BCG 1st Round Case – Water Flows [NEW]

Information to be shared only under request:

• The client derives its revenues from providing residential, commercial, and public buildings with water
• Billing is done monthly according to the consumption of the customer
• Profits have been growing at a 1-2% pace for the past 3 years, and 0% growth is expected going forward unless something is done
• There are no problems to fix with the current business, the client simply wants us to help them grow profits further
• The goal of the client is to increase profits by 10% in three years
• The client’s most recent profit was $500M
• The client has a budget of $100M to implement any initiatives

Ask clarifying questions and/or present the structure.

Example of an excellent answer (score: 2)

GOAL CLARIFICATION

An excellent candidate would clarify the objective in terms of absolute amount and time frame, budget constraints, and better understand how the client makes money.

STRUCTURE

A great candidate would include in the analysis the following elements:

1. Profit improvement levers:
   1. Revenues
      1. Segment analysis to determine which segment to prioritize
      2. Define options to increase revenues based on:
         1. Current business
            1. Increase billing rate
            2. Increase water consumption
            3. Increase number of accounts
         2. New offerings
            1. Variation of existing offerings
            2. Diversify into brand-new offerings altogether
   2. Costs - define ways to reduce the cost per unit or number of units in a cost area. Possible options include:
      1. Copy best practices
      2. Leverage economies of scale
      3. Consolidate unused capacity
2. Opportunity potential
   1. Estimate of direct profit result
   2. Potential synergies/cannibalization effect
3. Capabilities of the client to launch:
   1. Financial
   2. Non-financial
4. Risks and next steps

The candidate may include additional elements, but there should be a rationale related to the objective of the client.

COMMUNICATION

An excellent candidate should present clearly the different areas in a structured way.

Moreover, the candidate should clearly present the rationale for why he/she wants to explore a particular point, connecting the answer to the objective of the client.

Suggested score

An excellent candidate should:

1. Clarify the goal of the client (timebound and quantified)
2. Include the main elements in the structure as presented above
3. Communicate the structure in a clear way

Recommended score calculation: starting from 2, decrease the score by 0,5 points down to 0 for any of the following:

• The candidate did not clarify the objective (timebound and quantified)
• The candidate missed points 1, 2, or 3 in the structure (not including risks and next steps is tolerable)
• The candidate included several useless elements in the structure (i.e., boiling the ocean)
• The candidate communicated the structure in a disorganized way or without a clear connection to the goal

Information to be shared only under request or when relevant:

• The client engaged us for a cost-cutting exercise several years ago which resulted in the client becoming the most cost-efficient water provider in the United States; we believe that there are no more attractive cost-cutting opportunities
• It is difficult to change the pricing structure due to government regulations
• Due to rising sustainability awareness, average water consumption per capita is expected to slowly decline over time
• The number of residential, commercial, and public buildings are expected to grow in line with population growth (if asked, US population growth is less than 1%)
• The vast majority of buildings in the southwest are already attached to a water provider and switching is unlikely due to the complications involved
• Expansion into other regions is difficult due to regulatory concerns since the client is involved in the public utility business. Furthermore, the client’s German ownership also complicates matters
• In terms of new offerings, the client prefers something closer to their core business

Example of an excellent answer (score: 2)

The client should look into expanding into new offerings such as bottled water or water filters. This is because:

• These new offerings leverage our client’s capabilities in water provision
• There are limited profit growth opportunities in the current business due to regulatory controls on pricing, changing water consumption habits, efficiency reached with costs and the market already being saturated
• Expansion is very difficult due to regulatory concerns

In terms of the next steps, the candidate should suggest evaluating the new offering idea in more detail to determine whether we should go ahead.

Suggested score

An excellent candidate should: 

1. Navigate through the opportunities in a structured and well-communicated manner
2. Be logical and demonstrate business sense when prioritizing ideas
3. Identify growing into adjacent offerings as the best option, presenting his/her rationale in a clear way
4. Propose the next steps related to evaluating the adjacent offering strategy in more detail

Recommended score calculation: starting from 2, decrease the score by 0.5 points down to 0 for any of the following:

• The candidate did not shortlist ideas in a structured and well-communicated manner
• The candidate did not demonstrate business sense when prioritizing ideas
• The candidate did not identify growing into adjacent offerings as the best option
• The candidate did not properly present his/her rationale for growing into adjacent offerings and related next steps

Information to be shared only under request:

• The client intends to build a bottling plant to bottle water from its existing water sources
• The bottled water will be sold throughout the United States; expansion outside the United States is not yet considered

Example of an excellent answer (score: 2)

A great candidate would include in the analysis the following elements:

1. Profit potential of the water bottle business:
   1. Direct results
      1. Revenue potential (derived from market size and share that the client may reach)
      2. Associated costs
   2. Synergies/cannibalization (mention possible economies of scale in terms of water filtration)
2. Capabilities of the client to launch:
   1. Financial
   2. Non-financial
3. Risks and next steps (mention specific risks such as rising environmental awareness prompting consumers to shy away from bottled water)

The candidate may include additional elements, but there should be a rationale related to the objective of the client.

