Energy Industry

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ENERGY INDUSTRY

How to Analyze Economics of Electricity Market in Argentina?

Case Type:finance & economics;industry analysis.Consulting Firm:Analysis Groupfirst round job interview. Industry Coverage:energy industry.

Case Interview Question #00525: You are a consultant on a project to study the economics of the electricity market in the South American country of Argentina.The current population of Argentina is around 41 million. The electricity market in Argentina has three types of electricity plants: coal fired, oil fired and gas fired.

The table below summarizes the economics of each type.Type of power plant based on fuel source Coal Oil GasCost per unit of electricity 35 75 125Price per unit of electricity 50 100 175Annual market supply available (units of electricity) 10 15 25

The market operates on a Marginal Price basis That is, the price of all units of electricity sold will be equal to the price of the last unit sold. For example, if themarket demand equals 50 units then the price of all 50 units sold will be $175 per unit irrespective of it is coal fired, oil fired or gas fired. How would you analyzethe electricity market in Argentina?

Possible Answers:

This industry analysis case tests the candidates economics fundamentals and quantitative skills. The candidate just needs to answer the following questions.

Question #1:Draw a demand curve for a demand range 0 to 50 units.

Possible Answer:

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See Figure 1, the demand curve for electricity market in Argentina.

Question #2:Who makes the most profits ($) when the market demand is 35 units?

Possible Answer:

At demand = 35 units the market price per unit will be $175 per unit. From the calculations done in the table below, the oil fired power plants will make more

profits.

Type of power plant Coal Oil GasCost per unit 35 75 125Price per unit 175 175 175Capacity sold at demand = 35 units 10 15 10Profits (175-35) * 10 = 1400 (175-75) * 15 = 1500 (175-125) * 10 = 500Question #3:Assuming no further capacity addition, within what demand ranges (1) Coal fired plants make more $ profits than others? (2) Oil fired plants makemore $ profits than others? (3) Gas fired plants make more $ profits than others?

Possible Answer:

a. Coal fired plants are the most profitable for all values of demand between 1 and 25 units. b. Oil fired plants are the most profitable when demand is between 26and 50 units c. Gas fired plants are never the most profitable. They make the least dollar profits among the 3 in the given demand range

Calculations: Profits in dollars

Plant type Coal Oil GasDemand = 1 10 (50-35) * 10 = 150 0 0Demand = 11 25 (100-35) * 10 = 650 (100-75) * 15 = 375 0

Demand = 26 50 (175-35) * 10 = 1400 (175-75) * 15 = 1500 (175-125) * 25 = 1250

Question #4:What are the implications of this kind of market conditions for your client who is in this market?

Possible Answer:

A new competitor who may enter the market can change the market economics depending on what type of power plant the new player sets up and how muchcapacity it installs.

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It is important to forecast demand accurately and if required diversify the portfolio with a combination of different types of power plants.

Viessmann Group to Devise Growth Strategy for Boiler Business

Case Type:add capacity, growth.Consulting Firm:Siemens Management Consultingsecond round job interview. Industry Coverage:industrial equipment;energy industry.

Case Interview Question #00515: The Viessmann Group is an international heating systems manufacturer headquartered in Allendorf (Eder), Germany. Thecompany controls 23 production and project management divisions in 11 countries around the world. As of 2011 the company employs 9,600 people and reportsannual sales of 1.86 billion. Viessmann Group provides an extensive range of HVAC (heating, ventilation, and air conditioning) products, inc luding combined heatand power generation (CHP), heat pumps, sU.olar thermal systems, ventilation and air-conditioning equipment, etc.

Youve been approached by the boiler division of Viessmann Group and they want you to help them devise a growth strategy. The ir main goal is to increase salesand preferably profits too. How would you go about the case? What recommendations would you give to the boiler division?

Possible Answer:

Candidate: So the client is the boiler division of a large company and wants us to help develop a growth strategy to increase its sales and profits. Are there anyother goals I should be aware of?

Interviewer: No, that would be all.

Candidate: Before we take a look at the company specific information, I would like to know more about the industry, such as current trends, any new technologicaladvances, nature of competition, etc.

Interviewer: Boiler companies typically have a line of products based on capacity and fuel used. There are no new advances in recent times. 80% of the market isorganized and the main customers are the thermal power plants.

Candidate: Hmmm. A company can grow either by expanding market share in its existing market, entering new geographical markets, coming out with newproducts or by acquiring another company. I would like to know more about the client company. Can you please tell me:

What this companys products are Who are its customers are

Where does it operate Its access to cash/financing resources

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Its competitorsInterviewer: Its a medium size firm about Euro 200 Million in annual sales, operates primarily in Germany. Its the biggest player in the organized segmentwhich is approximately 80% of total market. Its main customers are thermal power plants, etc. Products can be classified on the basis of capacity and fuel for theboilers. It doesnt have much cash or technology. Its a midget compared to global players in the same industry.

Candidate: Well, not being cash-rich restricts the firm from exploring various growth options. For instance, new product development seems to be out of questiongiven no access to technology advances.

Similarly, exploring new geographical markets, even overseas markets, would be out of reach presently as there is dearth of capital. Acquiring another company isa possibility if synergies exist that can to offer significant benefits out of the merged entity. But, we also must keep in mind the results realization lag in case of amerger. Again, M&A activity presently does not seem feasible.

Interviewer: Sounds reasonable.

Candidate: Now that we have eliminated some of the options, I would like to focus on current market and consolidation of the existing product line. Specifically, Iwould like to know the individual products on offer, margins to be made on each of them and their individual growth potential.

Interviewer: It is a fair point. Our client presently offers boilers based on its capacity and fuel type. Typically, they get a maintenance contract for a specified timeperiod as well. As far as the growth potential is concerned, there are quite a few captive power plants being developed currently in Germany. Additionally, thereare a couple of really big power plants announced by our big customers. Margins are negotiable and depend to a great extent on the customer in question.

Candidate: I see. Given these facts, I would look at the mix of products on offer. To that effect, I would like to know the share of each of the individual product typein the sales. Post that, I would like to map each product with its growth potential, its current market share in its category and the margins to be retained.

Interviewer: I think you have figured it out. What would you like to suggest to the client company?

Candidate: In my opinion, our client should focus on the products which promise growth and also offer higher margins. Possibly, they are currently providing a

standard capacity type or a fuel type to most of the customers. They should rather look at the individual customer needs and design their offer accordingly. Thisbenefit to customer would also enable them to command a greater margin on each product sold. Sales force incentives could also be aligned with customer-centricity in terms of correct product requirement assessment and supply. In short, focusing on the right product is the key for growth for our client.

