Nutrafix
- Vitamin supplements for pregnant women
- Nutrition supplements for ailing patients (Typically cancer and diabetes)
They are evaluating an entry into the Chinese market, as the growth in the European markets is stagnating.
The client has hired us to advise him on the market entry strategy for the Chinese market.
Suggested case structure
- Market analysis: The interviewee should attempt to lay out a list of typical parameters that can be used to evaluate the attractiveness of the market– market size, growth, customer segments, trends etc. The key hurdle to cross is – Is the market attractive enough to enter?
- Company: If the market is attractive, the interviewee should look to answer the question – What would it take to enter the market? Some factors could be: product rebranding, new production line etc.
- Competition: After understanding the capabilities of the company, it is critical to check the competitive landscape. The key question to answer is – Given the competitive landscape – what is the probability of success in the new market?
- Recommendation: Based on the analysis, the interviewee must succinctly lay down the next steps for the client in order to enter the market.
1. Market Analysis
The interviewee should at the outset try to ascertain the attractiveness of the market – market size, growth, profitability, customer segments, willingness to pay, market trends etc.
Exhibit 1
Market Size
In order to calculate the market size for each segment, the interviewee would first need to calculate the potential customers in both the segments, as that information has not been shared in the exhibit.
a. Potential customers
Number of potential customers – Pregnant women
- Population of China – 1 Bn
- % of women – 50%
- No. of children per woman – 1
Using the above we can calculate the number of women as follows:
𝑁𝑜 𝑜𝑓 𝑤𝑜𝑚𝑒𝑛=1 𝐵 ×50%
=500 m
In China women usually only have 1 child. Assuming a 75 years life expectancy, the probability that a woman would be pregnant at any given time is
𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠 (𝑃𝑟𝑒𝑔𝑛𝑎𝑛𝑡 𝑤𝑜𝑚𝑒𝑛)=1%×500 𝑚
=5m
Number of potential customers – Patients (Cancer segment)
- Population of China – 1 Bn
- Average population suffering from cancer– 2%
- Average lifespan of the disease – 3.5 years
A similar approach to calculating the number of pregnant women is adopted. A shorter life span of 70 years is assumed.
=1 m
Number of potential customers – Patients (Diabetes segment)
=1 m
b. Market size
The market size can now be calculated using the data from Exhibit 1 and the no. of potential customers.
Market size (Pregnant)
𝑀𝑎𝑟𝑘𝑒𝑡 𝑠𝑖𝑧𝑒 ($ 𝑚)=% 𝑜𝑓 𝑐𝑜𝑛𝑠=𝑐𝑜𝑛𝑠𝑢
𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟𝑠×𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑐𝑢𝑠𝑡𝑜𝑚𝑒𝑟𝑠×𝐴𝑣𝑒𝑟𝑎𝑔𝑒 exp〖𝑝𝑒𝑟 𝑦𝑒𝑎𝑟〗
=15%×5𝑚×120
=90 m$
Market size (Cancer)
=25%×1𝑚×600
=150 m$
Market size (Diabetes)
=20%×15𝑚×375
=1125 m$
Total market
=90𝑚+150𝑚+1125𝑚
=1365 m$
Key insight
- The total potential market size is ~3x the existing sales of the company in Europe (450 m$) across all countries. Hence it is an attractive market
2. Company
The interviewee should look to evaluate the company’s capabilities of entering the market – production capacity, investment, changes to the product to enter the new market
Allow the interviewee to think aloud and lay out a long list of factors that he would need to evaluate in order to answer the question – What would it take to enter this market and do we have those capabilities?
If he is stuck, prompt him to think about the factors listed above.
If enquired, share the below information verbally with the interviewee:
- The companies plants in Europe are running at 95% capacity utilisation.
- The company has invested 500 m$ across its plants in Europe. A similar capacity expansion in China would cost 300 m$
- It has 900 m$ as reserves on its balance sheet which can be used for capital expenditure
- The company does not have any existing distribution channel in China. It would need to set it up from scratch. The company has experts who have helped set up international distribution chains before.
- The company would need to spend 5 m$ in order to change its products to fit the market in China.
- The company would have set up a plant in China, as there is no capacity in Europe. In addition, the transport costs might make the product too expensive.
- The company has enough reserves to set up plants to cover the market need. Potential sales in China are 3x Europe and the cost of setting up Europe equivalent capacity is 300 m$. Given the 900 m$ ready for investment, a 3x capacity can be achieved assuming revenues per product are comparable.
- The company has the means to set up a new distribution channel
- The company would need to spend on product changes to fit the Chinese market
3. Competition
The interviewee should look to evaluate the competitive market in China – existing competitors, cartels, market saturation etc.
Exhibit 2
If enquired, share the below information verbally with the interviewee:
- The government is a major shareholder in all the three largest competitors
- Nutrition supplement is a new product line in China. There were several regulatory hurdles in relation to the prescription of these products to the two customer segments.
- However, the three main competitors in China lobbied the government together and were able to open up the market
- The competitors are looking to increase their production capacity in China
- Our client has a superior technology which would allow it to produce the products at 15% lower cost compared to the other competitors in China.
- The Chinese market is quite consolidated market with the top three competitors holding 80% of the market
- In addition, the government is a significant stakeholder in all the three major competitors. This would not bode well as an environment for an external competitor looking to enter the market, as the government has vested interests in the competition’s success
- Even though the cost of production, of the company is lower than the Chinese companies, the margins in the market might fall. The competitors are expanding their production capacities, which could lead to more competition, reduced pricing and lower margins in the market
4. Final recommendation
The three key questions laid out at the beginning of the case were – Is the market attractive enough to enter? Does the company have the capabilities to enter? In the light of the competition, what is the probability of success?
Although the market is attractive and the company has the capabilities to enter the market, the competitive landscape would make the chances of success very low.
The interviewee must recommend that Nutrafix should not enter the Chinese market.
