Framework For Marketing Cases

A recent interview I had unexpectedly changed from a standard behavioral interview, ("so, what's your greatest weakness?"), into a full-blown case interview.
I had to switch gears from trying to convince someone how awesome I was into actually having to use my brain-piece.

The case question was something that had to do with Lenovo wanting to open an authorized service center in El Salvador. My role was to determine if this would be a profitable business venture. My initial answer was terrible and I won't even reprint it here. After the carnage, the interviewer politely outlined the case framework that I should have used.

Among other things, I am a fan of acronyms. The case framework he provided goes from the macro environment to the micro environment is as follows:
PESTLE, PPPP, CCCC

Macro:

P...olitical
E..conomic
S..ocial
T..echnological
L..egal
E..nvironmental

Marketing:

P..roduct
P..rice
P..romotion
P..lacement

Micro

C..ustomer
C..ost
C..ompetition
C..apability

Net Present Value/Porter's 5 Forces.

So start from macro and go to marketing, then to micro and then finally do NPV or Porter's 5 Forces analysis depending on if its a profitability case (NPV) versus a market entry case (P5F). Going back to the Lenovo case, I should have begun by talking about/asking questions about the political environment in El Salvador, the economy, and other macro factors in that section, paying particular attention to the technological section: How many Lenovo computers were sold in El Salvador last year? How does it compare to the total number of computers sold and what is the market share? Who are the competitors and what are the barriers to entry?

Remember for all case interviews, its best if you turn the case question into a conversation: ASK QUESTIONS! No one expects you to know the political situation in El Salvador. (Unless you are interviewing in El Salvador)

Moving onto marketing, in this case the product is the authorized service center. So how much will the ASC cost? (Price) How are we going to let our El Salvadorean customers know about it (Promotion) and where exactly will it be located (Placement)? All of these are relevant questions you can ask the interviewer.

Moving on, we analyze the 4 C's looking at the individual needs of the customer. This is basically building a profile of who our final consumer will be and what it will cost us to provide service to them and how much revenue we might generate from them.

What's next? If we do a NPV analysis, we need to know how much money we will put down to build the ASC in the first place. This number we determined in the Price section. For NPV it will be defined as C₀. How much the initial investment is and cash flows generated by said investment in years 1-N should be given or ask the interviewer. Same goes for the discount rate, however some might ask you to determine the discount rate for yourself (how to do this described below).

NPV =   -C₀ + C₁/(1+R)¹ + C₂ /(1+R)² + C₃/(1+R)³ +.... + C_n/(1+R)ⁿ

Or if you want the fancier looking formula here it is:

C_t is the C₁, C₂, C₃...C_n. These are the expected cash flows from year one, year two, year 3...to year n.

R = Discount Rate. It's the rate of the opportunity cost of investing C₀ in an ASC instead of a well diversified stock portfolio or buying treasury bonds. How do you find the discount rate? This formula:

R = R_f + Beta(R_mp)

Where
R = Discount Rate
R_f = Risk free rate of return, or the current Treasury Bill rate
Beta = Riskiness of the venture (set by managers after considering PESTLE)
Rmp = Rate of market premium (rate of growth of a well diversified stock portfolio, traditionally 8-9%)

Back to the given numbers in the Lenovo ASC:
C₀ = Initial Investment = $2,000,000
C₁-C₅ = Cash flows from year 1-5 = $300,000 each year.
R = 5% + 1(9%) = 14% = 0.14

Back to the NPV formula:

NPV =  -$2,000,000 + $300,000/(1+0.14)¹ + $300,000/(1+0.14)² + $300,000/(1+0.14)³ + $300,000/(1+0.14)⁴ + $300,000/(1+0.14)⁵

NPV = -$2,000,000 + $263,157.89 + $230,840.25 + $202,491.45 + $177,624.08 + $155,810.60

NPV = -$970,076

Since the NPV for the Lenovo ASC is negative, the recommendation is to NOT build it. The reason is because Lenovo stands to lose almost a million dollars over the next 5 years should they choose the build the ASC instead of investing in treasury bills or a well diversified stock portfolio. And this calculation was done using a relatively conservative estimate of Beta, which assumes that the venture is less risky.

In any case where you have a negative net present value the recommendation will generally be to not build or invest, because you know you will end up losing money.

For use in analyzing cases this framework is very handy in drilling down from the macro to the micro and having some solid numbers to back up your decisions to build or not to build. If the case is determining whether or not to enter a market, simply use Porter's 5 forces instead of NPV analysis.

Now I only wish I could have sent this post to myself several weeks ago before my case interview...