Interviewer: Great. I think the analysis is sufficiently thorough. We can stop here. Thank you.

Candidates Notes:I also talked about cyclic goods, i.e. boilers and other such heavy industrial goods are highly cyclic in nature, meaning that if GDP grows by an xpercent, the sales of these goods would go up by 5x percent, and if GDP goes down by x%, their sales would also go down by 5x%. The interviewer agreed butreminded me that theres a lag in between GDP growth and growth of heavy industries.

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Comments:One can also explore profitability of operations, possible efficiency measures, credit policies, sales force incentives.

Power Company Entergy to Merge with Gulf States Utilities

Case Type:mergers & acquisitions.Consulting Firm:Booz & Companyfirst round job interview. Industry Coverage:energy;utilities.

Case Interview Question #00409: Booz & Co is advising Entergy Corporation (NYSE: ETR), a large S&P 500 American power and utility company. Entergy is an

integrated energy company engaged primarily in electric power production and retail distribution operations. It is headquartered in the Central Business Districtof New Orleans, Louisiana. Its U.S. Utility segment provides retail electricity services to approximately 2.7 million customers in Arkansas, Louisiana, Mississippi,and Texas.

Recently, Entergy is looking to merge with a rival: Beaumont, Texas-based Gulf States Utilities. The merger would cost $300M in transaction fees and integrationcosts to execute. Should they merge or not? Our client Entergy would like to know where the possible synergies would be.

Note to Interviewer:

The objective of this Merger & Acquisition case is

To see if the candidate can structure the problem To see if the candidate can identify possible synergies To see if the candidate can complete math calculationsSuggested Framework:

Current Product Mix Cost Structure Possible SynergiesQuestion #1:What are some possible synergies in the merger?

Possible Answer:

Decrease in management costs Eliminate duplicate distribution lines Increased plant utilization

Increased purchasing power of inputs Ability to long in longer term contracts due to larger size Decreased competition

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Consolidated pricing Increased lobbying powerQuestion #2:What would the possible savings be?

Additional Information:(to be provided to candidate upon request)

Table 1. Tons of coal purchased before the merger

Firm Coal purchased per year (ton) Price ($/ton)Entergy 100M $25Gulf States Utilities 50M $30

Under the merger, the combined company would be able to purchase coal for $24/ton.

Possible Solution:

Firm Coal purchased per year (ton) Price ($/ton) CostEntergy 100M $25 $2,500MGulf States Utilities 50M $30 $1,500MTotal $4,000MCombined 150M $24 $3,600MSavings $400M

Question #3:Should the client go ahead with the merger?

Possible Answer:

Yes, the merger will bring in cost savings of $400M per year, greater than the merger transaction fee and integration costs of $300M.

Bonus Question:What would happen to your recommendation if the cost of coal was variable and went up $2/ton? List concerns and summarize.

Pepco Holdings Form Joint Venture with Malaysias TNB

Case Type:market entry/new market.Consulting Firm:Siemens Management Consultingfirst round job interview. Industry Coverage:utilities;energy

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industry.

Case Interview Question #00354: The client Pepco Holdings Inc. (PHI, NYSE: POM) is one of the largest electric utility and energy delivery companies in the mid-Atlantic region of the United States. Headquartered in Washington, D.C., the company serves about 1.9 million customers in Delaware, the District of Columbia,Maryland and New Jersey.

With the recent deregulation of the electric utilities industry, there is increasing competition in the U.S. market. Therefore, the client is considering expandingoverseas. They have been slowly investing throughout the world and have the opportunity to potentially enter into a joint venture with Tenaga Nasional Berhad

(TNB), one of the largest electric utility companies in Malaysia. The deal will encompass two U.S. power plants and two Malaysian power plants and the twocompanies (Pepco Holdings and Tenaga Nasional Berhad) will split the profits 50/50. Should the client PHI enter the joint venture?

Possible Solution:

1. Clarify the alternatives:

Why would the client PHI want to do this?

What do they get out of the joint venture (JV)?

Think about doing a COUNTRY ANALYSIS is the country Malaysia a stable place to do business? What is the economic outlook? Are there growth opportunities?What does the electric utilities industry look like in Malaysia? Competition, size, growth, etc.?

Are there barriers to entry for a foreign firm? If so, the JV would be an easy way for the client (an American company) to enter the market without all of thedifficulties/restrictions that they would face if they attempted to enter on their own.

2. Broad strategic analysis

Try to think of the benefits for the U.S. company (PHI):

Lower barriers to entry if they go with the JV Diversifying their interests beneficial since the U.S. market is highly competitive

Adopting a presence in the foreign market Diversifying their risks dont put all eggs in one basketWhat is the downside?

Country risks economic & political stability Currency risks3. Financial Analysis

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NPV analysis will the cash flows provide value?

NRG Energy Considers Entering Telecommunications Market

Case Type:new business;business competition.Consulting Firm:A.T. Kearneyfinal round job interview. Industry Coverage:energy industry;utilities;telecommunications .

Case Interview Question #00352: Our client NRG Energy Inc. (NYSE: NRG) is an American energy company and utilities provider headquartered in Princeton,

New Jersey. NRG Energy offers gas and electricity services to New Jersey and some surrounding areas. The company owns and operates one of the industrys mostdiverse generation portfolios (including nuclear, wind and solar power) that provides nearly 26,000 megawatts of electric generating capacity, or enough tosupport nearly 21 million homes. NRGs retail businesses, Reliant Energy and Green Mountain Energy Company, combined serve more than 1.8 million residential,business, commercial and industrial customers.

With recent deregulation, our client NRG Energy is considering getting into the lucrative telecommunications market. You have been hired by the seniormanagement of NRG to advise them on their planned market expansion. Should the client do it or not? Why?

Possible Solution:

My approach to this start a new business type of cases was a basic industry analysis of the telecommunications market (size and growth), and then a four Csanalysis: our competitors, our competencies and how they would apply to this market, the cost of playing in this market, and finally, the different customers andtheir needs.

Basic Industry Analysis: What is the telecommunications market like today, in terms of market size and growth trend?

As I had expected, this market is huge and growing very rapidly. With convergence everyone wants to compete in this industry, but no one really knows where it isgoing.

I then went to first of the 4 Cs Competition: What does the competitive landscape look like?

I note that telecommunications is certainly a global market and we are currently only a regional player, which will certainly affect our strategies if we plan to enterthis market. This becomes apparent as we analyze the competition. The big players: AT&T, Verizon, Sprint, T-Mobile, the Regional Bell Operating Companies are alleither global or becoming global.

