Qvartz Case Interview Handbook

1. The QVartz case interview handbook

2. 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. The content will, however, not be explicitly tested in any way during the recruitment process at QVARTZ. IS THIS HANDBOOK RELEVANT FOR ME? This handbook is relevant for you if you are preparing for upcoming interviews and are new to case interviews. If you are already a seasoned case solver or have read other literature on the topic, this handbook may be of less relevance for you. See our section “Additional resources for case preparation” for other recommended sources of information. SHOULD I PREPARE BEFORE THE INTERVIEW PROCESS? While it is possible to make it through management consulting interviews without preparation, we strongly recommend that you do prepare, as it great- ly improves your chances of securing a job offer. The vast majority of successful applicants across all management consulting companies have prepared by reading up on cases, practicing with friends and brushing up on their arithmetic skills. Preparing is especially relevant for non-business students who may not be very familiar with business terminology and problem solving methods. INTRODUCTION 33

3. QVARTZ: a Nordic original. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 QVARTZ’ recruitment process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Quantitative preparation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Example cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 TABLE OF CONTENTS 5

4. QVARTZ is a management consulting company employing more than 240 professionals across our offices in Stockholm, Copenhagen and Oslo. Our aspiration is to become one of the top-three consulting companies in all Scandinavian markets – a seemingly tough goal, yet an inspiring challenge. Even though firmly rooted in the traditional, profes- sional values of high-end management consulting, QVARTZ was founded with the clear intention of changing the industry “from within”. Our ambition is to become the leading consulting company in the Nordic region by presenting an alternative to the standard consulting model. A Nordic 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 QVArtz: a Nordic original extensively within transactions, commercial and operational excellence programmes and organisational transformations. Our client base covers a range of industries, including private equity, energy, pharma & medtech, retail, transportation and many more. Although most of our clients are large Nordic companies, approximately 40% of our projects are car- ried out outside the Nordics. 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 develop our consultants as much as possible through mentoring and internal academies so that we can grow together as a company. 6

5. QVARTZ’ RECRUITMENT PROCESS FULL-TIME CONSULTANTs QVARTZ’ recruitment process for full-time consultants is centred around a comprehensive two-day recruitment camp. Over two days you will get the chance to learn more about what it is like to be a consultant at QVARTZ and show us who you are through a combination of interviews and group exercises on business di- lemmas. You will also meet many of your potential colleagues at QVARTZ, and the different sessions will offer you an opportunity to learn more about yourself and moreover provide you with concrete input to be further applied in your career, whether at QVARTZ or elsewhere. Among other things the programme includes • An introduction to QVARTZ • A timed quantitative test • A series of case interviews • A group case session • A personal style and preference session JUNIOR CONSULTAnts Our junior consultants work on client projects just like any other consultant. They perform tasks similar to those of newly hired full-time consultants, but typically work 15-20 hours per week while complet- ing their studies. The recruitment process for Junior Consultants con- sists of an introduction to QVARTZ, case interviews as well as a quantitative test. As for full-time consultants, we make sure that the candidates get to meet quite a few potential new colleagues during the process. If you want to know more about your career opportunities with QVARTZ, please visit www.qvartz.com.

6. 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 information 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 en- counter on a daily basis. They are a fast and concrete way for us to understand how you frame and solve am- biguous business problems. In addition, they also give you an opportunity to gain a better understanding of the work we do and 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 slightly different- ly 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, quantitative 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 problem and then tailor your approach to the problem at hand, rather than trying to fit something in to a predefined framework. 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 communication and presentation skills are therefore of great impor- tance. The interviewer wants to understand if you are tactful and approachable, and how you handle con- structive 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 chal- lenging problems. In addition to the problem solving approach, teamwork along with effective communication and 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 members interact, and continu- ously provide feedback. 8

7. 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 purpose of these cases is to understand how you work logically through a mathematical problem, make reasonable assumptions and interpret mathematical 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 interviewer. If the interviewer understands your model 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 in the given time frame. Approaches A) Extrapolation One approach is to extrapolate a metric from one element against an entire population. As an illustrative example, you could answer the question “How many gas stations are there in Sweden?” by extrapolating your knowledge about the number of gas stations in your local region against the whole country. (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 estimation per segment. Visually, you could do your calculations 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 segmenting 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 estimation or market-sizing cases, especially more uncon- ventional ones, is the driver breakdown approach. Here, you begin with the key metric and systemat- ically 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 example, 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 subcomponents “number of golf balls in the air per course” times “number of courses in the United States”, and subsequently breaking those down further. 12

