Question 1

Managers at Tokyo Manufacturing get together monthly to review ways to improve quality in their respective divisions. What philosophy might this company embrace?

Accepted Answer

Companies that utilize a Total Quality Management approach are constantly looking for ways to better the quality of their services and products. Just in Time refers to a money-saving method used by companies to deliver goods as they are needed by clients. Kaizen (or continuous improvement) refers to companies making small changes to their processes to better workflow and increase efficiency. Marginal analysis looks at the point at which maximum quality is obtained (when improvement equals improvement cost).
Key Takeaway: It's interesting to note that in Japan, the improvement process consists of 4 steps that comprise a Total Quality Management perspective: Kaizen (continuous improvement), Atarimae hinshitsu (performance), Kansei (careful examination) and Miryokuteki Hinshitsu (aesthetics).

Question 2

How did famous management thinker Joseph Juran define quality?

Accepted Answer

Ever been asked "what is quality?" It's a tough question to answer. We think the "fitness for use" definition Juran came up with is a good framework with which to think about quality. It implies a balance between managing defect and not spending too much for quality that isn't really needed.
Key Takeaway: Remember "fitness for use" as a definition if you ever need to remind someone that they are going overboard in quality requirements. For instance, a brake disc doesn't need to be perfectly shiny - it needs to stop your car. That's what its use is.

Question 3

Of the choices below, this is the best evaluation criteria for selecting which projects to proceed with:

Accepted Answer

Calculating the NPV or Net Present Value will help you see the true value in a project comparison. This allows you to view an apples-to-apples approach. If the investment or Net Present Value is positive, then the project plan is going according to the overall plan.
Key Takeaway: A company should choose projects based on the highest NPV for the available capital that they have. Too often organizations make the mistake of using IRR or payback period. NPV is the best way to determine which projects to move forward.

Question 4

Titanic Inc. is reviewing its existing projects; $10 million has already been spent on Project Iceberg but another $20 million is required. The project is expected to provide riskless cash flows with a present value of $28 million once it is completed. Should Titanic proceed?

Accepted Answer

Titanic should compare Project Iceberg against its other projects to see if they can invest the money better elsewhere. However, the key is recognizing that the $10 million already spent is a sunk cost. The decision now is whether to spend the last $20 million to get the $28 million.
Key Takeaway: Expended money is a sunk cost. It's hard to accept sometimes, but companies must make decisions on the value on the table moving forward versus the future investment required.

Question 5

It's been projected that Project X will take 7 years to amortize the project costs and start earning a profit for its company. This demonstrates which concept?

Accepted Answer

This exemplifies the Payback Period of Project X. The Net Present Value (NPV) is the discounted total worth of all benefits minus the costs over multiple time periods. The Internal Rate of Return is used to compare the internal benefit of two of more projects. The Benefit Cost Ratio is a ratio that compares benefits to the pricing of other options. A PMIS is any software or automated tool for performing project management.
Key Takeaway: Payback period isn't as effective a methodology as NPV to assess projects, but it is a nice heuristic that helps managers understand how soon the project's cash flows will cover the costs of the project.

Question 6

Boris hires an outside vendor to maintain his company's servers. However, he is extremely concerned about uptime. In order to remain profitable, Boris' company needs to have 99 percent uptime. Which of the following would be a clause Boris would want to include in the contract to directly address this requirement?

Accepted Answer

SLA stands for Service Level Agreement, which addresses the expectations of the buyer. If the vendor does not meet the requirements, the buyer can expect compensation or may be allowed to void the contract.
Key Takeaway: Service level management has become a big buzzword, especially in business process outsourcing and information technology. Creating a SLA helps set expectations on both sides of the coin.

Question 7

Which of the following can you use a Monte Carlo simulation to model? Select all that apply:

Accepted Answer

A Monte Carlo simulation relies on random sampling to simulate probablistic results.
Yes, you can use a Monte Carlo simulation to model stock returns, as well as cost, probability and project duration. It cannot, however, tell you anything about the quality of the inputs used to arrive at the results of the simulation.
Key Takeaway: Monte Carlo simulation is a highly robust tool for consultants. For instance, one Upward Mobility editor used it to model the probability that an airline would go bankrupt due to plane crashes with various insurance policies. You must be prepared for questions that ask you how you would analyze a situation. We're trying to go beyond what your standard case consulting book would cover and suggest some techniques.

