costs than it would be the case for other parts of the-

value chain.

All right!

We said earlier that the four main costs associated with production were: paper, energy,

machinery and production workers. Since our client wants to improve the bottom line

immediately, I think they should focus on reducing the cost of either paper or labour since

the machinery depreciation and energy cost are tied to the machines they already have in

place. Besides, I don’t think production labour is very expensive, since I suspect the print-

ing process must be highly automated. Do we have any information on how much each of

these components cost us?

Actually, yes! We know from the purchasing office that last year, 60% of the total pro-

duction cost of SEK 80 million came from raw materials such as paper and ink.

So that means our client spent SEK 48 million on paper last year?

Exactly.

That sounds interesting. Since paper represents almost 25% of the total costs, I would like

to investigate whether it would be possible to reduce that number. Could I have another

minute to think of how we could go through with that?

Of course!

* Sketches an approach *

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Purchasing Content creation

SellingProduction Distribution

Share

SEKM

10% 10% 30%10%40%

20,000,000 20,000,000 60,000,00020,000,000 80,000,000

48

All right, the way I see it, to reduce the paper costs, our client must either reduce the price

they pay for the same quantity of paper, or they could purchase less paper. I have come up

with a few proposals for each option

* Shows sketch to interviewer *

Price Quantity

Look for other suppliers Decrease size of newspaper

Bulk buying Shift to online

Secure longer supplier contracts in

return for lower prices

Buy lower quality of paper

This looks interesting! Which of these options do you think they should pursue?

I think the easiest change to look into would be to decrease the size of the newspaper and

to buy lower-quality paper. Since paper is a commodity good, I don’t think they’ll be able

to find much cheaper suppliers elsewhere. If they bulk buy, they still have to store the paper

and that might cost more than it saves. Writing longer supplier contracts may sound ap-

pealing, but if customer preferences shift toward online news consumption further, our

client may be left with excess paper. Shifting the business online is a good response to

reduce paper costs, but that shift will likely take longer than until the end of the year, so

that is something they should look into for the medium to long term. This leaves them with

two remaining options.

Great thinking! The news company has, however, already looked into the paper quality

of its newspapers and they don’t think it would be a good decision to buy any cheaper

quality than they do today. They do however like the idea of changing the size of the

newspaper. Today, the newspaper is 40cm x 55cm but management believes that 30cm

x 40cm is a more fitting size.

Alright, with these measures, they would decrease the newspaper from its current size of

2200 cm2 to 1200 cm2. Assuming they use the same thickness and number of pages as

previously, this represents a 45% decrease in area and volume. If they sell the same number

of newspapers as the previous year, with the same prices for paper, the volume reduction

would save them 45% of SEK 48 million, or SEK 21.8 million. That alone would be enough

to reach the 10% profitability goal as long as sales stay flat!

Great! Why don’t you wrap up our findings and make a recommendation?

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49

Absolutely! I recommend that management goes through with its proposal to shrink the

size of its newspaper, since it would save them annual costs of SEK 21.8 million. This alone

would help them reach their profitability goal of 10%. Before launching the new sizes,

I would, however, recommend that management look into how their customers would

appreciate the new sizes. Because there is now less space for news, perhaps customers

aren’t prepared to pay as much as they have done before, or perhaps the loss effect on

removed space for advertisement sales for the newspaper company would outweigh the

cost benefits of shrinking the newspaper.

Perfect! Do you have any additional advice to the newspaper company going forward?

Sure, I would also look into shifting the newspaper company’s business strategy to focus

more on online news consumption in the long run, which essentially would remove the

expensive production stage of the value chain. Another area that potentially could be im-

proved would be distribution that also constitutes a significant portion of the total costs.

Great job! Thanks!

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A Nordic private equity fund is considering the acquisition of a Swedish wood pellets

manufacturer. The company is currently owned by an industrial conglomerate.

Wood pellets are used as heating fuel. They are manufactured by compressing sawdust

into pellets. Pellets are extremely dense and can be produced with a low moisture con-

tent, which allows them to be burned with a very high combustion efficiency.

In this case, only the heating of buildings with wood pellets is in scope.

The first question our client asked was to assess whether there will be a future demand

for wood pellets. What do you think would be a good structure to analyse future de-

mand for wood pellets?

Let me take a minute to structure my thoughts.

Of course, take the time you need.

A minute passes and the candidate resumes the conversation …

In order to assess the future demand for wood pellets, I would like to divide the issue into

two main parts:

1) Who are the main users of wood pellets?

2) What is the substitute for using wood pellets?

Interesting, let us start with looking at the first one. Who are the primary users of wood

pellets?

Since pellets are used for heating, owners of any kind of building in need of heating are po-

tential customers. There are different set-ups for heating a building. In my view, multi-family

houses and commercial buildings in cities are primarily connected to central heating sys-

tems, and would therefore not be direct users of pellets. The primary customers of pellets

would be A) small family houses and B) commercial buildings in rural areas.

You mention central heating systems, what kind of fuel do they use?

I see your point. Central heaters can probably also run on pellets.

Good! So, you have now identified three main types of customers. What would the alter-

native for wood pellets be in each category?

I believe that there is a different dynamic to each segment. There are central heating sys-

tems running on garbage, wood – well, anything that burns basically. They buy fuel in great

quantities and probably shift it depending on the price.