8. 2. BUSINESS CASES The business case interview is by far the most common type of case interview. A business case interview 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 topics. 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 understand 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 being successful in a business case interview by practicing. 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 natural 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 approaches and frameworks which might inspire you in your case solving. But keep in mind always to adapt your thinking. Interviewers look for candidates with business acumen, who are able to develop high-quality 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 13

9. 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 keep in mind to make your conclusion as action-oriented as possible • Lastly, back up your conclusion with supporting arguments. Try to not 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 is to paraphrase the question back to the interviewer. And take notes, especially if you are presented with data • Ask clarifying questions if necessary. Even the most obvious questions are sometimes appropriate 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 structure 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 interviewer might give you hints on where to go first or if you should rethink your approach altogether. If this is the case, ask for another minute to collect your thoughts HOW TO OPEN AND CLOSE A CASE 14

10. FRAMEWORKS FOR BUSINESS CASES You will quickly find frameworks if you start looking around for material 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 predefined framework – instead you will have to adapt your approach and use the framework more as a backbone in your analysis. In the following pages, you will find four useful frameworks. 16

11. 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 evaluate 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 underlying 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 interviewer often has a preferred segmentation. • Decompose by applying appropriate segmentation, e.g. –– Business units –– Customer types –– Large vs. small customers –– Geographies –– Product types –– Sales representatives –– Etc. • Identify increases or decreases in components (e.g. have units sold gone up, down or stayed consistent) • Understand if trends are company-specific or an industry-wide problem • Decompose by applying appropriate segmentation (by e.g. 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 it is possible to improve it by an investment?). 18

12. 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 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 20

13. MERGERS & ACQUISITIONS FRAMEWORK • What does the client do? • What do our financials look like? • Potential reasons for M&A –– Increase market share or access –– Economies of scale or scope –– Learning curve advantages –– Diversification –– Pre-empt 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 good idea to have thought them through in advance, especially if you have no previous experience from transaction work or studies. 23

14. 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 salesmen 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? EconomicsReaching the customers This framework is similar to the industry analysis framework but with some important differences and additional issues. 24

15. 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 material 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 communicate 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. 27

16. QUANTITATIVE PREPARATION Most management consulting companies put emphasis 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 put some time aside for practicing numerical accuracy and speed by repeating basic arithmetic operations. WHY ARE YOU TESTED QUANTITATIVELY? We need to be confident that every team member is able to structure and carry out quantitative anal- yses. Most client recommendations are based on quantitative evidence. Comfort with numerical es- timations 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 28

17. 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 refine 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. 32

18. Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Sounds good! Let’s start with the behavioural parameters. Since we are only focusing on the wholesale market, I will 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 lifestyles. I think that the share of people who belongs 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% occasional 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

19. Interviewer Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate Candidate 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, which you’re missing, can you think of what it is? Ah! Yes, since we are 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 is 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. Share of sale Volume in litres Retail price VAT Retail mark-up Price/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 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. 34

20. Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate 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 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 competitiveness 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 the private equity fund to acquire the company or not. 35

21. The candidate takes around three minutes and then resumes the conversation Interviewer Interviewer Interviewer Candidate Candidate Candidate After years of engineering work, you finally have the world’s first commercially viable spacecraft. It costs you EUR 50 million to build. From its launch 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 the trips (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 economics 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 36

22. Interviewer Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate Candidate The candidate takes about half a minute to think before he proceeds Yes, of course you are 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), the economics, 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 substitutes. 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 ticket 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. 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. 37

23. The candidate writes down his calculations on a piece of paper Interviewer Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate 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 us 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 consideration I would like you to go into issue (2), the economics, 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 customer 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 to at least 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. 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? Candidate 38

24. 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 Interviewer We will wrap up the case example at this stage of the case. We do, however, encourage you to try and think what your approach would be for a marketing campaign for the first commercial space trip. 39

