Case Number:Case setup (facts offered by interviewer):q Your client is a manufacturer of bicyclesq They have been in business for 25 yearsq They manufacturer and sell three categories of bicycles: Racing bikes: High end, high performance bikes for sophisticated cyclists Mainstream bikes: Durable, but not overly complicated bikes for everyday riders Childrens bikes: Smaller, simpler versions of their mainstream bikes for childrenq Profits at your client have decreased over the past five yearsQuestion:q What is driving the decline in overall profits?q What recommendations might correct the situation?Suggested solutions:The first question is to determine what has caused overall profits to decrease. To accomplish this the candidate must first understand what has transpired in each of the three product categories over the past five years during which profitability has slipped. The following are questions and answers that would be provided in an interview scenario.q What are the clients margins for a bicycle in each of the three segments?Racing: Cost = $600/unit, Profit=$300/unitMainstream: Cost = $250/unit, Profit = $75/unitChildrens: Cost = $ 200/unit, Profit = $50/unitq What has happened to the market size of each of the three segments over the past five years?Racing: Has remained constant at its present size of $300MMMainstream: Has increased at 2% growth rate per year to its present size of $1.0BChildrens: Has increased at 3% growth rate per year to its present size of $400MMq What has happened to our clients market share in each of these segments?Racing: Market share has decreased from 60% to 30%Mainstream: Market share has increased from 0% to 5%Childrens: Market share has increased from 0% to 3% q Who are the clients major competitors in each market segment? What has happened to their market share in each segment over the past five years?Racing: There is one main competitor and a host of small firms. Your main competitor has increased market share from 30% to 50%Mainstream: There exist many, large competitors, none of which holds more than 10% of the marketChildrens: As in the mainstream segment, there are many competitors, none with more than 10% of the marketThe above information provides enough information to put together a picture of why profits have decreased over the past five years : Your client, with a commanding position in a flat market segment (racing), expanded into new segments (mainstream and childrens). As this occurred, market share decreased dramatically in the most lucrative segment (racing), creating an unfavorable mix. The extent to which profits have decreased can be deduced from some quick math : profits have slipped from $60MM five years ago (=60% x $300MM x 33% racing margin) to $44MM today ( = (30% x $300MM x 33% racing margin) + (5% x $1B x 23% mainstream margin) + (3% x $400MM x 20% childrens margin).The dramatic decrease in market share in the racing segment is at this point still unexplained. Questions that would help formulate an explanation include:q Have there been any major changes in product quality in your clients racing product? Or in its main competitors racing product?Noq Have there been any major price changes in your clients racing product? Or in its main competitors racing product?Noq Have there been any major changes in distribution outlets for your clients racing product? Or for its main competitors racing product?Yes. Previously your client and its main competitor in the racing segment sold exclusively through small, specialty dealers. This remains unchanged for the competition. Your client, however, began to sell its racing bikes through mass distributors and discount stores (the distribution outlets for mainstream and childrens bikes) as it entered the mainstream and childrens segment.q How do the mass distributors and discount stores price the racing bikes relative to the specialty stores?Prices at these stores tend to be 15 to 20% less.q What percent of your clients racing sales occur in mass distributors and discount stores?Effectively none. This attempt to sell through these distributors has failedq How has the decision to sell through mass distributors and discount stores affected the image of the clients racing product?No studies have been done. q How has the decision to sell through mass distributors and discount stores affected your clients relationship with the specialty outlets?Again, no formal analysis has been performed.Although some analysis and/or survey should be performed to answer more conclusively the last two questions, a possible story can be put together. There has been no appreciable change in either quality or price (or any other tangible factor) of your clients racing product relative to its competition. It is not the product that is the problem, but rather its image. As your cli