I also note the emergence of non-traditional players in this market: satellite providers who are attempting to provide all of these services wire free. Although Irecognize their presence, I note that it will probably be some time before this becomes a cost effective option for most customers. I at this point hypothesize thatwe may not have the resources to go head to head against the big boys, but there may be a profitable niche.

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I then switched to the 2nd CCompany Competencies (Competitive Advantage): What are our core competencies, that would provide the client with acompetitive advantage?

Before asking this, however, I noted that we already have wires (electricity) running to the houses in our regions and thus have an infrastructure advantage thatwe should be able to leverage. In addition, we have significant contact with our market and thus have some consumer knowledge that global players may not have.

There may be another advantage for our client. Another important player in the value chain is the CAPs (Competitive Access Providers, some type oftelecommunications provider company that competes with other, already established carriers), and these small companies are the link between the global players

(AT&T, Verizon, Sprint, etc.) and the local market. Our client might have the capability to bypass the CAPs in our region because they can provide the same servicesthat the CAPs do.

I also propose some other potential alternatives: we could be a lender to some of these CAPs, as they are small players who often do not have access to capital. Wecould also potentially have joint ventures with some CAPs.

I switched to the 3rd C Customers

My analysis of the customers points to some potentially profitable niches for our client. I confirm that there are two distinctly different segments of customers inthis market. There are the business customers and the residential customers, each with very different needs. I confirm that business customers would be moreprofitable (less price elastic) than residential customers.

I also note that there are a number of different services that telecommunications companies provide: cable, local phone service, long distance phone service,internet access, etc., and that the demand for these services would differ for each of the two customer segments.

Finally, I switched to the 4th C Costs

From a cost perspective, I note that the cost of becoming a global player, and investing in the necessary infrastructure will probably not be a profitable endeavor.The industry is highly capital-intensive, and this would put us at a large disadvantage relative to larger, global players like AT&T, Verizon, Sprint, etc.

Recommendations for Client:

To summarize, I recommended the following for our client:

Although more rigorous analysis needs to be performed, at first glance it seems that if our client avoids going head-to-head with the big, global players, they couldpotentially leverage its internal capabilities in order to compete in a profitable niche in this large, rapidly growing market of telecommunications.

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National Grid USA Faces Fierce Competition After Deregulation

Case Type:business competition/competitive response.Consulting Firm:Celerant Consulting2nd round job interview. Industry Coverage:utilities;energyindustry.

Case Interview Question #00315: Your client National Grid USA is a subsidiary of London UK-based multinational electricity and gas utility company NationalGrid plc (LSE: NG, NYSE: NGG). Headquartered in Waltham, Massachusetts, United States, the company operates over 9,000 miles (14,000 km) of electricitytransmission and delivers electricity and natural gas to New England areas of the Northeast states of Massachusetts, New Hampshire, New York, Rhode Island andVermont, serving over 3.3 million customers with electrical power and 3.4 million customers with natural gas.

National Grid USA has hired you because the company is facing increasingly fierce competition due to deregulation in their industry. Soon, the electricity carrier(wires) business will be separate from the electricity generation (power plant) business. Any power company generating electricity will soon be able to sell in theirNew England market. What would you recommend the client National Grid USA to do?

Possible Answer:

Suggested Framework:3Cs (Corporation, Customer, Competitors).

1. Competition:

The electricity utility industry is a business with high fixed costs, and low marginal costs (like airlines and telephone). Therefore, consequences:

Incentives to produce a lot in order to amortize the initial investments; High barriers to exit, which causes increase in competition intensity; However, it takes 7 year to build a power plant, creating huge barriers to entry; Also, economies of scale and learning curve will give a competitive advantage to existing big players.Therefore, after deregulation, we can forecast few new entrants, industry consolidation (the biggest players buy out the smallest), but incentive to production

increase and overcapacity.

2. Customers:

The client mainly has two kinds of customers: individuals and corporations. Right now, the level of services offered in this industry is not very differentiated bycustomer type (pricing, flexibility, maintenance).

You also have to talk about the definition of market boundaries here: customers may be loyal and/or they may not have so much choice for their electric company

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in their geographic location. This means that a good strategy might be to choose an area with small potential competition (Dakota for example) for the electriccompany. New England might not be the best.

Another issue is price sensitivity. Electricity is a COMMODITY and customers should be very sensitive to prices.

3. Company:

I (the interviewee) found out that the customers were not satisfied with the level of service of our client; that the client is not a low cost competitor.

Recommendations for Client:

Discuss issues with potential overcapacity, customer sensitivity to prices, incentives to decrease prices to marginal cost. Additionally, our client is not an excellentplayer and does not differentiate among its competitors. Because it is small and regionally located, no chances to benefit from economies of scale. The best waynow is to find a way out. Our client will probably get a good price for their wires and power plants. Additional Notes:

The candidate should always keep in mind that getting out of the business is OK to mention if you explore the other solutions and found that they were not viable!

Philips Electronics to Divest from Home Solar Technology

Case Type:market sizing;new product.Consulting Firm:Alvarez & Marsal2nd round job interview. Industry Coverage:energy industry;electronics.

Case Interview Question #00311: Your client Koninklijke Philips Electronics N.V. (Royal Philips Electronics, Euronext: PHIA, NYSE: PHG) is a global electronicscompany headquartered in Amsterdam, Netherlands. Philips is one of the largest electronics companies in the world with 25.42 bil lion in sales in 2010. Thecompany is organized in a number of sectors: Philips Consumer Lifestyle (formerly Philips Consumer Electronics and Philips Domestic Appliances and PersonalCare), Philips Lighting and Philips Healthcare (formerly Philips Medical Systems).

Recently, the Research & Development (R&D) department of Philips has developed a new product: a device that could replace all energy costs (electric, gas, heating,air conditioning, etc.) using solar technology. The estimated price of the device to the customer would be $5,000/house, with a pay back in 2 to 3 years. The R&Ddepartment says that the estimated investment for the device is $100 million. Question to you: What is the potential market for the device in the U.S.? How wouldyou estimate the percentage of market that will install the device?

Possible Answers:

1. Hypothesis: this device is mainly targeted at residential market.

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The U.S. population is 300 million and there are ~100 households. Assuming that half of the American people live in apartments and the other half live in houses.Therefore, there are 50 million houses in the US = potential market size. An Net Present Value (NPV) analysis looks good here: estimating a 10% margin on theproduct, total market potential = 50 million houses * ($5,000/house) * 10% = $25 Billion! This looks even too good to be true!!