Question 8

What is Pareto's Law?

Accepted Answer

Pareto's Law says that 80 percent of the effects come from 20 percent of the causes. Vilfredo Pareto, an Italian economist, observed in his country that 20 percent of the people owned 80 percent of the wealth. The poor were lucky then - today it's more like 10/85. Management thinker Joseph Juran (1904 - 2008!) was the one who actually came up with this concept as it applies to business and named it after Pareto.
We'll go through the other ones since they're kind of fun to know:
b) "Work expands so as to fill the time available for its completion" is Parkinson's Law. That's another good one to know.
c) is Murphy's Law. Sometimes it may seem like "anything than can go wrong will," but it isn't necessary a good philosophy to have!
d) "Never attribute to malice that which can be adequately explained by stupidity" is Hanlon's Razor.
Key Takeaway: This is a handy heuristic to help focus your attention on the most important things involved in running a business.
Other examples: 20 percent of your customers will cause 80 percent of your problems. 20 percent of items in inventory represent 80 percent in sales. And so on.
One application I'm sure you'll find interesting is that 80 percent of beer is drunk by 20 percent of consumers. That's why most beer commercials are concentrated on football and tawdry men's magazines. It just makes sense for those companies to focus on their heavy consumers.

Question 9

Jerry was in the midst of assessing his risk for a project at a well-known real estate firm when the stock market collapsed, sending shockwaves throughout his company and his project. The market crashing can be classified as what type of risk:

Accepted Answer

Factors affecting the stock market would be considered external risk factors to this and most other companies.
Internal risk factors allude to those factors relating directly the project within the company such as staffing, resources, etc. Technical risk factors refer to those relating to technology. Since the stock market crashing was not foreseeable, this wouldn't be a possible answer.
Key Takeaway: Firms cannot possibly prepare for all unforeseen risks. However, external risk must always be considered when considering whether to proceed with a venture.

Question 10

Customers, company and competitors are are part of the 5Cs framework. What are the other 2Cs?

Accepted Answer

Context and collaborators are both part of the 5Cs.
The 5-Cs of marketing analysis are: context (or climate), customer, collaborators, competitors and company.
Context is the regulatory and economic environment. Sometimes technology and social context should be considered as well.
Customers are the targeted market. Look carefully at the size of the market, growth rate and market trends.
Company refers to the company you are analyzing and its brand, product mix and other key traits.
Competitors are rival firms.
Collaborators are suppliers, distributors and other companies the firm works with.
Key Takeaway: Practice using this framework heavily before your real case interviews. As it is very general, you must learn to focus in on the 2 or 3 Cs for the specific case that are the most relevant.
We intentionally included another variation of this question to help you memorize the framework.

Question 11

AT&T hires you for a project asking you to help them increase their ARPU. What do they mean by ARPU?

Accepted Answer

ARPU normally means average revenue per user. It's calculated by dividing total revenue by the number of subscribers. It is commonly used by telephone carriers, cable companies and other "pipes" type companies. Note that ARPU can be monthly or annual, the A stands for Average.
Key Takeaway: "Pipes" companies always worry about becoming dumb pipes. That means they carry data and don't do much else. The key to avoiding being a dumb pipe is to provide value-added services and constantly innovate. And because they're often quite bad at that, that's why they need the services of a talented consultant like you!

Question 12

Ted has 10 content projects he wants to push forward. Each one has a positive net present value with an initial up-front investment followed by a multiple-year revenue stream. Which of the following would be the biggest reason why he would not pursue them all right away?

Accepted Answer

The best answer here is cash flow. It is important to recognize the impact of negative cash flow in early periods from investments.
Key Takeaway: Cash is the lifeblood of a company. No company can afford to run out of it. Thus, a company cannot make all the investments that might be profitable because it needs cash to run its day-to-day operations.

Question 13

Boris wants to figure out how much more his company should invest into the quality of a certain product. What tool would be most effective for this exercise?

Accepted Answer

A marginal analysis finds the point at which a company no longer receives incremental revenue for its incremental investment in quality. A company should invest in quality up to the point where marginal investment is equal to marginal return. Remember that having perfect quality is not economically efficient.
Key Takeaway: Conducting a marginal analysis is a true value-added tool. This is an escape hatch for any question where you are asked how much you would invest in improving something. Think of the economic concept of marginal revenue. You only want to invest up to the point you earn profit in return.

