S22E10: McKinsey Case Interview Example – College Football Expansion

Welcome to Strategy Simplified: McKinsey Case & Coaching The team has had surprising success and has gained attention of a more powerful Athletic Conference like a league. Gaining membership into this conference would drastically raise the profile of the school and lead to increased revenue streams. However, in order to gain acceptance into the conference, the school will need a bigger stadium that's like larger than the stadium that they're currently renting. Your client wants to build a 25,000 seat stadium on site. Is this a good idea? Before we dive into some more specific cost information, I'd like you to 1st brainstorm some drivers of stadium construction costs. Speaker 2 Welcome back to Strategy Simplified. Today we're bringing you a live McKenzie style case interview, exactly the kind of experience you'd face in a real interview with McKenzie. Leading the case is Jolly Packer, a former McKinsey consultant and one of our coaches here at Management Consultant. So you'll get a front row seat to how a McKinsey interviewer thinks, probes and evaluates a candidate in real time. And if you want to work directly with Jolly, you can book a coaching session or a package at the link in the episode show notes. In this case, you'll hear a profitability and investment decision case in higher education athletics. So very interesting, fun case focused on break even analysis, scenario planning and recommendations under uncertainty. And the hot seat is written an NBA candidate with a decade of experience working in government who is now testing his skills under live pressure. So grab a pen and paper and try to solve alongside him. Now let's jump into the case. Speaker 1 So Rhythm, we're going to be looking at a college football program today for a case on really focus on profitability and scenario planning. So I'm going to give a case opening then please jump in with clarifying questions and then we'll get into the first question. So your client is a public university that is considering adding an intercollegiate football team to its athletic program. Their only financial requirement is to break even. They are also interested in the intangible benefits of adding this football team. Longer term, they hope to pay for a new stadium and use football to subsidize other sports programs on campus. The Board has put together the following list of additional information for your McKinsey team. Enrolment is 10,000 students at this public university. The school is near a city of 1,000,000 residents. The school is located in the southern United States where football is very popular. The school feels that adding a football program has many benefits, including increased exposure and brand awareness, school pride, enhanced college experience, the students, improved connections with alumni, and additional revenues. The school currently participates in 16 men's and women's sports, including basketball, track and field, and baseball. So before we get into the first question, let me know if you have anything you'd like to clarify. Speaker 3 But then break even. Is there something we should be concerned about in terms of schools perspective? Speaker 1 So as I said, they're just looking to break even financially. They feel there'll be other benefits that come alongside this program. So we don't need to at this point focus on those other benefits, but just when it comes to the calculations. Speaker 3 Is there any particular reason why they're looking into specifically specifically for football stadium since they are already into basketball and other track and field? Speaker 1 They feel that their offering could expand into football, and they also feel that given their location in the southern United States, it's it's a logical next step. Speaker 4 OK, since. Speaker 3 Let me come up with the structure and see what key metrics could derive us and look into what are the requirements of the stadium and in what time period we can break even. Speaker 1 Yeah. So just to frame your your work, the first question that we're going to be working through is what factors would you consider when evaluating whether this is a good idea for your client? So feel free to take care. Speaker 3 Of course. Speaker 5 Hey, strategy simplified. My name is Katie and I'm a Black Belt alum. I use the program to help me land an offer at BCG where I spent three years in the Middle East and now I'm back. I'm on the management consultant team to help you lend the offer that you want to get. How does the Black Belt program work? We start with A1 on one on boarding call so that we can develop a personalized plan and help you understand where to focus your energy. And throughout the entire recruitment process. I'm here along with our team to push you, to cheer you on, and to help you do whatever it takes to land that offer. If you'd like to chat before you sign up for Black Belt, you can click the link in the show notes to book a complimentary 15 minute call with me and we'll figure out what best suits your needs. Candidate's Approach to Revenue Potential My structure, I would like to look for segments to come up, whether it's a viable idea. First one is a cost structure, the cost of stadium and second one really the staffing and coaches and scholarship we are going to provide to attract the talent and in terms of travel and operations. And 2nd bucket would be the revenue potential, the number of tickets we'll be able to convert and media and broadcasting and merchandise and food items we can sell. And third one will will be the financial viability in terms of investment, how much we're going to invest and what does success looks like for our school. And 4th, 1:00 will be the