2. To estimate the percentage of market that will install the device, we could run a market survey.

Further facts revealed by interviewer: A survey shows that 30% of homeowners are interested in the device. Additional question: How do we test this percentage?

Possible Solutions:

Pre-order. This is risky since this would be expensive and would require a small sample (big confidence error). Look at similar energy saving devices (new refrigerators, showerheads, etc), see what is the percentage of people who actually bought it after showing interest.The job candidate was then told that people in the US dont buy energy saving devices. They would rather spend their money some other way. Market therefore issmall and the project was stopped.

3. Final Recommendations for client:

The potential market is too small. Right now, we should advise the client not to invest huge amount of money in the device. These kinds of products require animportant word of mouth and the company must be ready either to spend a lot on advertising or to have a long payback period. The other solution is to spend moreon R&D to decrease the investment and the price billed to the customer.

Siemens Energy Facing Strong Competition from GE Energy

Case Type:business competition/competitive response.Consulting Firm:Towers Watson2nd round job interview. Industry Coverage:Energy.

Case Interview Question #00308: Your client is Siemens AG (FWB: SIE, NYSE: SI). Siemens is a global engineering conglomerate headquartered in Berlin, Munichand Erlangen in Germany. The company has three main business sectors: Industry, Energy, and Healthcare. Siemens Energy Sector is the market leader in

manufacturing of power equipment in the U.S. market, providing a wide range of products, solutions and services for power generation, transmission anddistribution.

You have been asked by the CEO of Siemens Energy Sector to assess the threat of a new competitor in the U.S. market. The new competitor is a joint venture formedbetween a leading U.S. competitor GE Energy and a major Mexican manufacturer. The new competitor will manufacture power equipment products in Mexico andship them into the U.S. Their current Mexican operations will remain unchanged and you are only concerned about the U.S. market. Question: What are the issuesand what options does the client have?

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Additional Information:(to be divulged during the course of interview)

Table 1. Comparison of client and competitor

Category Client CompetitorCustomer Any company that generates power; mostly utilities and

large manufacturing facilities.Any company that generates power; mostly utilities and largemanufacturing facilities.

Purchasing Decision Traditionally based on quality; utility deregulation has made

customers more price sensitive.

Traditionally based on quality; utility deregulation has made

customers more price sensitive.Market Share No. 1 (Best Brand Name) No. 5Relative Price High LowProduct Quality High ModerateDistribution Method Small sales force DistributorsOther Products None Many complementaryPromotion None Heavy, to gain share in U.S. marketManufacturing Capabilities Automated, well-run Very manual, trouble integrating after JV

Table 2. Cost Issues (Example of Product Costs)

Cost (Labor and Material) Client CompetitorLabor Rates $10/hr $2/hrAmount of labor used per unit 10 hours 25 hoursTotal Labor Cost $100 $50Material cost $20/unit $22/unitAmount of material used per product 20 units 20 unitsTotal Material Cost $400 $440Total Cost (Labor + Materials) $500 $490Take Aways:

Less expensive labor rate in Mexico, but less productivity as well. Client sources material cheaper than the competitor, which saves money in total cost. Overall cost difference is not as great as we may have originally believed.Possible Answers:

1. Issues

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You can structure the analysis around the 4 Cs (or 3 Cs- Customers, Cost, Competitor). At a minimum, you have to study the cost issues. You want to find out whatadvantage, if any, will accrue to the competitor for operations in Mexico. Once you analyze this area, you should discover that the cost is not really different.Otherwise, you end up making cost-reductions recommendations.

You should also consider the issue of the different value proposition of the client vs. the competitor (high cost and quality vs. lower cost and quality) in anenvironment where the purchasing decision is becoming price driven. Additionally, the competitor has the ability to offer a wide range of complementary productsthat the client does not manufacture.

2. Recommendations

A key point to exploit is that the client and competitor have different value propositions. The client is the selling not just a Cadillac, but really a Cadillac engine.The competitor is selling the entire Honda car.

a. Cost Reduction Opportunity

Joint venture (JV) could be catalyst for change to reduce costs further. Since the market is becoming more cost conscious, this could be worth pursuing.

b. Changing Value Proposition

Segment the market, target your customer, and position the product to make sure it is reaching the right quality-conscious consumer. Dont damage your brand

image. Create a slightly different, lower cost/lower quality product to reach other attractive segments. This also prevents the competitor from gaining in your market.Develop complementary products or relationships to package with your product. Manufacturing other products may not be a core strength, but partnering withanother manufacturer could be worthwhile for the right market segment.

Anadarko Petroleum to Boost Oil & Gas Production in Asia

Case Type:increase sales/market share;add capacity, growth;market entry/new market.

Consulting Firm:Schlumberger Business Consulting (SBC)final roundjob interview. Industry Coverage:Oil, Gas, Petroleum Industry;Energy.

Case Interview Question #00210: Our client is Anadarko Petroleum Corporation (NYSE: APC), a mid-sized independent oil and gas exploration and productioncompany. Headquartered in the Woodlands, SPD Montgomery County, Texas, Anadarko has been relatively successful in developing small offshore fields for thepast 20 years.

With major areas of operation located in the United States, the deepwater of the Gulf of Mexico and Algeria, Anadarko also has exploration and/or production in

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Alaska, China, Brazil, Ghana, Indonesia, Mozambique and several other countries.

The Board of Anadarko has just set an ambitious goal for the next five years: To be the largest oil and gas producers in Asia by the end of 2015. A quick industryscan reveals three major competitor companies (see Table 1) that are larger than the client. To support its aspirations, our client decides to purchase Minyak-5, alarge deepwater oil field offshore Indonesia.

Anadarko Petroleum Corporations CEO has retained SBC to do a diagnostic of the companys current portfolio, operations and o rganization to help themunderstand what they need to do to achieve this goal. Your first task is to quantify the size of the goal in relative terms. How big is the leap?

Additional Information:Table 1. Benchmark Results (million barrels of oil equivalent):

Proven Reserves Annual ProductionCompetitor A: PetroChina (largest in Asia) 15,000 1,250Competitor B: Petronas of Malaysia 9,000 750Competitor C: Pertamina of Indonesia 6,000 500Client: Producing Assets 6,000 300Client: Minyak-5 (newly acquired deepwater asset) 3,000 0

Possible Answer: Key factors to consider:

Production (the goal) is directly correlated to reserves.

Existing production rates: the average production rate of Anadarko Petroleum Corps competitors is much higher than our client. Reserves replacement rates: in this example, assume the reserves replacement rate is 100% (all companies are replacing reserves at exactly the same rate as

they are being depleted).A successful candidate will realize that the challenge is threefold:

Increase production from its existing assets to meet 8.33% extraction rate, the standard held by competitors PetroChina, Petronas, and Pertamina.

