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Case

Case prompt

Cropia is a global global Swiss agribusiness that produces agrochemicals to improve crop yield and performance. The R&D division of Cropia has developed Supercrops, a chemical that helps control the ripening of produce.


After lenghty testing, this chemical appears to work especially well with strawberries:

    • It allows strawberry to harvest earlier
    • It improves the overall quality of the harvest


Cropia would like to know if they should attempt to commercialize this chemical in the US and, if so, what the right pricing policy would be.


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.


Suggested case structure

Key question: Is the estimated profitability high enough for Cropia to attempt to commercialize this chemical?

Exhibit 1 


 


Suggested steps ranked by priority:
  1. Volumes: Understand whether the market size is large enough to justify the product launch. If there’s no market, no point in launching the product.
  2. Price: Identify the right pricing point based on:
    1. Availability of similar products on the market
    2. [If similar products are not available in the market] Value (incremental profit) generated for customers
  3. Profitability
    1. Cost base: Check that cost base ensures profitability at the optimal price level
    2. Estimate potential profit


Make sure the interviewee builds a solid structure that includes all the above 3 elements

If needed, share Exhibit 1 with the interviewee


1. Volumes

The interviewee should enquire about the revenue generated by growing strawberries in the US. 

Share Exhibit 2 with the interviewee to estimate market size


Exhibit 2 


 


Market size estimate: The total revenue generated by growing strawberries in the US is given by



Hence,


36,000$∗(45∗2,000)=3.24 𝐵𝑛$


Key insight

The market size looks large enough to continue the analysis.


2. Cost synergies

a. Value added

If needed, brainstorm with the interviewee on how to price a product, ensuring that he understands that (a) if there are direct competitors, competitor’s prices should be considered; (b) if the product is new and there are no clear competitors, the key is understanding how much value is generated for the end user


The interviewee should enquire about whether there are similar products on the market, since in that case price would be based on competitors’ prices


There are no products in the market that can match the productivity enhancement of Supercrop


At this point, the interviewee should try to estimate the benefit for farmers in terms of additional profit generated by using the product. He should remember the case prompt and ask the interviewer additional data about the two benefits listed:

    • Improved quality
    • Earlier harvesting


If needed, prompt the interviewee to recall the two benefits listed at the beginning of the case


The interviewee should enquire about improved quality and earlier harvesting


b. Benefits: improved quality

Market information to be shared:

    • Two types of strawberry currently produced:
      • Magnus strawberries (75% of total), sold as whole strawberries
      • Minor strawberries (25% of total), sold to juice manufacturers for smoothies 
    • All strawberries are sold for the same price
    • Applying Supercrops would increase the yield of Magnus strawberries by 20%

The interviewee should estimate the benefit for farmers in terms of improved quality. From the previous table he should remember that the revenue/acre/year is 36,000. Since the yield of Magnus strawberries is going to increase, we can assume revenues for Magnus strawberries to increase in line. Also, since there is no hint suggesting that any of the cost drivers will change, we can expect the increase in revenue to translate itself in a profit increase.


𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡:36,000$∗0.75∗0.20=5,400$/acre/year


If needed, prompt the interviewee to estimate the additional profit using a standard and simple unit of measure. The best one is additional profit/acre/year, since then it is easy to sum up the total benefit and multiply it by the number of acres


b. Benefits: earlier harvesting

Share Exhibit 3 with the interviewee. It shows the number of days needed for each phase of the strawberry cultivation cycle and its cost/acre/day


Exhibit 3 


 

Additional information to be shared together with the graph:

    • Strawberries are cultivated in greenhouses and they can be grown in any season or weather condition throughout the year.
    • The cultivation cycle is repeated multiple times throughout the year
    • Costs in the graph represent all costs incurred by farms

If the interviewee gets stuck, the interviewer can give the interviewee some hints.


The first benefit of earlier harvesting is given by the difference in costs due to a lower number of days required for the “Growing” phase. Whilst all other phases will take the same number of days, the “Growing” phase will decrease from 80 to 50 days. 

Additional profit/production cycle/acre is given by the difference in days multiplied by cost/acre/day

𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡/𝑐𝑢𝑙𝑡𝑖𝑣𝑎𝑡𝑖𝑜𝑛 𝑐𝑦𝑐𝑙𝑒 :(80−50)∗30=900$/acre

However, we know that the cultivation cycle is repeated multiple times throughout the year. Since the whole cycle takes 121 days, it can be repeated 3 times per year (approximately 365/3). Hence, farmers will benefit from the reduction in costs three times/year.