Suggested score

An excellent candidate should: 

1. Take time to structure the factors to consider
2. Include the main elements in the structure as presented above
3. Communicate the structure in a clear way
4. Contextualize the structure in terms of the water bottle business

Recommended score calculation: starting from 2, decrease the score by 0.5 points down to 0 for any of the following:

• The candidate missed points 1 or 2 in the structure (not including risks and next steps is tolerable)
• The candidate included several useless elements in the structure (i.e., boiling the ocean)
• The candidate communicated the structure in a disorganized way or without a clear connection to the goal
• The candidate did not properly contextualize the structure in terms of the water bottle business (e.g., not highlighting specific risks or synergy opportunities)

Information to be shared only under request:

• For simplicity, the client can assume that the 5% profit margin takes into consideration both fixed and variable costs, and that margin does not increase after ramping up production
• The $95M investment includes everything from factory construction costs to the costs associated with launching the bottled water brand
• The expected market shares are for the first, second, and third years of actual operation (i.e., after the 1-year plant construction period)

Example of an excellent answer (score: 2)

The candidate should realize that:

• The client will only be operational a year from now, so the 1.5% expected market share in Year 3 is beyond our horizon

Approach:

1. Market size in Y2 = market size in Y1 * growth rate = $100B * (1 + 10%) = $110B
2. Market size in Y3 = market size in Y2 * growth rate = $110B * (1 + 10%) = $121B
3. Revenues in Y2 = market size in Y2 * expected market share in Y1 of operation = $110B * 0.5% = $550M
4. Revenues in Y3 = market size in Y3 * expected market share in Y2 of operation = $121B * 1% = $1,210M
5. Total revenues = revenues in Y2 + revenues in Y3 = $550M + $1,210M = $1,760M
6. Total profit = total revenues * profit margin = $1,760M * 5% = $88M

The profit from launching the bottled water business ($88M) is more than our 3-year profit target of $50M; furthermore, the investment cost is below our budget of $100M. Therefore, this opportunity is attractive financially and we should look into whether we have sufficient capabilities to launch this business as well as whether we can cope with the associated risks as a next step. 

Suggested score

An excellent candidate should: 

1. Take time to structure the approach
2. Communicate the structure to follow before starting computations
3. Perform the computations correctly
4. Contextualize the profit in terms of the profit target

Recommended score calculation: starting from 2, decrease the score by 0.5 points down to 0 for any of the following:

• The candidate did not set up the right analysis
• The candidate did not communicate the approach before beginning with the computation
• The candidate made mistakes in the computation
• The candidate did not contextualize the final profit figure

Example of an excellent answer (score: 2)

The candidate should:

1. Recap the objective
2. Provide an answer-first approach to the question asked
3. Mention risks and the next steps to take

RECAP OF THE OBJECTIVE

“Our client asked us to help develop a strategy to grow profits by 10% in 3 years.”

ANSWER-FIRST APPROACH TO THE QUESTION

“Based on our analyses, our preliminary recommendation is that they should expand into the bottled water business. This is because: 

• The expected profit in the first 3 years is $88M, which is above the target of $50M;
• The necessary investments fit within our budget of $100M; and
• Opportunities to grow profits within our existing business or from geographical expansion are limited."

RISKS AND NEXT STEPS

“Nonetheless, there are some key risks associated with such a move, the main ones being:

• The $95M investment for such a business is only slightly below our budget of $100M; any cost overruns might force us to source additional capital and potentially impact the business case
• We have limited knowledge/know-how on running a bottled water production business despite there being some overlaps with water provision 

Therefore, we would like to analyze additional elements before making a final recommendation, such as: 

• Assessing our client’s financial and non-financial capabilities to ensure they can successfully run such a business
• Conducting a more rigorous risk analysis and coming up with mitigation strategies for the identified risks
• Double check the business case and potentially develop worst-, base-, and best-case scenarios”

Suggested score

An excellent candidate should: 

• Recap the objective of the case
• Recommend expanding into the bottled water business to grow profits, with reasons
• Mention possible risks and propose next steps related to the original structure and/or to implement the suggested approach

Recommended score calculation: starting from 2, decrease the score by 0.5 points down to 0 for any of the following: 

• The candidate did not have an answer-first approach
• The candidate presented the conclusion in a disorganized way
• The candidate did not provide reasons why the client should expand into the bottled water business
• The candidate did not conclude the recommendation proactively, mentioning the next steps