Start production from the newly acquired Minyak-5 to meet the 8.33% extraction rate. Further exploration to add reserves and production (even with Minyak-5, it will only be the second largest).

Follow-up Questions

Question #1:How close is our client to achieving its goal of becoming the largest oil and gas producer in Asia? How much will the client need to increase itsreserves base by to become the largest producer in Asia?

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Possible Answer:At current production levels, client is by far the smallest competitor in its peer group. The largest producer (Competitor A PetroChina) isoperating at annual production rate of 1,250 million barrels of oil equivalent (BOE).

It has the potential to become the second largest company thanks to its recently acquired Minyak-5 asset, which increased its reserves base to 9,000 million BOE.

However even with Minyak-5, it does not have enough reserves to become the largest and is short of 6,000 million BOE.

Question #2:How much will Anadarko Petroleum Corp need to increase production off its current reserves base to match best practices?

Possible Answer:The reserves-to-production ratio for the three competitors is consistently 12:1 (e.g., 6000:500 for Pertamina). For Anadarko Petroleum Corp itis much lower at 30:1 (9000:300). Off the current asset, Anadarko Petroleum Corp extracts 3.33% (300 / 9000). Other companies extract 8.33% (1/12)

To match best practices, Anadarko Petroleum Corp needs to improve extraction rates by (8.33-3.33)/3.33 = 150% to match the best practice.

Question 3:How much will Anadarko Petroleum Corp need to increase production off its current reserves base become the largest producer in Asia?

Possible Answer:To become the largest producer in Asia, Anadarko Petroleum Corp will need to produce >1,250 million BOE to exceed its largest competitor

(PetroChina). With its current reserves base (of 9,000 million BOE), that would mean an extraction rate of >13.89% (1,250/9000).

To become the largest producer, Anadarko Petroleum Corp will need to improve its current extraction rate by (13.89-3.33)/3.33 = 317%.

At current extraction rates 3.33%, it needs to increase reserves to 1,250/3.33% = 37,500 million BOE.

If it can achieve best practice extraction rates 8.33%, then it only needs to increase its reserves base to 1,250/8.33% = 15,000 million BOE, or by increase currentreserves base by (15,000-9,000)/9,000 = 66.67%.

Question 4:Sketch out a graph or chart to show at least one way of illustrating the size of the challenge.

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Possible Answer:See attached figure. X-axis: proven reserves in million BOE, Y-axis: production rate %, different colors show different annual production volumein million BOE.

Question 5:What are some options the client has to becoming the largest producer? (What areas would you investigate in order to make a recommendation?

Possible Answer:

1. Increase production

Improve current extraction ratesAre clients reservoirs more complex than its competitors? If no,further diagnostic on production process.Is the technology it uses appropriate? If no, benchmark competitor technology for similar situations.

Develop Minyak-5 as soon as possibleAre there any external factors to slow time to development (e.g., rig shortage, lawsuits)? If no, focus on core engineering.Are there any internal factors (e.g., insufficient capital, no experience base)? If no, focus on capital management and capability development.

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2. Increase reservies

Organic (exploration)Is there sufficient capability to explore organically? If no, buy brownfields and develop capability.Are there sufficient opportunities for the clients risk appetite? If no, try exploring overseas and examine risk management. Inorganic (acquisition)

Is there sufficient capital to make acquisitions? If no, try to farm in (short-term) and focus on capital/portfolio management (long-term).Does the client have a good track record of integrating acquisitions? If no, beef up A&D (Acquisition & Development) organization.

Goodman Introduces New Residential Central Air Systems

Case Type:new product.Consulting Firm:Gallup Consultingfinal round job interview. Industry Coverage:energy;utilities.

Case Interview Question #00201: Our client Goodman Global Group, Inc. is a privately held company (owned by private equity firm Hellman & Friedman andpreviously controlled by Apollo Management) which manufactures residential and light commercial indoor heating and cooling products and systems. As themarket leader in residential central air conditioning systems (with 40% market share in the U.S.), the company is profitable with 10% EBIT (Earnings Before

Interest & Tax).

Goodman Global has a large R&D department that has just designed a new technology for residential central air conditioning systems. The new technology ismuch more energy efficient and it cuts electricity requirements (and hence costs) by 50% to produce the same cooling effect. Should the client introduce the newtechnology right now? If so, how would you advise them to introduce the new product?

Additional Information:

1. Goodman Global is the market leader in new technology inventions.

2. The durability of this new technology is 3 years, i.e. the closest competitor will take 3 years to copy the unit.

3. Revenue/Cost of old unit v.s. new unit:

old unit new unitRevenue $2000 $???Parts and Labor $1000 $3000

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R&D, Sales etc $400 $400Fee to external distributor $400 $400Profit $200 $???

4. There are certain economies of scale expected as manufacturing produces more of the new units, as the volume increases to over 100,000 units, costs willdecrease by 20%.

5. The candidate should notice that some costs are fixed and some are variable. Also that the external distributor is currently receiving $400 or 20% of the unit cost,will the company be able to keep the distributor at a fixed fee of $400 or will they argue for an increase to 20% of resale value?

6. The lifespan of the unit is 10 years.

7. The U.S. is split into 4 regions for air conditioning usage: Northeast, Northwest, Southeast, Southwest. Average expenditure for electricity running airconditioning per year: NE $700 per year; NW $300 per year; SE $1500 per year; SW $ 1200 per year.

8. How do people choose air conditioning units? 80% of sales are made on price of the unit. 20% of sales are made on the lifetime value of the unit.

9. Goodman Globals sales are 40% of total market, 30% to the price segment and 10% to the lifetime value segment. (Notice th eir old product appeals more to thelifetime value segmentthe client has 50% of the lifetime value market)

10. There is only 1 other large player with a 40% market share and 6 regional players share the remaining 20% of the market.

Possible Answers: 1. To answer the question whether to introduce the new product or not, first answer these two question: Is the new product going to be

profitable? Will it make the overall business more profitable?

Look at Revenue/Cost plus building or stealing more market share.

Get the cost information for the old and new product, try to decide if it will be possible to gain a 10% EBIT on the new product, What price do you think you cansell the new product for?

To decide this look at the lifetime savings customers get from using the new product, the SE region customers will save $7500 over 10 years. If this is worth say$5000 today, could argue how many people are willing to invest today for savings over the next 10 years and knock this down lower. Even if this is onlyworth $3000 to them we could sell the unit for $5000. This creates an EBIT of $1200 or 23%. This would lead you to believe that yes, Goodman shouldintroduce the new product.