risk and uncertainty. Risk will be the number of students that they will be able to convert. And there can be a possibly scenarios where we'll run into cost overrun in terms of training and building a whole team here. So do we have something on in terms of cost structure and to see or do we have a timeline for the break even period? Speaker 1 Yes, we do have some further information on costs, but before we go into that, I want to talk a little bit more about the the second of your buckets. So you said revenue potential. What sort of factors would you want to consider when it comes to revenue potential? Speaker 3 So in terms of revenue potential, we can see those students will be enrolled in terms of tuition fees or extracurricular activities, that will be one. And second would be the number of ticket sales during the matches of football. Plus we can rent our stadium whenever we have some summer breaks or winter breaks or when the session is not on online in full form or second and more we can look into media and broadcasting merchandise. We can create few teams and we can sell the clothing line. And last one, we, we can create a contract with the vendor vending machines that would be available at our stadium. Speaker 1 Great. And how is your cost structure and your revenue potential as your first two segments, how does that differ to financial viability, your third segment? Speaker 3 Financial viability in terms of sometimes in university we have some constraint in terms of stakeholders, whether they are ready to invest that much or whether they have some doubts or it's there is a whole political environment going on before building or investing into these types of stadiums. There can be some stakeholders who are more inclined towards education side or more inclination toward different sport. Speaker 1 Understood. So you're really considering the political climate or the decision makers under your viability bucket rather than the cost and revenues? Great. OK. So we first want to look at projected yearly revenues for this program. I'm going to provide some following information. And in addition, you'll need to draw back on the information I provided in the upfront about the case to to get this anticipated revenues. So this is the following. The student fees, a combination of tuition and student fee increases, will raise $250 per student per year. Game guarantees The school expects to be paid $300,000 per away game. There are 6 away games per year now to ticket sales. Expected price point of $25 per home game. There will be 6 home games per year and an expected attendance of 7000 per game in the first season. That excludes student attendance. Students would be attending for free at the stadium. Finally, they expect to receive alumni support of 1,000,000 per year. OK. So combined with the upfront data I gave you, you've got all the information you need to calculate and your revenues. But please let me know if you've got any clarifying questions. Speaker 3 I do want to clarify those numbers, I hope I bought them right. So talking about the first student year contribution in terms of tuition fees, it will be $250 per year and the cost to conduct the game per game will be 300 K and. Speaker 1 Sorry, so that's a, that's a payment that the school would receive for attending away game. That's a game guarantee. So they're actually paid $300,000 per away game, of which there are 6. So that can be counted as a revenue. Speaker 3 Wait. And in terms of date revenue, we'll be receiving $25 per home game, per attending and there will be 6 home game per year. And attendance, we're expecting 7000 and we're excluding the students and alumni donation would be 1,000,000 per year. Speaker 1 1,000,000, correct. So yeah, for the attendance of 7000, those 7000 are paying, paying attendees. There will be perhaps additional students, but they will not be paying. So we don't need to factor them as a revenue. Speaker 4 OK, boring and. Speaker 1 Like I said, there'll be some information you need to draw upon from the earlier part of the case to calculate the revenues. Speaker 3 So what I'm going to do is in terms of annual revenue, I'll be adding up the alumni donation and then summing up with the attendance multiplied by the ticket price 7000 into $25. And then we'll be receiving 3000 game and there will be 6 game, we'll be adding that. And do we have and also we have total number of students 10,000, I'll be multiplying that with the 250 per year. And so let me work through the calculation and I'll come with a number. Speaker 4 6 plus 300 K 6 50 student. Speaker 3 MK1 million plus. Speaker 4 115 for Seven 5. Speaker 3 I come up with like 1,000,000 from donation from alumni and in terms of attendees, I'll receive 1.05 million and 1.8 million from ticket sales and 2.5 million from students and the total sum up to 6.35 million in terms of revenue, OK. Speaker 1 So what's your interpretation of that figure? Speaker 3 There will be involved cost that will be fixation cost to build up the stadium and variable cost in terms of operations, day-to-day operations throughout the year and the remaining profit when I'll do it by the investment, I'll get a break even period and we can see whether it matches with their target break even period or not. Assessing Program Costs and First-Year Profitability OK, great. So we're going to do exactly that. We're going to now move on to analysing the costs, though. We've got some additional information to provide you and again, please let me know if anything's unclear. That's the a few different line items here. So great. Though personally, in terms of costs in financial aid and scholarships, the school will need to provide financial aid to 52 football players. This includes