25. Our client, the Swedish window manufacturer “Vertical Windows”, is considering entering 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 production 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-residential market. Maybe I should set up an issue tree to make the analysis more structured? I think that is a good idea! VERTICAL WINDOWS Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate 40

26. 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 influence 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 windows) + (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 total annual sales? Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate Attractiveness of the German market Market size Residential market Market growth Non-residential market Profitability Product 41

27. Thanks! So, this would give 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 gives annual sales worth EUR 6 billion. Does that number make sense to you? Vertical Windows currently has a revenue 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 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 market is fragmented or consolidated. Secondly, 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. Interviewer Interviewer Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate Candidate Candidate 42

28. 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 then 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 obvious for it to take advantage of. Let us do that! Interviewer provides data. Interviewer Candidate Sweden Denmark Norway Germany The European vertical windows market split by market share The European vertical windows market split by market material European vertical window market 100% – total market size European vertical window material 100% – total market size Market share of top 3 players in the market Wood/Aluminium 100% Aluminium Wood PVC 10% 100%100%100%100% 45% 55% 60% 40% 80% 20% 90% Sweden 80% 53% 7% 8% Denmark 50% 4% 4% 42% Norway 3% 3% 4% 90% Germany 17% 5% 41% 37% 37% 10% 53% Vertical Windows 43

29. My first observation is that Vertical Windows currently does not offer windows in the segment 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 portfolio to include also PVC windows. I agree that it reduces the addressable potential of the German market, but do you perceive 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 in 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 give you any additional reflections regarding the attractiveness 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 59% 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? Interviewer Interviewer Interviewer Candidate Candidate Candidate PVC Aluminium Wood Wood / Alu Price level by window type Price levels by material Indexed 100 300 44

30. 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. Fur- thermore, Vertical Windows’ main segments constitute 54% of the German market, which represent a significant pocket to tap into. Vertical Windows has actually reached the same conclusion as you did in your analysis. It has started to develop a market entry strategy for Germany and it has also started talking to a German window manufacturer, which it thinks may represent an interesting acquisition target We will wrap up the case example here. We do, however, encourage you to try to reflect over what your approach would be in order to analyse the potential acquisition as a means for supporting Vertical Windows’ market entry. Interviewer Candidate 45

31. We are on our way to the Danish affiliate of Toyota Motors to attend a meeting with the VP of sales. The VP is currently in the process of setting the budget for 2014, when he calls us to resolve a growing concern of his. For the year 2015, he has set the total sales budget of the new Toyota Prius to 5,000 units. However, he is a bit concerned whether this target is realistic or not. As a consequence, he has asked us to provide an initial assessment of the feasibility of his budget target. Furthermore, he would like some pointers for initiatives that could help increase the sales of the vehicle. I am not familiar with the car, but I believe it is a hybrid car? That is correct. It is a medium-sized, hybrid car. The interviewer shows a picture of the car. Great! Let me make sure I have understood the task correctly. The VP of sales for the Dan- ish affiliate of Toyota Motors wants to know if it is realistic to sell 5,000 Toyota Prius cars in the Danish market in 2015. Furthermore, he is interested in possible initiatives to increase sales of this particular car. That is right! I do not have any further questions right now, but I would like to have a minute to gather my thoughts. Take the time you need. Candidate takes a minute to gather her thoughts and organise her high-level approach in bullet points to solve the task. I want to start by looking into the feasibility of selling 5,000 units. In order to do this my suggested approach is: 1) Define the total number of passenger cars in Denmark and then estimate the number of new cars sold each year 2) Do a segmentation of the market to achieve an understanding of the addressable market for Toyota Prius Your approach sounds good. I would like you to continue with the analysis of the passenger car market. Give me a minute to structure my approach a bit. The candidate takes another minute to gather her thoughts around the main drivers of the Danish car market. She then takes a marker and walks up to the whiteboard. THE TOYOTA CASE Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate 46