𝑨𝒅𝒅𝒊𝒕𝒊𝒐𝒏𝒂𝒍 𝒑𝒓𝒐𝒇𝒊𝒕 =𝟗𝟎𝟎∗𝟑=𝟐,𝟕𝟎𝟎$/𝐚𝐜𝐫𝐞/𝐲𝐞𝐚𝐫

The second benefit of earlier harvesting is given by adding more cultivation cycles: since cycles will be shorter, there will be time to repeat them more times throughout the year. Currently the cycle takes 121 days and hence it is repeated 3 times per year (appr. 365/3) but in the future it will take 91 days (121 - 40) so one more cycle can be added in a year (91 is about 365/4). In order to estimate the additional profit/acre/year arising from adding a cycle we should calculate the full profit of a cycle, including the benefits estimated so far:

  1. Estimate current profit/cycle

Current profit/cycle is given by the difference between the revenues per cycle and the costs listed in Exhibit 2 multiplied by the relevant days. Whilst we do not have the revenues per cycle, we can infer them by dividing the yearly revenues of 36,000$ by the current 3 cycles.



  1. Estimate the additional profit per cycle given by all the benefits calculated so far (improved quality and the first benefit of earlier harvesting). Since additional profits are on a yearly basis they should be divided by three.

𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 =(5,400+2,700)/3=2,700$/𝑎𝑐𝑟𝑒/𝑦𝑒𝑎𝑟


  1. Sum up total additional profit arising from adding one cultivation cycle

𝑨𝒅𝒅𝒊𝒕𝒊𝒐𝒏𝒂𝒍 𝒑𝒓𝒐𝒇𝒊𝒕 𝒅𝒖𝒆 𝒕𝒐 𝟏 𝒂𝒅𝒅𝒊𝒕𝒊𝒐𝒏𝒂𝒍 𝒓𝒐𝒖𝒏𝒅 𝒐𝒇 𝒄𝒖𝒍𝒕𝒊𝒗𝒂𝒕𝒊𝒐𝒏 :𝟓,𝟖𝟎𝟎+𝟐,𝟕𝟎𝟎=𝟖,𝟓𝟎𝟎$/𝐚𝐜𝐫𝐞/𝐲𝐞𝐚𝐫

c. Price point

Identifying the price point

At this point, the interviewee should try to figure out a reasonable price point that customers should be willing to pay based on the estimated total benefits. Two key steps:
  1. Estimate total incremental profit
  2. Estimate which share of the incremental profit can be captured through prices

    If needed, prompt the interviewee to focus on incremental benefits rather than costs: the price customers are willing to pay does not depend on your costs


    1. Incremental profit


    𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 =5,400+2,700+8,500=16,600$/acre/year


    2. Share of the incremental profit can be captured through prices


    Working in our client’s favour is the monopoly nature of the product, but working against it is the newness and resulting lack of social proof. The best answers will be between 20% and 50%. 


    After the interviewee gives you his or her percentage, say that we will use $4,000/acre/year as our pricing for the sake of simplicity


    3. Profitability

    Estimating potential profits

    The interviewee should enquire about the production cost base to ensure that profits can be reached. 


    Cost information to be shared:

      • 10 kg of Supercrops are needed for an acre in 1 year
      • Production cost is 7.5$/kg
      • Current excess capacity can be used for production: no relevant fixed costs

    Profitability/acre can be calculate as follows: 


    𝑃𝑟𝑜𝑓𝑖𝑡/𝑎𝑐𝑟𝑒/𝑦𝑒𝑎𝑟=𝑅𝑒𝑣𝑒𝑛𝑢𝑒/𝑎𝑐𝑟𝑒/𝑦𝑒𝑎𝑟−𝐶𝑜𝑠𝑡/𝑎𝑐𝑟𝑒/𝑦𝑒𝑎𝑟=4,000−(7.5∗10)=3,925$/acre/year


    Hence total potential profits will be given by multiplying the above by the number of acres in the market:


    Potential profit: 3,925∗(45∗2,000)=353.25 m$/year


    The opportunity seems too good to be true.


    4. Other factors

    Prompt the interviewee to focus on potential risks and other non-financial factors that should be considered


    Potential other factors to be considered include:
    1. Intellectual property: Do we already have a patent on this product? If yes, when does it expire? If no, is it possible to get a patent? 
    2. Differentiation: Is our product going to be unique in the upcoming years? Is it defensible?
    3. Environmental Issues: Is there any risk of a backlash and/or boycott from the general public? Could the U.S. government attempt to regulate our product?
    4. Operational reality check: Does the company have the resources to do this?
    5. Strategic Fit: Is this opportunity too small relative to the size of the client?
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