Dog Microchips - MyConsultingCoach
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Case

Case prompt

All dogs licenced in the UK must already be fitted with a subcutaneous microchip which identifies the dog with its owner’s contact details. However, the UK government is bringing forward legislation which would require all newly-licensed dogs to be fitted with a new kind of microchip also containing a passive transponder. This would allow lost dogs to be located.


If the legislation is passed, the government will have to issue a contract to manufacture these new microchips.


Stratos is a UK microchip manufacturer, making chips for a wide range of applications. Management at Stratos are interested in making these new subcutaneous location chips and has asked us to find out whether they should go forward with trying to secure the contract.


Comments

This case has both profitability and market sizing components.


Detailed solution

Paragraphs highlighted in orange indicate hints for you on how to guide the interviewee through the case.
Paragraphs highlighted in blue can be verbally communicated to the interviewee.
Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section.


Structure

The candidate should begin by asking any relevant clarificatory questions, before structuring their approach to the case.


Recall that:

Profit = Revenues – Costs


The candidate should analyse these components in sequence.



Revenues

Recall that:

Revenue = Volume x Price


Thus, the candidate will need values for both price and the number of chips required nationally.


The candidate should begin to ask structured questions to move towards these values.


The following information can be shared upon the candidate’s request:


The total number of dogs in the UK is approximately 12m


Average canine life expectancy is 8 years


94% of dogs are licenced


The government is prepared to pay £15 each for the new chips



Estimating Volume

Thus, we have a value for the price (£15), but must still estimate the number of chips required.


The candidate might make this estimation via multiple different methods. Here, we will use the replacement concept.


To begin, we assume that the number of dogs in the UK has remained constant.


To maintain stable numbers, the number of new dogs each year must equal the number which die.



We calculate this number as follows:


Replacement Rate = Population/Lifespan = 12m/8 = 1.5m new dogs per year


94% of these dogs will be licenced in accordance with the law


1.5 x 0.94 = 1.41m new licences per year


We can round this to 1.4m new chips required per year from the start of the programme


Note that dogs which have already been licenced are not covered by the new legislation, so need not be considered.



Estimating Revenue

We can now plug our values for volume and price into the equation above.


Revenue = Volume x Price

Revenue = 1.4m x 15

Revenue = £21m



Costs

The candidate should now move on to consider costs. They should begin by asking structured questions to gain more information on aspects of costs; including fixed and variable costs of chip production, the costs of any investments required and the cost of licencing any proprietary technologies.


Upon request, the candidate can be given the following information:


Chips will cost Stratos £4 each to manufacture (with this including labour, raw materials and other costs).


To produce these additional microchips alongside their current contracts, Stratos will have to increase the size of their production facilities.


Stratos can lease a unit adjacent to their current production line for £750k per year.


This new production line will also require new equipment to be purchased at a cost of £6m.


A few different location technologies can be used to make chips that are compliant with the new legislation. However, all are proprietary and will require both an initial lump payment plus an additional licencing payment for each chip manufactured.


Stratos has two options to licence locator technology:


Cartograph

Will require a lump payment of £500k and per-unit licencing fee of £1


Transpose

Will require a lump payment of 250k and a per-unit licencing fee of £2


The candidate will need to make calculations as to the different cost components.



Production Costs

Cost to manufacture = number of chips x unit cost

Cost to manufacture = 1.4m x 4 = £5.6m per annum


Cost of new facility = rental cost + equipment cost

Cost of new facility = 750k + 5m = £6.75m in year one


Total production costs = 5.6m + 6.75m = 12.35m



Licencing Costs

These will need to calculated for both possible providers:


Cartograph

Cost to licence tech = lump sum + (unit fee x number of units)

Cost to licence tech = 500k + (1 x 1.4m) = £1.9m


Transpose

Cost to licence tech = lump sum + (unit fee x number of units)

Cost to licence tech = 250k + (2 x 1.4m) = £3.05m


The candidate should note that, at the volumes required here, Cartograph is the cheaper option and thus the one that should be engaged if production goes ahead.


Total Costs in Year One

Total Costs = production costs + licencing costs

Total Costs = 12.35m + 1.9m = 14.25



Profit

Now that the candidate has values for both revenues and costs, they can calculate Stratos’s projected profits for year one of the dog microchip contract.


Year One Profit = Revenues – Costs

Year One Profit = 21m – 14.25m

Year One Profit = £6.75m



Competitive Landscape

The candidate should enquire about the wider market Stratos finds itself in. In particular, the candidate should seek information on Stratos’s competitors, their market shares, possible sources of advantage over Stratos and the overall probability of Stratos winning the contract.


Upon request, the following information can be given to the candidate:


Stratos has four other competitors which are capable of bidding for the government contract.


All have roughly equivalent market share in this space and all have an equivalent chance (approximately 20%) of winning the government contract.


However, if Stratos invests £1m to lobby government ministers, they believe that they can raise their chances of securing the contract to as much as 75%.



Deciding Whether to Invest in Lobbying

In order to decide on the best course of action here, the candidate should compare the expected profits with and without lobbying.


Expected Profit Without Lobbying

(6.75 x 20%) + (0 x 80%) = £1.35m


Expected Profit With Lobbying

(6.75 x 75% - 1) + (-1 x 25%) = £3.81m


The expected profit with lobbying is higher. Thus, Stratos should opt to invest in lobbying government ministers to help secure the deal.



Final Recommendation

The candidate should provide a brief, structured recommendation advising Stratos on how to proceed.


If the legislation requiring the new microchip type for dogs is passed, Stratos should attempt to win the government contract to provide these chips as the expected profits will be £3.81m in year one, with further profits in subsequent years.


In doing so, Stratos should licence locator technology from Cartograph, as this minimises licencing costs and so boosts profits.


They should also invest in lobbying government ministers to increase their chance of winning the contract rather than one of their competitors. This move boosts expected profits.


The candidate should also note any potential risks or other issues which might need to be considered before going forward.



Exhibits
This case doesn't have any exhibits.
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