32. To calculate the total car population I would like to use number of households as a starting point. Sorry for interrupting, but before you proceed I would like to know if this approach will capture the entire passenger car fleet? I think it will cover the majority since this approach will account for the B2C market, and it will also account for business fleets used by employees since these are often used pri- vately as well. One part of the B2B segment which is not covered is the taxi segment, but I would presume that the taxi market is quite small. I could of course add an additional analysis of the taxi segment, if you consider it to be relevant? You do not need to do the additional analysis for the taxi market, I agree that it is most likely fairly small. So for now, let us assume that Toyota Prius is only sold B2C and B2B for business fleets. With that sorted, you can now continue your analysis of the market for passenger cars. Great! I will start the analysis by assuming that the average size of a household is two people and that the population size in Denmark is roughly 6 million, giving us a total of 3 million households in Denmark. The households can then be divided into three main types, depending on their access to a car: The candidate explains the structure of her matrix. Given that 20% of the households own two cars, and 60% of the households own one car, the total number of private passenger cars in Denmark is 3,000,000. To calculate how many new cars are sold each year, I will assume that the average lifetime of a car is 15 years. The total number of new cars sold each year is then 200,000 cars (3,000,000/15), depending on one additional assumption, notably that the total population of cars remains constant. Good. I agree, but could you elaborate on how you found the percentage split for the number of cars per household? Absolutely! Based on my experience from the Nordics, I believe that the majority of households in Denmark have at least one car, which is why I have set the share of households without a car to 20%. Out of the households with a car, I am quite certain that most of them only have one car, explaining why I have set that share to represent 60% of all households or 75% of all households with a car. Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate Per cent of households Number of households Number of cars Households with two cars or more 20% 600,000 1,200,000 Households with one car Households with no car 60% 1,800,000 1,800,000 20% 600,000 0 Total 100% 3,000,000 3,000,000 47

33. That makes sense. Do you want to continue the analysis of the 200,000 cars or is that the addressable market for Toyota Prius? The 200,000 cars do not reflect the addressable market for the Toyota Prius. There are different needs in relation to size and usage. Hence, I will break down the market further by looking into four main types of cars: SUVs, family cars, mid-sized cars and compact cars. Can you think of another dimension that is relevant when choosing a car? I suppose that price is also an important differentiator. Other consumer typology, such as age, could also be relevant, but given the limited information, consumer typologies would be complicated to analyse with reasonable certainty – unless it is possible to obtain this information from the client? We do not have any more information regarding consumer typologies – and it can also be difficult to operationalise such segmentations – so price sounds like a good additional segmentation parameter. Ok, let me organise the different parameters into a matrix to get a clear overview of the different car segments. Candidate sketches a matrix on the whiteboard. I have added percentages of the estimated market split for the two dimensions by first estimating the split based on car size, and then estimating the distribution across price levels within the mid-sized market. Excellent, but before you continue with your analysis, could you explain the reasoning behind your percentage splits? Yes, of course. The first split of the market, by size, is based on my own observations of the cars people drive in the Nordics. I perceive that most cars are either family or mid- sized cars, but that compact cars are still fairly common. SUVs, on the other hand, are less common. With that in mind, I have assumed that SUVs make up 10% of the market, and that the more common compact cars have a market share twice as large of 20%. Thus, the remaining 70% are family and mid-sized cars, between which I consider mid-sized to be a bit more common, and has therefore set its market share to 40%. Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate Price fighter 8% 20% 60% 20% 10% 30% 40% 20% 24% 8% Mainstream Pricing Premium segment Share of total market SUV Family Mid-sized Size Compact Share of mid-sized market 48

34. I agree with your reasoning. Would you please also elaborate on your reasoning for the split of the mid-sized market based on pricing? I have only considered the mid-sized market for the market share split based on pricing due to the assumption that Toyota Prius only competes in the premium-priced segment for mid-sized cars, and I believe that the split based on pricing will vary with the car size. My view is that within the mid-sized car segment most cars are found within the mainstream pricing segment, why I have assumed these to stand for 60% of the market. For the remaining 40%, I believe the split to be 50/50 between “price fighter” and “premium”, which is why both segments make up 20%. Do you agree with the assumptions and the underlying reasoning? It sounds fair. Ok. Given this, the market in which Toyota Prius operates accounts for 8% of the total annual sales of new cars. This gives us a market of 16,000 new cars each year, which implies that Toyota Prius would have to take roughly one third of the market in this segment to meet the sales budget. Based on this, I would say that selling 5,000 Toyota Prius cars in Denmark in 2015 is very ambitious and probably unrealistic. Especially given the fact that Toyota Prius uses hybrid technology and is therefore only relevant for parts of the premium segment for mid-sized cars. I agree, what do you do next? Now that this is clarified, I would like to move on to the second part of the VP’s request and identify possible measures to increase sales. I would like to divide initiatives to boost sales into three main types of growth levers: 1) Enter new segments 2) Increase the addressable market by making the car more affordable 3) Increase awareness through marketing I think those are three relevant levers. What are the possible segments for the first lever? This brings us back to our initial discussion about the market, from which I would consider the possibility of increasing sales in the B2B market. The attractiveness of this initiative depends partly on how active Toyota already is in the B2B segment. This initiative covers both taxi fleets and business car fleets. One approach to attract large companies would be to convince them to update their business car fleet to include more green cars. This is also an approach that could be used towards the largest taxi companies. Good. What is your assessment of the two other growth levers? Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate 49

