Kidzone is a large diversified company which produces products for children in the age group of 0-10 years. Its products range from stuffed toys, books, educational aids to battery operated toys.
Its battery operated toys division has requested for a $50mn capital allocation. The capital is required to triple its production capacity.
Kidzone wants us to advice them on this capital allocation and expansion.
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.
Suggested case structure
Key question: Would the proposed expansion lead to a commensurate increase in the profitability of the division.
Prompt the candidate to focus on the issues that need to be considered to analyse the investment.
Suggested issues to be analyzed by priority:
- Market analysis: Understand whether the market size is large enough to justify the increase in capacity. Understand future growth prospects
- Competition: How many competitors are there? Clients standing in terms of market share, product positioning, pricing vis-à-vis the competitors
- Scale: What changes due to the increase in capacity? Is there any cost advantage?
Allow the interviewee to create a long list of issues and then share the data. Then it would be up to the interviewee to frame the key issues to be analysed (listed above)
Share the below information with the interviewee:
- There are 3 large players in the battery operated toy market who control 90% of the market
- The top two players in the market are X and Y, with 44%, 31% market share respectively
- Kidzone is the third largest player with 15% market share
- 3 mn battery operated toys are sold in the market
- Industry has been reporting a strong year on year growth; but growth has slowed over the last few months
Battery operated toys division information
- The division sells 450,000 units annually
- The primary customers are nuclear families with a single child
- The products are distributed through online & offline retail stores
- The battery operated toy division has exceeded internal returns targets; however its profitability has been dropping over the last few months
- The company’s products meet the latest trends in toy designs. There is constant upgrade in features based on market signals
Pricing and cost information
- The company’s cost per unit is 40$; for competitor X the cost is 36$ and for Y it’s 34$
- The price for our company is 60$, for competitor X the price is 55$ and for Y it’s 65$
- Major cost components are assembly and labour
- With the proposed expansion, the company would achieve a 6-8% reduction in cost
The candidate might start doing quantitative calculations. Allow the candidate to do so; however if he is trying to calculate an arithmetic answer; prompt him to use the data to draw insights around the key issues that were laid out before.
The interviewee should reach the following conclusions looking at the data shared with him/her:
- The market growth is slowing down; hence increasing capacity would not necessarily lead to higher sales
- The competition has a significant cost advantage of 10-15% over our client
- Even the proposed expansion would not help us match the competition’s cost structure or give us significant advantage
- Given the competitor’s pricing strategy and our revised cost structure, there is little room to change our pricing strategy
- Additionally, the recent margin erosion further limits the company’s options to change prices
At this point the candidate might ask for additional information like reasons for decline in profits, competitor’s plans to increase capacity/ change pricing etc. Advise the candidate that no additional information is available at this time; Ask the candidate to make a list of additional issues that he would advise the client to analyse further.
The candidate should recommend that based on the data shared it is unclear whether the expansion would lead to increased profits for the company. He should recommend the client to analyze certain factors further.
Some candidates might outright give a recommendation of not investing. This is acceptable; however prompt them to list out additional issues that could substantiate or negate this recommendation.
3. Other factors
Prompt the candidate to create a list of additional factors that the client should analyse
Potential other factors to be considered include:
- Reason for drop in profits of the division: Has there been a change in labour costs or assembly process?
- Cost structure of competitors: Company Y has the lowest cost structure despite being the second largest player; what are they doing differently? Vertical integration? More automation in assembly processes?
- Pricing: Company Y has the highest pricing. Could we change our product proposition with additional features to make it more premium & increase prices?
- Industry analysis: How would the increase in capacity affect the industry dynamics? Why has the growth been slowing despite strong earlier performance? Is there any new product gaining market share at the expense of battery operated toys?