St. Olaf Management Consulting Group 9/22/13 Case Prep 2

Agenda Mental Math Tricks Useful equations & organization formats Practice Case 1 & 2 Data Analysis Do’s & Don’ts Practice Case 3

Mental Math Tricks Split apart large numbers & decimals ROUND! Ex: 105 x 42 = 42 x 100 + 42 x 5 = 420 + 210 = 630 ROUND! Ex: 105 x 42 = 42 x 100 + 40 x 5 = 420 + 200 = 620 Interviewer will ask for more precise calculations if needed Make a weird fraction look like a common one 63/184 60/180 6/18 1/3 = 33% Useful for percent change problems, e.g. market growth rates, & percent of total revenue problems

Mental Math Tricks Continued Memorize Fractions Ex: 1/9 = .11, 2/9 = .22 … n/9 = .nn Gives a range to estimate by Ex: Cost over total revenue is between 3/8 and 2/5, thus cost must be between 37.5-40% of total revenue Base of 10% Ex: 10% of 220 = 22 5% is ½ of 22 = 11 15% = 11 + 22 = 33 20% = 2 x 22 = 44

Mental Math Tricks Continued Rule of 72 Estimates the number of periods needed to double an investment Example: If you invest $100 with a compound annual interest rate of 9%, how many years would it take for the investment to double? 72/9 = 8 years Check the work: 100 x 1.09^8 = $200 Practice Problem: Invest $50 with a compound annual interest rate of 5%, how many years until the investment doubles? 72/5 = ~ 14 years

Math Do’s & Don’ts Do’s Don’ts Write out equations Watch out for dropping zeros! Check totals Just give the answer…push to the ‘So What’ – what’s the implication of this number? What does it mean for the client? Do the #s make sense?

Contribution Analysis

Organizing Data Information Segment Share Volume Total Revenue Cost Revenue/Unit Cost/Unit Profit/Unit Total Profit

Practice 1: Travel Agency Question: A travel agency makes a 10% commission on all of its travel bookings. Their current profit before taxes is $1MM, while the industry average ranges from $2MM to $3.5MM. Why are they making less than the industry average? HBS MCC Guide, 53

Practice 1: Quantitative Info Given Total Gross Revenue per year = $10M Revenue is the same for competitors Customer segments are business and leisure Business comprises 40% of total revenue and leisure the remaining 60% Total transactions per year is 1M 300K for business travelers, 700K for leisure Cost per transaction = $9

Practice 1: Calculate profitability of each segment Share Volume Total Revenue Revenue/Unit Cost/Unit Profit/Unit Total Profit Business 60% 300K $6M $20 $9 $11 $3.3M Leisure 40% 700K $4M $5.71 $(3.29) $(2.3)M 100% 1M $10M $1M

Practice 1: Generate Solutions Benchmark the cost structure of other travel agencies. Negotiate with the airlines on the possibility of charging a premium for leisure tickets or capture a larger commission through cost charged to the customer. Look into the possibility of reducing cost per transaction for the leisure travelers. Offer the leisure traveler other products to increase revenue per transaction such as hotel bookings and travel packages. Become a niche player and focus only on the business traveler

Data Sheet Analysis Do’s Don’ts Look for ‘high’ level information Look at every individual cell You will get bogged down by the data and miss the greater points Totals Net income Examine trends Talk out loud – explain to the interviewer what you’re analyzing Push to the ‘So what’ – what does the data reveal?

Practice 2: Projecting Profits Project the profit for Year 8 Look for trends & identify outliers Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 $263M $554M $615M $600M $610M $750M $810M X

Practice 2: Solutions Two methods Only use the growth rate from Y6 to Y7 to project the profit in Y8 810-750 = 60 60/750 = ?? Range: Between 10% and 1/15 (Round down to 5/75) or 6% Approximation: 1/12 = 8% Y7 * 1.08 = 810 * 1.08 = $875M Estimate the average growth rate from Y4 to Y7 Y4 to Y5: < 1% Y5 to Y6: 25% Y6 to Y7: 7% Average growth rate = ( 1%+25%+7%)/3 = 11% Y7* 1.11% = $899

Data Analysis: Example Question Regional Jet Corporation is a U.S. manufacturer of regional airplanes-airplanes with 100 seats or less. Its business consists of two types of aircraft: (1) jet engine, 80 to100-seat aircraft and (2) propeller, 20 to 30-seat aircraft. In fiscal year 1999, Regional Jet delivered 100 jet engine aircraft and 150 props. This represented a unit volume increase year-over-year of 10% and 5%, respectively, and revenues of $730 million and $225, million, respectively. Although overall profitability for Regional Jet in 1999 was a competitive 5% economic profit margin, profitability varied significantly by business. The prop business generated a stellar 30% profit margin, while the jet engine business was unprofitable with a margin of 3%. Over the past several years, Regional Jet has experienced eroding profitability in its jet engine aircraft business. Its prop business, despite being profitable, has been flat in most recent years. At a January 5th analyst conference (a meeting with the investor community) Regional Jet's senior management team announced that the company was committed to managing for value. To this end, Regional Jet has hired you and a team of consultants to help the company develop and implement the value-maximizing strategies for its businesses. HBS MCC Guide, 79

Data Analysis: Example Analyze the data below How does each of the business segments contribute to profitability?

Data Analysis Example: Profitability by customer segment of Jet Engine Aircraft Business How does each of the customer segments contribute to profitability?

Data Analysis: Takeaways from data Jet Engine Aircraft Business is unprofitable Profit margin is -3%, which means Regional Jets is losing $.03 for every $1 spent Customers who buy 20 aircrafts, representing the largest share of revenues, are to blame for the unprofitability Contribute a loss of $(33M)

Data Analysis: Calculations Why does the profitability vary among customer segments? Calculate price per aircraft Below is the cost per aircraft (Hint: Cost per aircraft is in thousands…what is 1,000 thousands?)

Data Analysis: Solution Steps Customers who buy 1 aircraft (small) Custsomers who buy 3 aircraft (medium) Customers who buy 20 aircraft (high) Calculation Total Revenue/# of Aircraft Delivered $42M/5 $280/35 $408/60 Price per aircraft $8.4M $8.0M $6.8M • Push to the ‘So What’ • Cost per aircraft is $7.8M – the price of an aircraft for Customers who buy 20 aircraft is lower than the cost of the aircraft. •Regional Jet loses $1M for every sale to the 3rd tier of customers.

Data Analysis: Solutions Aggressively pursue new small and medium customers and do not increase sales to existing high level customers. Aggressively pursue new small and medium customers and do not serve any high level customers.