Case Type: new product.
Consulting Firm: Gallup Consulting final 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 and previously controlled by Apollo Management) which manufactures residential and light commercial indoor heating and cooling products and systems. As the market 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 is much more energy efficient and it cuts electricity requirements (and hence costs) by 50% to produce the same cooling effect. Should the client introduce the new technology 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 unit | |
| Revenue | $2000 | $??? |
| Parts and Labor | $1000 | $3000 |
| R&D, Sales etc | $400 | $400 |
| Fee to external distributor | $400 | $400 |
| Profit | $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 will decrease 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 air conditioning 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 Global’s sales are 40% of total market, 30% to the price segment and 10% to the lifetime value segment. (Notice their old product appeals more to the lifetime value segment…the 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:
I think it is important how big the SW/SE region actually regarding our customer base in the lifetime-value market. Since it seems that our current product is similar to the competition we could sell the new product for a very premium price as mentioned above and it wouldnt effect out “price sensitive” customer base as we would need the old product anyway if we dont want to give these customers to the competion as our costs for the new product are way too high for them.
The biggest issue I think would be required analyzing at the first, the air conditioning market curve (mature? increase? decrease?); if your 10% EBIT is going to grow for the next 3 years (time for the competence to enter this product) maybe you should think about waiting a little more due to enjoy this growing and once it’s starting to decrease then you low the price of the current units and launch the new product.
Another option is launching right now the new product while keeping the old units alive. To avoid cannibalization you should produce/distribute little quantities but selling them at a high price. (think about how a TV brand launched LED tvs, PlayStation or Mobile Phone new models, and so on) In this way you will be acting as a market leader, keeping ahead of your competence and launching a new product without sacrifying your current profitability and earning too much mone for the new units produced.
More important point is that if you are well known as the market leader (or the best player) you have to act as market leader. Technology innovation is important for people because it gives you status besides other benefits such as low costs etc. If our company is a market leader with new models and new technology (because of R&D department), then there is no need to launch new model. To market new models requires extra time, and no time to lose for the client.