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 $50mn capital allocation. The capital is required to triple its production capacity.
Kidzone wants us to advice them on this capital allocation and expansion.
Suggested case structure
- Market analysis: Understand whether the market size is large enough to justify the increase in capacity. Understand future growth prospects
- Competition: How many competitors are there? Clients standing in terms of market share, product positioning, pricing vis-à-vis the competitors
- Scale: What changes due to the increase in capacity? Is there any cost advantage?
- There are 3 large players in the battery operated toy market who control 90% of the market
- The top two players in the market are X and Y, with 44%, 31% market share respectively
- Kidzone is the third largest player with 15% market share
- 3 mn battery operated toys are sold in the market
- Industry has been reporting a strong year on year growth; but growth has slowed over the last few months
Battery operated toys division information
- The division sells 450,000 units annually
- The primary customers are nuclear families with a single child
- The products are distributed through online & offline retail stores
- The battery operated toy division has exceeded internal returns targets; however its profitability has been dropping over the last few months
- The company’s products meet the latest trends in toy designs. There is constant upgrade in features based on market signals
Pricing and cost information
- The company’s cost per unit is 40$; 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 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