Question 14

Roger is trying to figuring out pricing for his new product, a rock that looks like a friendly turtle. He decides to price it 30 percent more than the cost of making it, which is $1. Roger is using what type of pricing strategy?

Accepted Answer

Roger is using cost-plus pricing. In general, we suggest you avoid cost-plus pricing whenever possible in your analysis. Cost-plus pricing typically applies a certain margin on top of production costs to come up with a price.
When possible, use value-based pricing. Value-based pricing requires a more sophisticated analysis than cost-plus pricing to determine what consumers of a good are willing to pay. When it is possible, value-based pricing is a more nuanced analysis and yields improved profits.
Key Takeaway: In the '80s, a pet rock craze swept the nation. The cost of making a pet rock was almost zero, yet people's willingness to pay was high. Cost-plus pricing would have prevented the inventor from maximizing the value of his idea.

Question 15

WePro has created a monopoly in the Nigindia sugar market by acquiring its competitors. Which of the following might keep it from fully leveraging its market power?

Accepted Answer

Splenda is a substitute good for sugar. If the cost of sugar is too high, Nigindians might switch to the artificial sweetener.
Key Takeaway: Always consider potential substitutes when assessing a market structure. For instance, riding a train or driving is a substitute for flying.

Question 16

Everyone loves Piggy Brand Bacon products, sold in supermarkets worldwide. Piggy acquires a mail-order steak company and renames it Piggy's Steaks. This could be an example of:

Accepted Answer

The best answer is that Piggy is trying extend the "halo" of its Bacon brand to the new acquisition. The Halo Effect is when the high quality of one brand or product results in people perceiving related or similarly branded products to be excellent as well, whether they are or not.
The Halo Effect is also a personnel management adage which refers to people's often errant belief that someone who is extremely good at one thing will be great at another. For instance, an amazing computer programmer might get the role of project manager because people think he is brilliant. This is a potential mistake that can lead to product failures.
Key Takeaway: Will Piggy's strategy work? We don't know. The Halo Effect only extends so far. For instance, Neutrogena branding a new line of luxury automobiles isn't likely to work.
Take a nuanced look at each case by suggesting market research. In this case, perhaps the logo of a happy pig might not play well with consumers looking for steak.

Question 17

A relatively unknown maker of luxury soaps, shampoos and lotions might provide its products to a high-end hotel chain for zero for which of the following reasons? Select all that apply.

Accepted Answer

Soaps, shampoos and lotions tend to be experience goods. Experience goods are those that have incumbent products already preferred by a user. In order to get people to switch, they must "experience" the new product. This requires a person to receive a sample or purchase the good (often at a discounted price, although heavy advertising may also persuade the buyer).
Branding is also a consideration since associating the unknown brand with a well-known, high-end luxury hotel will provide credibility in the marketplace through an association with a premium hotel.
Key Takeaway: We want you to recognize an experience good when it's presented. You will deal with many questions dealing with market entry or strategy for an experience good. They vary from condiments to disposable razors to hand creams. People have an established preference and must experience a higher utility from a new good. Thus, your good must both have a higher utility (relative to price) and you must get the consumer to actually try the good.

Question 18

You would most likely receive confirmation of "freedom to operate" from:

Accepted Answer

Freedom to operate comes from a patent attorney, and means you can move towards commercialization of a product or service without infringing on the intellectual property rights of others.
Key Takeaway: It is irresponsible to move forward on the commercialization of a product without freedom-to-operate approval from a patent attorney. Any go-to-market plan should include the not insubstantial cost of getting this authorization.

Question 19

A digital good distributed via the web has a marginal cost of zero.

Accepted Answer

There is no cost to copying a digital good, so the cost of producing the next unit is zero. The exception is high bandwidth digital goods such as video. Then the cost of data transfer might be substantial enough to factor into your consideration.
Key Takeaway: This has major pricing implications. It means that you are essentially trying to maximize revenue when selling a digital good, since cost will always be zero.

Question 20

Which of the following are barriers to entry?

Accepted Answer

All of the above. Initial investment capital, intellectual property, government policy (e.g. a limited number of permits) and access to sales channels are all barriers to entry.
Key Takeaway: Try to remember this list because it is important to know when assessing the attractiveness of entering a new market.

Quiz 7: Strategy