35. The second measure for increasing sales is to make the car more affordable. The segmentation matrix tells us that making the car more affordable and hereby gaining access to the mainstream segment could increase the potential market by 300% or 48,000 cars. In order to avoid reducing the actual price of the car, another approach for tapping into the market could be to offer attractive leasing solutions, seemingly making the car more affordable. The third initiative involves increasing awareness about the car and its qualities as a green- er alternative to conventional passenger cars. Could you please elaborate on how you would proceed the process of increasing awareness? I would suggest two main approaches to increase overall awareness, hereby also increasing the chance of getting people to consider a hybrid car over a conventional car – hopefully the Toyota Prius in particular: 1) Make an above-the-line (ATL) marketing investment, such as TV commercials, that could help increase overall awareness of Toyota Prius and promote the qualities of a hybrid car 2) Implement an ambassador programme, where celebrities are used as ambassadors for the car, hereby attracting extra attention Excellent! Do you have any last comments? I would just like to sum up the case by saying that the budgeted sales target of 5,000 cars in 2015 is very ambitious due to the size of the addressable market. However, there are measures that could be made to increase sales and, hopefully, reduce the gap. These include entering new segments, make the car more affordable and increase awareness. Interviewer Interviewer Candidate Candidate Candidate We will wrap up the case example at this point. 50

36. 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 content, 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 demand 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 is a potential customer. 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 systems, 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 alternative for wood pellets be in each category? I believe that there is a different dynamic to each segment. There are central heating systems running on garbage, wood – well, anything that burns basically. They buy fuel in great quantities and probably shift it depending on price. THE INVESTMENT CASE Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate 51

37. 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 investment horizon. Yes, there is a different dynamic in play for each segment. Could you describe in an overall 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 modest price premium 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 ability 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 revenue or lowering the cost base – or both. Ok, if we start by looking on the revenue side, what could be done there? Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate 52

38. 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 charcoal for the barbeque. I wonder if the company’s price premium is sustainable over time … What options could the company pursue to increase revenue? Well, the market is not really growing, so to increase revenue they either need to gain market share 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 suppliers’ 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) medium-sized suppliers with a similar set-up as the target company, B) large forest companies and C) international importers. Do the largest forest companies operate their own sawmills, and can, 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 production, C) production and D) distribution. By evaluating each step per competitor, we can identify advantages and potential disadvantages to base our assessment on. Interviewer Interviewer Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate Candidate Candidate 53

39. We concluded that the large forest companies have a minor advantage compared to the target company with regards to raw material. Also, the large forest companies have an advantage when it comes to transportation, by having the production of pellets in immediate 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 advantage 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 disadvantage, 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 their competitors. Candidate explains the rationale behind his matrix. Interviewer Interviewer Interviewer Candidate Candidate Candidate Candidate A) Raw material B) Transportation C) Production D) Distribution Value chain Value chain Raw material - + + Transportation - + + Production -/+ -/+ -/+ Distribution -/+ -/+ - A) Equal to target company B) Forest companies C) Importers 54

40. 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 share 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 management team’s wishful thinking. That further supports my suspicion. The large forest companies have integrated the pellets production directly with their sawmills, 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 company 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. Interviewer Interviewer Candidate Candidate Candidate 55

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Qvartz Case Interview Handbook

Lewis Lin 🦊

Qvartz Case Interview Handbook