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?
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|
|Parts and Labor||$1000||$3000|
|R&D, Sales etc||$400||$400|
|Fee to external distributor||$400||$400|
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.