tuition fees, books, and room and board. Tuition fees would be $14,000 per student per year, room and board would be $12,000 per student per year, and books are $2000 per student per year. Next up the the coaching theme. So the head coach will be on an annual annual salary of $500,000 per year. He will hire 8 assistants at an average of $125,000 per year. There will also be support staff such as trainers and tutors. The school estimates 25 new employees at an average cost of $60,000 per year. In terms of travel for the away games, this will cost $80,000 per game. The recruiting costs will be a total of $200,000 per year and it would cost 1500 dollars, $1500 per year per player for uniform and equipment. And now the total of 80 players, so 80 players, 52 of whom receive the finance rate and scholarships that we discussed at the start. I. Speaker 3 Want to clarify, is it 18 or 80? Speaker 1 80. Speaker 3 It's. Speaker 1 80 the 80 total players 52 are on scholarship, but all 80 players will be requiring uniform and equipment at a cost of $1500 per player per year. Finally, in this scenario, for the home games, the school would be renting a small stadium from the city at a cost of $100,000 per home game. Speaker 3 I'll quickly run through the numbers. So in terms of aid, we are providing it to 52 players and distribution fees and books and rooms that includes around 28,000 per year. And in terms of hiring a coach, assistant and support staff will be paying salaries for coach will paying 500K per year and for assistant will paying 125 K and we're hiding 8 of them. And in terms of sports, staff will be paying 60,000 per year and we're hiding 25 of them. And travel be is going to cost us 80 grand per game and I'm assuming that we'll be having six games, right? Correct. In terms of recruitment it cost us 200K per year and student athletes which are 18 number. The uniform and equipment will cost 1500 per year and renting a stadium will give us 1100 thousand per game and again we are assuming. Speaker 1 What cost us 100,000 per game to rent for the home games? Speaker 3 And we are again assuming six games. Speaker 1 Correct. Speaker 4 Right, OK. Speaker 3 I'll just quickly multiply each of them and come up with the totals that will give us the total cost that is going to cost us throughout the year. Speaker 1 Perfect. And once you're ready with a number, please also consider break even and whether or not this investment makes sense for the. Speaker 4 School, yes. It's Miss 1651 and 444A4 6 cent wiki plus 3D one million. 60,000 into 25 multiply 50 so. Speaker 3 It will cost us 5,085,856 thousand and if I'll subtract it from the revenue that will give us profit and if I'll divide the initial investment of building that will gives us the break even time period. So at least our setup is profitable. It's less than our revenue what we are generating. Speaker 4 So I quickly. Speaker 3 Subtract it from six. Speaker 4 .635. Speaker 3 Annually, we'll be saving $494,000 by investing 5,000,080, five $856,000 and if we'll divide the initial investment by this, I'll get a time period. Speaker 1 So, OK, for time period for now we'll move on to that. But yeah, so the the main take away that you're you're giving is that we we'll actually break even on our costs within the year. This is the first year and our our revenues exceed by around 500,000 in in profit. Evaluating the New Stadium's Incremental Financials So yeah, great. That was pretty good. So we're going to move on now to another non math question. So let's assume that our client went ahead with implementing this football program. The team has had surprising success and has gained attention of a more powerful Athletic Conference like a league. Gaining membership into this conference would drastically raise the profile of the school and lead to increased revenue streams. However, in order to gain acceptance into the conference, the school will need a bigger stadium that's like larger than the stadium that they're currently renting. Your client wants to build a 25,000 seat stadium on site. Is this a good idea? Before we dive into some more specific cost information, I'd like you to 1st brainstorm some drivers of stadium construction costs. Speaker 3 Well, you know, a client is looking into going to the leading phase by building a bigger stadium that has a capacity of 25 thousandths seats and they want to look into introspect. What are the certain things we would be looking into? I'll look. I'll have some more time and look into the key. Speaker 4 Drivers, thanks so much. Speaker 3 In a good build up stadium, I would like to see a few segments such as the first one will be definitely the real estate availability, whether we have this much available of land and the cost and the costing, how much extra it is going to cost us. And that would be widespread in terms of everything production capabilities and operations and hiding extra staff, whether we'll be able to manage with the given staff or or we are going to contract it with some real estate company or other stadium building company and there would be definitely risk involved again. Speaker 4 Of. Speaker 3 The stakeholders whether they will be agreed to take this risk of competing with the bigger colleges and whether we'll be able to turn in around the number of attendees from 7000 because that will impact our revenue stream as well. Plus the margins are really tight like will be generating 5500 thousand in terms of previous investment. We have to see how much extra we'll be able to generate by building that this much capacity stadium. Speaker 1 Great. Perfect. That's exactly what we're going to move on to. So we're now going back to another math question. So again, it's going to be a lot of information