The investment case

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For small houses, demand is more static. They can use electricity, oil or geothermal for

heating, but they do not shift fuel. Shifting fuel would be connected to an investment in a

new boiler. So, the installed base would perhaps be slightly more stable over the invest-

ment horizon.

Yes, there is a different dynamic in play for each segment. Could you describe in an over-

all way how you would investigate future development in each segment?

One could look at the historical development and growth rates, and of course get hold of

an industry expert to provide additional market insight.

That sounds like a good approach. Let us say that after looking at historical data and

conducting expert interviews, we found that the demand from small houses is declining,

commercial is increasing and central heating is flat lining.

So there will be a demand for wood pellets over the investment horizon, but no spectac-

ular growth.

That sounds like a good hypothesis.

I will provide you with some additional information about the target company, so you

can evaluate the attractiveness of the potential investment.

• The target company is a pioneer in the industry and

was established some 25 years ago

• According to the management team, the company has a very

strong brand and excellent customer relations which enable a

price premium — albeit modest — compared to its competitors

• The company’s business model is to operate four factories

in forest areas where it sources sawdust from local sawmills

(50-100 km from the production sites)

Would you say that the pellets company is an attractive target for the private equity fund?

Hmm, the attractiveness of the investment is determined by the private equity fund’s abil-

ity to increase the value of the firm and ensure that it becomes an attractive target when

selling again. Buy low and sell high, right?

That’s right. And how would they try to increase the value of the company?

There should be a case for how to increase the company’s profits, either by increasing

revenues or lowering the cost base – or both.

Ok, if we start by looking on the revenue side, what could be done there?

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Well, the company already has a strong brand and good relations with its customers. But,

wood pellets is a really basic product, a commodity – I mean, I would not pay extra for

a branded bag of charcoal for the barbeque. I wonder if the company’s price premium is

sustainable over time …

What options could the company pursue to increase revenues?

Well, the market is not really growing, so to increase revenues they either need to gain market

shares or raise product prices.

Is raising prices a possible strategy? What do you believe is the most important criterion

for the customer when shopping for wood pellets?

Assuming that the quality is equal across suppliers, the most important thing would be

the price.

That is right, so how would you go about determining the target company’s market

position?

Since wood pellets are a commodity, the price is determined by the market and the suppli-

ers’ competitiveness is about being the most cost-efficient. The way forward would be to

make a cost comparison across the value chain for the target company and its competitors.

Do we know who the other suppliers of wood pellets are in Sweden?

Good question, there are three main categories of competitors in the market. A) medi-

um-sized suppliers with a similar set-up as the target company, B) large forest compa-

nies and C) international importers.

Do the largest forest companies operate their own sawmills, and can they thus produce the

pellets out of sawdust from their own wood production?

Yes, they use their own sawdust for the production.

If you were to make a structured comparison of the different competitors’ value chain,

how would you approach this?

Give me a minute to gather my thoughts.

A minute passes …

We have three types of competitors, and a value chain for producing and distributing

pellets consisting of four main steps: A) acquiring raw material B) transportation to pro-

duction, C) production and D) distribution. By evaluating each step per competitor, we can

identify advantages and potential disadvantages to base our assessment on.

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53

We concluded that the large forest companies have a minor advantage compared to the

target company with regards to raw materials. Also, the large forest companies have an

advantage when it comes to transportation by having the production of pellets in imme-

diate connection to the sawmills.

Good. As you mentioned, the forest companies have back-integrated their operations

and co-located the pellets production with the sawmill. How could you assess the ad-

vantage of having the production next to the sawmill?

Well, that depends on how much sawdust you need to produce one unit of pellets?

The density of sawdust is six times less than in pellets, which is the whole idea of the

product.

So, in order to produce one truckload of pellets, they would need to transport six loads of

sawdust between the sawmill and the production site. That is a pretty big disadvantage

for the target company.

If we look at production, are there any significant economies of scale when producing

wood pellets?

Production costs are almost equal across competitors. There is no economy of scale that

is relevant in this case.

Looking at the final step of the value chain, distribution, importers would have a disadvan-

tage, as they need to ship the pellets in by boat. Shipping costs are still low, so perhaps it

is just a minor disadvantage.

So, summing up the cost advantages and disadvantages and plugging them into a matrix

organised according to value chain and competitors, we see that the target company

holds a poor competitive position compared to its competitors.

Candidate explains the rationale behind his matrix.

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A) Raw materials B) Transportation C) Production D) Distribution

Value chain

Value chain

Raw materials

-

+

+

Transportation

-

+

+

Production

-/+

-/+

-/+

Distribution

-/+

-/+

-

A) Equal to target company

B) Forest companies

C) Importers

54

Do you have any information on the recent market development such as sales or market

share per competitor?

The forest companies and the importers have only been on the market for a couple of

years, but have quickly gained significant market shares from the traditional players (like

our target company). This proves that we are facing a price game, and that customer

relations is not a sustainable competitive advantage, but rather a reflection of the manage-

ment team’s wishful thinking.

That further supports my suspicion.

The large forest companies have integrated the pellets production directly with their saw-

mills, hence, they have a structural advantage that the target company cannot mitigate.

Interesting, so what recommendation would you give to the investment committee?

The structural disadvantage compared to competitors will make it hard for the target com-

pany to compete on price. We already see signs of this disadvantage in the current market,

with the company’s decreasing market share.

In my view, the wood pellets company would not be a good investment for the private

equity fund.

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