2. Now consider how to launch the new product.

Target heavy user areas? Think about how and why people buy air conditioning; get information as to product/unit choice. Now see that company needs to target

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consumers who buy according to lifetime value. A good answer would consider other issues such as marketing strategy, marketto people with environmentconcerns as well as costs?

A very good answer would finally consider cannibalization of the companys old product. Will the company continue to sell onl y its old product in the more costconscious regions of the NE and NW. How much of our market for the new product will be lost sales of our old product? How much can we expect to steal fromcompetitors?

WESCO Distribution to Re-engineer Business Processes

Case Type:HR/organizational behavior.Consulting Firm:Deloitte Consultingfinal round job interview. Industry Coverage:industrial equipment;utilities;energy;electronics;telecommunications.

Case Interview Question #00192: Your client WESCO Distribution (NYSE: WCC) is the nations largest distributor of electrical and communications produ cts.Based in Pittsburgh, Pennsylvania, WESCO distributes more than half-million products (1.5 million SKUs) made by multiple manufacturer/suppliers through 256branches and warehouses in the US. Given that they are the middle-men, margins in the distribution industry are very thin.

The company has been generally decentralized with a high degree of branch autonomy (branch and district managers are kings of their own domain). Eachbranch has its own processes with considerable off-system accounting and record keeping on Excel spreadsheets, etc. Given growth over the last decade, the home-

grown mainframe computer system can no longer effectively handle the volume of transactions. In addition, the time required to reconcile and report sales,inventory, and financial information from the branches to corporate is hindering senior managements ability to make timely business decisions.

To address these issues, the client is undertaking a major business transformation program. They will re-engineer most business processes (sales, marketing,forecasting, logistics, finance, customer service) and are implementing one system for everyone in the company that will provide real-time information and a 360degree view of the business. Senior management anticipates a high degree of resistance from the branches. Branch leadership feels the system and processes fromcorporate will not understand their needs and threatens their autonomy. Past initiatives have struggled because people were not adequately prepared for thechanges. Employees are worried about how their jobs will change and whether they will have the skills to do their jobs within the new system.

How would you assist the client WESCO Distribution to successfully manage this large scale change program?

Possible Answers:

Leadership Alignment and Visibility/Sponsorship: Facilitate leadership at corporate to sing from the same page. Then, enabl e corporateleadership to engage district and branch leaders. Clearly explain why the changes are required in the competitive business environment and why their leadershipis needed and how they will be rewarded. In times of large scale changes, there should be a high degree of leadership visibility. Employees need to know that theirleaders (at corporate and branches) are behind this effort and they need to hear this directly from their leaders. Provide talking points and support to make iteasier for them to communicate to employees.

Communications: Develop a comprehensive communication strategy for internal and external audiences. Explain to employees the business case for change, what

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is in it for them, and how their jobs will change. Communications should be timely and consistent to stem rumors. Similarly, there should be a communicationsstrategy for suppliers and customers to explain how service will improve to assure them there will be no disruptions.

Workforce engagement: Engage employees from as many branches as possible in the design and implementation of the new process and system. Gather input ontheir business requirements throughout the lifecycle of the project. Conduct roadshows out to the branches. Use trainers from each of the branches to train endusers. Engage branches and employees so the take ownership of the system.

Organizational Reinforcement/Incentives: Make sure those who are providing input, championing and, adopting the system are recognized, rewarded, and utilized

as change agents.

Training: Profile how jobs will change and train employees thoroughly on the new process and system. Hands-on training clos e to the go-live and relevant toemployees jobs tends to be most effective.

Notes: This is a Human Capital Case and thus contains an approach much different from the usual Strategy case. However, the job ca ndidate should not abandonthe use of a framework. Here the focus isnt so much on the bottom line as it is on the approach needed to manage the proposed changes in the organization. Thecase should be carried out in a conversational format with hints and clues to push the candidate along. The candidate should touch on the major points in order toconsider the interview a success.

What is US Annual Demand for AA Batteries?

Case Type:market sizing.Consulting Firm:Kurt Salmon Associates (KSA)first round job interview. Industry Coverage:Energy;Consumer Products.

Case Interview Questions #00135: You are on a flight home from London and find yourself seated next to the newly appointed CEO of Energizer Holdings, Inc.(NYSE: ENR), an American manufacturer of consumer products most well known for its Energizer and Eveready brands of batteries.

The CEO will be meeting with a group of important stockholders as soon as the plane lands in Chicago and he asks you to help him estimate the total U.S. market forhis companys flagship product, AA batteries. How would you estimate the U.S. annual demand for AA batteries?

Possible Answers:

The best job candidates will start with some macro-measure, such as the total US population, and then estimate the number of batteries used per capita. Forexample, they might first identity the types of tools or appliances that use AA batteries, then estimate the number of batteries used by each appliance, and thenconsider the different lifetimes or replacement cycles of batteries used by each appliance. The best candidates will also apply a reality check to the ir final answers,e.g. that would mean that everyone buys 100 batteries per year which sounds too high.

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Alternately, a candidate could work this problem from a supply rather than demand perspective. The candidate might start by identifying the number of batterymanufacturers, estimate their total revenues, and divide by retail price to estimate the number of batteries sold. This approach is generally less intuitive, andcandidates are more likely to pull a number out of the air for values like total revenue. If a candidate struggles with thi s approach, the interviewer maysuggest the demand-driven approach and see how he or she responds.

GE Defines Pricing Strategy for Eternal Light Bulb

Case Type:pricing & valuation;new product.Consulting Firm:McKinsey & Companyfirst round job interview. Industry Coverage:Utilities;Energy Industry.

Case Interview Questions #00131: Your client is General Electric Company (NYSE: GE), a multinational conglomerate corporation headquartered in Fairfield,Connecticut, US. The company operates through four segments: Energy, Technology Infrastructure, Capital Finance and Consumer & Industrial. In 2011, Fortunemagazine ranked GE the 6th largest firm in the U.S.

Recently, researchers in GEs Energy Division have just developed a new product: a new light bulb that can last eternally. Your job is to help them go to market bydefining their pricing strategy. The new light bulb cost $1 billion in total to develop.

Possible Answers:

Me: Are the new light bulbs different from conventional light bulbs in any other way? Are the light bulbs intended to replace regular incandescent light bulbs orfluorescent light bulbs?

