❑ Your client is a manufacturer of bicycles
❑ They have been in business for 25 years
❑ They manufacturer and sell three categories of bicycles: ➢ Racing bikes: High end, high performance bikes for sophisticated cyclists ➢ Mainstream bikes: Durable, but not overly complicated bikes for everyday riders ➢ Children’s bikes: Smaller, simpler versions of their mainstream bikes for children ❑ Profits at your client have decreased over the past five years
❑ What is driving the decline in overall profits?
❑ What recommendations might correct the situation?
The first question is to determine what has caused overall profits to decrease. To accomplish this the candidate must first understand what has transpired in each of the three product categories over the past five years during which profitability has slipped. The following are questions and answers that would be provided in an interview scenario.
❑ What are the client’s margins for a bicycle in each of the three segments?
Racing: Cost = $600/unit, Profit=$300/unit
Mainstream: Cost = $250/unit, Profit = $75/unit
Children’s: Cost = $ 200/unit, Profit = $50/unit
❑ What has happened to the market size of each of the three segments over the past five years? Racing: Has remained constant at its present size of $300MM Mainstream: Has increased at 2% growth rate per year to its present size of $1.0B Children’s: Has increased at 3% growth rate per year to its present size of $400MM
❑ What has happened to our client’s market share in each of these segments?
Racing: Market share has decreased from 60% to 30%
Mainstream: Market share has increased from 0% to 5%
Children’s: Market share has increased from 0% to 3%
❑ Who are the client’s major competitor’s in each market segment? What has happened to their market share in each segment over the past five years? Racing: There is one main competitor and a host of small firms. Your main competitor has increased market share from 30% to 50% Mainstream: There exist many, large competitors, none of which holds more than 10% of the market Children’s: As in the mainstream segment, there are many competitors, none with more than 10% of the market
The above information provides enough information to put together a picture of why profits have decreased over the past five years : Your client, with a commanding position in a flat market segment (racing), expanded into new segments (mainstream and children’s). As this occurred, market share decreased dramatically in the most lucrative segment (racing), creating an unfavorable mix. The extent to which profits have decreased can be deduced from some quick math : profits have slipped from $60MM five years ago (=60% x $300MM x 33% racing margin) to $44MM today ( = (30% x $300MM x 33% racing margin) + (5% x $1B x 23% mainstream margin) + (3% x $400MM x 20% children’s margin)).
The dramatic decrease in market share in the racing segment is at this point still unexplained. Questions that would help formulate an explanation include:
❑ Have there been any major changes in product quality in your client’s racing product? Or in its main competitor’s racing product? No
❑ Have there been any major price changes in your client’s racing product? Or in its main competitor’s racing product? No
❑ Have there been any major changes in distribution outlets for your client’s racing product? Or for its main competitor’s racing product? Yes. Previously your client and its main competitor in the racing segment sold exclusively through small, specialty dealers. This remains unchanged for the competition. Your client, however, began to sell its racing bikes through mass distributors and discount stores (the distribution outlets for mainstream and children’s bikes) as it entered the mainstream and children’s segment....