Wharton Casebook 2007-2008

Wharton Casebook 2007-2008

(Parte 5 de 5)

Logical Conclusion:

The cost of operating the new retirement home is higher, however it alone tells nothing about the problem our client is facing. Let me go ahead and calculate the margin that is generated in different homes. The new retirement home not only has higher costs, but it also has higher revenues. Consequently, margins generated by each home are pretty consistent and, if anything, the new retirement home generates higher margin in both absolute and relative terms. Having analyzed the performance of the new retirement home and compared it to the performance of a typical retirement home that our client operates, we reached the conclusion that our client has no profitability problem. The new home generates 61 0 margin versus 53 600 in old home or about 17% in both cases. On the other hand, there are some significant differences in cost structure for the new and old retirement homes, so we can study it in more depth and potentially reduce costs in both of them to generate higher margin.

Costs OLD (typical) retirement home NEW

Amenities Total 48 0 54 0 - Fixed component 24 0 30 0

- Variable/month per apartment 30 60

- Total Variable 24 0 24 0 Maintenance Total 100 0 80 0 - Variable/month per apartment 125 200

Utilities Total 38 400 45 0

- Variable/month per apartment occupied 60 125

- Apartments occupied 640 360 Medical Facility Total --- 60 0 SG&A Total 80 0 60 0 Total Costs 266 400 299 0 Total Margin 53 600 61 0 Gross margin, % 16,8% 16,9%

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E. Practice Case #5 – R&D Portfolio

Question (posed by interviewer):

You are part of our team working for a Pharmaceutical manufacturer. We've been asked to look at their current R&D portfolio and assess whether they're maximizing their potential with their current projects. My questions to you are: (1) How can you help them decide what information you would need and (2) What components do you think would round out a portfolio for this company?

Interviewer Guidance and Information to be given if asked: Current staffing needs are at equilibrium and layoffs and hiring are not expected to be necessary

***Remember to make them brainstorm. You want them to come up with categories for this company to consider when developing their R&D portfolio. For any questions, make sure you keep them on track with this goal. They should be naming different areas to look at (i.e. investing in current projects versus Investing in creating new business)***

Logical Conclusion:

The company should be considering looking at multiple areas of its business such as whether the R&D is for new business or current business, new technologies versus current technologies, spread of projects across your business units, big projects versus small projects, high dollar investment versus low dollar investment, short duration projects versus long duration projects, etc. (There may be a few others but these are the pertinent ones.)

Additional Requests, Attachments, Etc:

Interviewer - When the interviewee has provided their conclusion for the areas they think the company should be looking at for a successful mix, please ask them to pick two and create a 2x2 diagram for you. Please ask: "If you were to look at these two areas, how would you suggest breaking up the expenditure." ***Please see example attachment for the appropriate 2x2 graph and sample calculations***

If asked how much the R&D expenditure is annually, answer with $1M, but this is not relevant to calculations and they can be done using percentages only.

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Successful Roadmap:

A successful interview would follow this "logical path:" (1) Develop a small framework from which they follow. Potential framework categories include Revenues and Expenses, Regulatory Environment, Internal Issues, etc; (2) Start asking appropriate questions based on this roadmap. (example: "I would really like to look at the current state of finances for the company. There is the possibility that for expense reasons, they may not be able to heavily invest in a lot of R&D Projects." (3) When prompted, conclusion should be short and sweet. "In my opinion, this pharmaceutical company should really focus on 4 different categories. These are large investment versus short investment, longer projects versus shorter projects, new business versus existing business, and the mix over different business units. These will allow it to maximize its spending investment and reduce their risk by not being overly invested in one area." (4) The 2x2 should follow. It doesn't matter which areas they pick to compare but the math should be easy. If there is a problem with the math, an easy prompt can be given without too many "points" being taken off.

Sample 2x2:

Category:Duration of Projects<- this can be any category Long 40% Short 60%

High 40%

Category: $$ Investment

The main points to make sure the interviewee gets correct is that all four boxes together should = 100% and that each of the columns and rows should equal the percentage allocated for that particular category (ie 40% for long term projects or 60% for low $$ investment projects)

$$ Investment: 40%; Duration: 40%; Total % of All Projects: 16%

$$ Investment: 40%; Duration: 60%; Total % of All Projects: 24%

$$ Investment: 60%; Duration: 40%; Total % of All Projects: 24%

$$ Investment: 60%; Duration: 60%; Total of All Projects: 36%

(Parte 5 de 5)