Interviewer: You can assume that the new light bulbs can be used to replace both incandescent and fluorescent light bulbs. You can further assume that the newbulbs are perfect replacements for these types of bulbs (i.e., they are available in two different forms, one that is exactly like any other incandescent bulb, and onethat is like any other fluorescent bulb).

Me: In order to determine the optimal pricing strategy, well need to look at both microeconomic and marketing theory. First, it may be useful to determine theupper and lower limits on the price GE can charge for its new light bulbs. In general, price is bounded by two things: the products economic value to the customer(EVC) and the companys average cost in producing the product. The EVC sets the upper bound in price since a person will not pay more than the product is worth

to her, and the average production cost sets the lower bound since the company can not earn economic profits if the price is below this point (in the short run,however, the company will want to produce as long as price is above average variable costs since this yields a positive contribution to fixed costs). The optimalprice must fall somewhere within this range.

Interviewer: How would you determine the lower and upper limits in price?

Me: The average total cost of production can be obtained by considering fixed costs for the product (e.g., overhead and administrative costs), plus manufacturingcosts, plus distribution costs, plus selling costs, and so on. Of course, the average cost will vary with the level of production. Generally, the average cost function is

U h d ( h h i i d h i )

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U-shaped (where the x-axis measures quantity and the y-axis measures average cost).

Note that the average total cost of production is independent of the $1 billion development costs. This makes sense since this is a sunk cost. The sunk cost doesaffect the overall return on investment (ROI) and the internal rate of return (IRR) for the project, however.

The EVC can be computed as follows: First, we assume for simplicity that the resale value of the new light bulb is negligible after it has been used for many years(this is akin to any other old household item). We further assume that the average person will be able to use one of the new light bulbs for 50 years before it isdiscarded (either because it is accidentally broken or because the person dies and his belongings are disposed of). Finally, we assume that a normal light bulb lasts

an average of 6 months and costs $.50.

Now, to compute the EVC we need to determine how much one of the new light bulbs will save a person. Since we assume that the new light bulb has an effectivelife of 50 years, it will save a person $1 a year from having to buy two old light bulbs for 50 years. Thus, the EVC is approximately the net present value of a $1annuity for 50 years (to be more accurate, we would have to consider the economic value of the time savings from having to buy and replace normal light bulbs, thereduced risk of being electrocuted from not having to frequently changing normal bulbs anymore, and so on. We assume that this is negligible.

At the same time, however, we must also realize that the new, significantly more expensive light bulb may be accidentally broken prematurely (e.g., while movingto a new house), resulting in an economic loss for the customer. The probability of this should be considered in the EVC.).

Interviewer: Good. Now how would you determine the optimal price?

Me: From microeconomics theory we know that the optimal, profit-maximizing price is given by the equation: P = ( Ep / (1 + Ep) ) x MC, where Ep = price elasticityof demand for the new light bulb, MC = marginal cost of producing the new light bulb

Interviewer: How would you get the elasticity and MC data that you need to use the optimal price formula?

Me: The marginal cost of manufacturing, packaging, distributing and selling the new light bulb can be obtained by performing a cost study of these processes. Forinstance, the marginal costs associated with manufacturing will include the costs of raw materials, direct labor, and energy. Of course, the marginal cost will varywith the level of production. In general, the marginal cost curve is roughly U-shaped.

The elasticity function is more difficult to obtain. Generally, this is hard to derive in real life, especially for a new product that lacks past sales data. However, GEmay be able to estimate the demand and elasticity function for the new light bulb based on its historical sales data of normal light bulbs. Using this data in aregression analysis, it can determine what the key drivers of demand are. For instance, it can perform a regression analysis with sales quantity as the dependentvariable and price and bulb lifespan as the independent variables (the exact type of regression model will need to be determined i.e., logarithmic, linear,exponential, etc.).

The elasticity function may also be estimated by conducting a survey of potential customers of the new light bulb. In this survey, customers can be asked what

titi th ld h th li ht b lb t diff t i i t Thi d t th b d t d i th l ti it f ti

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quantities they would purchase the new light bulb at different price points. This data can then be used to derive the elasticity function.

Interviewer: This sounds like a lot of work. Do you really need to do all of this to determine the optimal price?

Me: No, youre right. The optimal price can be accurately estimated. We know that at the industry level, demand for light bul bs is highly inelastic since light bulbshave become a necessity and there are few substitutes for them (cross-elasticities are low).

At the same time, however, light bulbs are a commodity. Thus, at the firm level, there is nearly perfect competition for light bulbs, and demand is perfectly elastic

for any single firm.

As a result, the optimal pricing strategy for GE is to price its new bulbs slightly below the EVC for the new bulb (which is equivalent to pricing is slightly below themarket price for conventional bulbs) since this will provide consumers a savings in using the new bulb (this assumes that the average production cost for the newbulb is below this price level. If it is not, it is not economical for GE to produce and sell the new bulb). If GE were to price its bulbs above its EVC, consumers wouldhave no incentive to purchase it. If it were to price the new bulb at the EVC, the new bulb would offer no advantages to a conventional bulb, and it would just beanother commodity bulb. As a result, it would not allow GE to significantly increase sales and profits.

GE needs to consider a few other issues in its pricing strategy. First, it should price its new product low initially to induce trial. Second, severe cannibalization of itsconventional bulbs is likely to result. Thus, GE needs to ensure that the sale of its new bulb will offer a higher contribution margin than that from the sale of its

conventional bulb. Lastly, GE needs to consider the industrys competitive reaction. Since the industry is a commodity market, P = MC, and thus, it is unlikely thatcompetitors can afford to compete by lowering the price of their products. They may, however, attempt to build their brands to make their product less of acommodity.

Interviewer: How would your analysis be different for GEs business customer segment (i.e., for businesses that use the new bulb to replace fluorescent lights)?

Me: In our consumer analysis, we assumed that the economic value due to the time savings from not having to buy and replace new bulbs is negligible (primarilybecause the opportunity cost is negligible what is the opportunity cost of saving 2 minutes to pick up light bulbs while at the grocery store or from saving 2minutes at home installing the bulb?) With business customers, however, this is not the case. The elimination of the need to replace bulbs periodically will savebusinesses money from having to hire maintenance personnel to do this. Thus, the EVC for businesses will be higher than that for consumers, and GE can charge

businesses a higher price.