and we are interested in the total incremental revenues and costs as a result of this proposal. OK. So let me know if you have any questions as we go through. And yeah, just to emphasize the incremental revenues and costs, so we're considering building a 25,000 seat stadium. The estimated construction costs are $40 million and this will be paid for over 20 years with no interest due to accessing a government subsidy. You can assume that the school is not capital constrained. Ticket prices for this new stadium will be $35 per person. You can assume that 50% of our student population attends the game and students don't pay for tickets as they already pay through the fees that we discussed earlier. They expect the stadium to be 80% full. On average, we still would have 6 home games per year. The operating costs for our home games will increase by $100,000 per game at this case. At this point, we can assume that there's no other uses that they've explored for this stadium. And then finally, alumni support, student fees and game guarantees for away games you can assume are unchanged. Speaker 3 Recap of So the total construction cost will be around 14,000,000 and that will be paid in next 20 years with no interest because of building it for the school. And seating capacity will be 25,000 and we can expect 80% of the capacity and we have six games per year. Ticket pricing will be 35 per person and we'll assume that since 50% of the students will be attending and they won't be paying. So multiplying 80% utilization, the remaining will be our attendees will be paying this ticket price and alumni cost will remain change. Speaker 1 Clarifying question. So it's the total, total capacity of 25,000, we're assuming 80% of that. It's full of that number. Some amount, as you correctly identified, will be students. Speaker 4 Right. Speaker 3 So. Speaker 1 You'll need to understand how many are left once the students have been accounted for. Speaker 3 I'll quickly run down the calculation and come off with a number. Speaker 1 Great. So yeah, there should be an incremental revenue number and an incremental cost number. Speaker 4 Yeah. Yeah. Yeah. Speaker 3 That there is an incremental of 600K per year and in terms of ticket revenue generated by ticket is 210 Ki. See that? Speaker 1 I can see very. Speaker 3 Additional in terms of extra costing is quite large and. Speaker 1 Took me through your incremental revenue figures. Speaker 3 Incremental revenue will be through extra ticket generation will be 210 K That's just revenue we'll be receiving through the stadium tickets. Speaker 1 But to total, yeah, told me for how you thought about that number. Speaker 3 I don't like since the capacity will be 25,000 and we'll be utilizing 80% of the stadium and out of that half will be the attendees will be paying for tickets and since we that will be the revenue generation from one game and we'll have six games. Speaker 1 Just a clarification. So we said that there'll be 80% utilization on a 25,000 person stadium. We said half of the students will attend, so 5000 students will attend. So we'll still have 15,000 fee paying attendees. How might that change your figures? Speaker 3 Yeah, the app changes, so 50, I'm sorry I missed out something like is it the 50% student we're going to pay? Out of the total attendees, 50% will be the students. Speaker 1 No. So the information was 50% of the student population will attend the game and we know we have 10,000 students. So 5000 of those 20,000 seats are allocated. So yeah, wait 15,000. Speaker 3 And then we put back the math and like my figures, Sure. Speaker 1 And so this is the total incremental revenue as well, so across the whole year, not just on a game by game basis. Speaker 2 Right. Speaker 4 OK. Speaker 1 Cool. So take a moment to to sort of adjust that and then afterwards we'll move into the final question of the case. Speaker 4 Right. Thank you. Speaker 3 The changing number will be 350 K that will be generating through the tickets selling. Speaker 1 And is that an annual number that you've got too? Yes. Speaker 3 That's oh, that's per game and in terms of annual will generate, we'll quickly multiply. Speaker 4 As 6. Speaker 3 2.1 million per year. Speaker 1 In incremental revenues, right. OK. And then in terms of our costs? Speaker 3 In terms of our cost, the incremental cost will be 600 K, although in terms of internal incremental revenue, I did subtract it from the earlier revenue. So that will be the total revenue that will be generating from the selling ticket to the attendees, OK. Speaker 1 OK, so are we looking at a a loss or a gain with this new stadium built? Speaker 3 I think we're looking at the profit with the building of this new stadium. Speaker 1 OK, cool. So we're going to move on to the closing question and we're going to keep it tight because I'm aware of the time we're hitting the clock. So finally, our client has asked for a formal recommendation. What would you like to say to them? Speaker 3 And recommend to a client that they should go to build this new stadium with a capacity of 25,000. This will help them to build to bring their brand equity. Plus, this will influx new students enrolment and there are few risk involved whether we'll be able to turn up the number of attendees with these games and will the construction will be completed within stipulated time. Speaker 1 Great. Post-Case Feedback and Episode Conclusion Thanks so much. Let's close out the case there. So I've got a bit of feedback for you. But first, Katie, just give me a time check how we're looking for questions and the overall time. Perfect. OK. So not long enough to go through specific questions, but what I'll actually give us the feedback on the questions and then we'll just briefly discuss something around the math in the penultimate question. OK, So starting off in terms of question one, the case structuring, I liked your structure, but when you first presented it, I, I started to see some overlap between the segments you presented. So I clarified that when you talked about this financial viability, I think this was more a choice of words than what you actually meant with financial viability because you've given cost and then revenue potential potential. It felt like financial viability was almost like endogenous to those two first cases. So just keeping an eye on being like me, see with those case buckets. But it's totally fine to use the structure you did. You know, this is a profitability case, but it doesn't mean you only talk about revenues and costs at the first level. I think it's fine to have multiple buckets if you present it in the right way. And I think, yeah, your financial viability when you spoke about it was actually a useful category. I just think the way you named it was misleading. So just, yeah, something to keep in mind. But overall, by the way, this case was good. Your your math was strong. You move quickly. And I think it's a challenging. Lengthy case. So yeah, well done for for sticking with it, especially with all the information that I was providing. So that was on the first question. On the second question, which was the first piece of math where we looked into projected yearly revenues, you move very quickly. You got to the correct answer. I was, you know, I was taking along with you. I knew what you were doing at each step. It was well structured and it was good that you spoke through each line item when you were clarifying. So that's something to keep in mind. 1 Little point on clarifying at the beginning when I asked if you had any questions, you gave some questions which were good, but I would have liked to have seen a recap of the data that I provided at that point, especially because it was used throughout the case. So if you've got one of those numbers wrong, like the enrollment of the number of students at the college, you were going to be having these follow through mistakes. You didn't, but just that's something to to keep in mind. OK. Moving on to Question 3, which was when we looked at more qualitative side of considerations when it came to creating this new stadium. I think what structure was good here We talked about real estate availability, costing, stakeholder risk and then capability to meet the demands of this new stadium size. I would just mention though, with your issue trees, you had a tendency to lay out some very structured first buckets and then just give like a list of things within them. If you feel you have the time, try and give that next level also in a structured way. So for example, you know, within real estate availability, perhaps you want to think about like available land on campus and then maybe available land near campus and the cost of acquiring that land. That could be two buckets, for example. So rather than just listing ideas within that. So if you have time, I think it's good to go to that next level of of of nisi structure. So that was the question freezed the 4th question when we came to incremental revenues and incremental costs. So unfortunately you did slip up a little bit here. We haven't got time to go through this full solution because we've got this time stop. But you'll receive the case obviously after this call and you can spend some time checking that you were you were close. But I think there was just a little, a little mishap. But basically what this was requiring you to do is to find a new ticket revenue which came to 3.15 million per year and then minus the old ticket revenue which you would have calculated in a prior step as one of your sub calculations which was 1.05 million per year. So there would be a incremental revenues of 2.1 million per year and then you need to do the costs, you'd be looking at stadium costs, which was 40 million / 20 years, so 2,000,000 per year and operating costs which increased by 100,000 for each of the six games, which brings you to 2.6 million in incremental. So you're actually at a $500,000 loss with the construction of this stadium. The math in this question, let the case then go different ways really depending on the candidate. If you'd identified the loss and said you shouldn't go ahead, that that worked in some ways in this case. But you could have also identified this loss and said the other revenue streams are going to account for this or this investment is going to pay back in other ways because we haven't looked at other revenue streams. And it was mentioned in the case that joining this league will bring other revenue stream. So could have gone either way with that. And then finally, the closing question. Yeah, you were a bit pressured for time, I think, but it was good that you started with the recommendation and then you talked about the risks underlying it. Try and keep it, that pyramid approach that you take. You start with the synthesis and then you talk about the underlying factors which support your synthesis. So that was good to see and yeah, good, good under the pressure that we had at the end there. So, yeah, well done for a strong case. This wasn't easy. I'd also say that I bet they felt maybe lots of pauses in this case because of the amount of math we had. Most McKinsey cases will be more conversational and you'll have more chances to go back and forth with the interviewer. But this case in particular was a very, very math heavy case. So thanks. Thanks so much. Speaker 3 Thank you so much, Abby. Speaker 2 That wraps up today's McKenzie case. 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