In addition, we also assumed that the resale value of a new bulb that has been used for many years is negligible for the consumer since, aside from garage sales, itmay be difficult for the individual seller to locate a buyer (this is currently changing as a result of the Internet, though. But, then again, how many people would bewilling to pay a non-negligible amount of money for an old household item, such a hammer or an old mirror, both of which can theoretically last a long time like thenew GE light bulb?). This is not the case with business customers, however, since the resale market for old business furniture is relatively strong. In addition, it islikely that the expected lifetime of a bulb used in a business environment will be longer than that used in a consumer s home. The reason for this is that bulbs aregenerally fixtures in the office building even as the occupants in the building change. Thus, the expected lifetime of the new bulb in a corporate office is likely to beabout the same as that of the building. These factors will allow GE to charge an even higher price to its business customers.

Interviewer: Good I think thats all I wanted to cover with this case Do you have any question for me about the firm?

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Interviewer: Good. I think that s all I wanted to cover with this case. Do you have any question for me about the firm?

Note:This case is different from theGE Develops Eternal Light Bulb That Lasts Forevercase because it deals with developing a pricing strategy for a new productas opposed to analyzing the effect of new product on the industry.

GE Develops Eternal Light Bulb That Lasts Forever

Case Type:new product;industry analysis.Consulting Firm:Marakon Associates2nd round job interview. Industry Coverage:Energy Industry;Utilities.

Case Interview Questions #00036: Your client is General Electric Company (NYSE: GE), a multinational conglomerate corporation headquartered in Fairfield,Connecticut, US. The company operates through four segments: Energy, Technology Infrastructure, Capital Finance and Consumer & Industrial. In 2011, Fortunemagazine ranked GE the 6thlargest company in the U.S.

GE Energys Global Research Lab has developed a super-durable filament for light bulbs; with this filament, the light bulb will never burn out The lab is ready tolicense this new product and technology to a light bulb manufacturer. What will be the effect on the light bulb industry?

Additional Information: (to be given to you if asked)

The light bulb industry is dominated by two multinational producers. The two companies sell their products side by side for essentially the same price in similaroutlets internationally. There are a several small local players in various regions of the world who produce local brands and some private store brand light bulbs.There have been no technological innovations in light bulbs for many years.

Possible Solution:

One outcome is that one of the two major players purchases the technology. If the technology is patented and exclusively licensed, this player may enjoy anadvantage for a limited time. If the producer makes enough bulbs at a low enough cost, all customers will eventually switch over to the permanent light bulb,thereby drying up the industry, putting the competitor out of business and greatly reducing their own business.

Another solution is that all of the players obtain some version of this technology. If that were to happen, the price for this product would decline to the normalindustry profit level, and customers would shift to the permanent light bulb. Over time, all bulbs would be permanent and the industry volume would greatlydecrease, making the industry more competitive and wiping out industry profits.

Note:This case is different from theGE Defines Pricing Strategy for Eternal Light Bulbcase because one deals with developing a pricing strategy for a newproduct while the other analyzing the effect of new product on the industry. You may also want to check out the solution to that case.

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Consolidated Edison Turns Around Steam Boiler Division

Case Type:reduce costs;business turnaround.Consulting Firm:Kurt Salmon Associates (KSA)2nd round job interview. Industry Coverage:Energy;Manufacturing;Utilities.

Case Interview Questions #00072: Your team was asked by Consolidated Edison, Inc. (NYSE: ED), a diversified energy and manufacturing company to help turnaround their steam boiler hose division. This boiler hose division provides boiler hoses for both external customers and the clients boiler division. Additionalbackground information on the client and the steam boiler hose industry includes:

Boiler hoses are sold both with original equipment and as replacements. There has been increasing price pressure in the industry. The client is third of eight industry participants.The following information is also available in response to questions asked by the candidate: Last years Profit and Loss (P&L ) showed (as a percent of sales):

Raw Material 70%Labor 20%Distributed overhead 10%SG&A (Selling, General & Administrative Expense) 15%

Profit 15%

The raw material is a commodity petrochemical. At least two of the other companies in the industry are making moderate profits.

How would you structure an analysis aimed at restoring profitability? Where do you expect to be able to save costs?

Possible Solution:

The candidate should avoid getting bogged down in the following areas:

Drop the product line (apparently not possible because hoses are necessary for boiler sales). Raw material prices (they are the same as everyone elses) Allocation of overhead (no cash savings and provides little potential) (SG&A) Selling, General and Administrative Expenses (standard industry fee paid for independent installers).Better Solution:

Better answers will move beyond the previous answers to consider:

Scale economies (client is big enough to achieve scale production).

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Scale economies (client is big enough to achieve scale production). Production technology (client has a modern plant) Labor costs (wages rates and productivity are average for the Industry) Raw material purchasing practices (material are purchased through long term contracts with prices based on the spot market minus a discount).

Outstanding Solution:

The best answers, following a logical progression, should stumble upon the actual answer: the product has been over designed, requiring excess raw material. Theanswer should the following organizational implications:

How is our product engineering operation wired into the marketplace? (there is little contact between the engineering and marketing/sales organizations) What kind of feedback are we receiving form our sales force? (customers are delighted with our hoses, but require all the product features)Are there other areas in the company where similar problems exist?

How Much to Pay for GEs New Wind Turbine Generator?

Case Type:pricing & valuation.

Consulting Firm:Mercer Consulting2nd round job interview.

Industry Coverage:Energy Industry.

Case Interview Questions #00047: Your client General Electric Company (NYSE: GE) is a multinational conglomerate corporation headquartered in Fairfield,Connecticut, United States. The company operates through four separate divisions: Energy, Technology Infrastructure, Capital Finance, and Consumer & Industrial.In 2011, Fortune magazine ranked GE the 6th largest company in the U.S.

GEs Energy Division produces a new windmill with an accompanying electric generator that harnesses the power produced by the windmill (a.k.a wind turbinegenerator WTG, wind power unit WPU, wind energy converter WEC, or aerogenerator). This new wind turbine generator may cost $150,000 each to manufacture.You are hired by GE Energy to find out how much their customers are willing to pay for the new windmill. How would you go about it?

Possible Solution:

Porters five forces dictate that industry rivalry, potential substitutes, and supplier/buyer power need to be assessed. This framework could be an appropriate start.

To narrow it down, lets assume competition, and a demand/supply level far beyond your capacity. We must also examine other c omponents: The $150,000 cost isirrelevant here in this case because so far you have no idea what this product is worth to anyone.

Assessing the value of the products benefits is perhaps the next step. The closest substitute to the windmill is probably utility produced electricity. Therefore,

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g p p p p p y y p y ,inquire how the electrical utilities measure and charge for the electricity they provide, convert the Windmills output alongthese terms and assert a cost/benefitestimation of how much potential customers would be willing to pay for it. Other considerations upon which to discount the value might be reliability, maintenance,etc.