3)
Prioritization Matrix (2 by 2’s): Can be used to evaluate any project/R&D activity. There are
number of ways to do the same a few are outlined below –
GUESSTIMATES
Do not neglect this section and be thoroughly prepared with the same. A guess estimate can be asked in multiple ways, even while solving a normal profitability case. Once you have completed the guess-estimate then try to include the following to make your analysis much richer –
a. Verification of data – Identify a few sources from where you can get the right numbers to further refine your estimate.
b. Sensitivity Analysis – Conduct a basic sensitivity analysis and identify the most critical assumptions you made.
Such an extended analysis shows that you have thought through all the assumptions made and are not arbitrarily using any number to estimate. Although the numbers do not matter here but having a basic sense of the numbers used, knowledge of conversion scales and identifying the potential areas of over/under estimating helps a lot.
Guesstimate problems can be solved through three methods (with certain other variations):
1). Top Down Method 2). Bottom Up Method 3). Employing a proxy Tips:
1). When you receive a guesstimate question, please make sure you scope it down so that applying a method becomes easy
2). Use simple numbers and round off intelligently so that you don’t get stuck on account of calculations 3). Please try to write the guiding formula you are going to use and explain it to the interviewer so that while you are performing the guesstimate, he follows you.
4). Whenever you make an assumption, please take a buy in of the interviewer asking “ Does that make sense ?”
5). Whenever you make and assumption, please make sure that the actual no. can be found out through a public information source, so even if your assumed no. is not correct, it can be correct. Be sure to state the same.
6). Try and be MECE (Mutually Exclusive Collectively Exhaustive), just like in solving cases, at each step
Example 1: Estimate the no. of auto rickshaws in Delhi
Whenever you encounter such problem, please be sure to ask the interviewer whether he wants you to solve the problem from supply side or demand side.
From Demand Side
You actually go about determining the actual demand of auto rickshaws. The steps followed could be as under:
1). Formula: No. of auto rickshaws = (Total No. of Auto Passenger Trips to be travelled per day in Delhi)/ (No. of Trips/Auto/day)*(No. of Passengers/Trip)* Utilization factor
2). Now in order to calculate Auto passenger miles, we would divide the trips into trips into trips made for regular usage ( done by professionals ) and occasional trips, and use top down method to calculate each
3). We would first figure out trips done for professional usage by figuring out how many people use auto rickshaws for professional usage on a daily basis, using filters such as income.
Top down Method
Population of Delhi = 1.2 Crores
% Working (say 1 per household) = 1.2/4 = 30 lacs Auto Fare per day =Total kms* km rate = 20*15 = Rs. 300 Total monthly expense = 300*30 = 9000
Assumption (A person can at max spend 10% of his income on auto rickshaw) = 90000 Rs per month should be his income)
% people in urban Delhi in that income bracket (10%) = 3 lacs
% People who shall be travelling by auto = 1-% people who use own vehicle-%people who use metro
= 40%
No. people who would use auto on a regular basis for professional usage = 3 lacs*0*40% = 1.2 lacs Hence no. of passenger trips from professional usage = 1.2*2 trips/day = 2.4 lacs auto passenger trips Similarly, we can find out for occasional usage ( we can also employ 80:20 rule as well, saying majority of trips are for professional usage, lets add 20% to account for remaining trips, but such justifications should be backed well with data)
On no. of trips an auto makes, you can use the following formula
= (Average speed of an auto) * No. of operating hours* (Idle time)/ Average distance per trip And verify this no. by using your judgment whether it looks practical or not
You can similarly find out, the other terms in the main formula and figure out the number.
From Supply Side
1). In order to verify this you can employ supply side through following formula
= (Average Total No. of autos sold in Delhi/year)*( Average life of an auto)
2). You can find out the first term by looking up the sales numbers of all the major auto players for past few years ( In the interview you would have to assume or ask) and average life of an auto also is a similar information
Similar Problem: Estimate the Airplane Fleet size of Air India
Example 2: Estimate the two wheeler market in India
Please make sure you ask whether the market has to be estimated in no. of units or You can again approach this problem from supply side and demand side. You need to clarify the same with the interviewer.
Demand Side
1). We would divide the demand into : New Demand ( new users) and Replacement Demand ( Existing Users)
Replacement Demand = ( Total No. of Two Wheelers Currently in India)/ ( average replacement period)
New Demand = (Population segment Growth Rate) * Total no. of two wheelers currently in the country
2). Two wheelers can be of two kinds: Domestic (owned for personal usage) and Professional (owned by professional agencies such as dominos, police, postman)
3). To estimate for personal usage, we would employ top down method 4). Start with population of India, 1.2 Billion
5). Urban (30%) and Rural (70%), which implies 0.36 Billion Urban and 0.84 Billion Rural
6). No. of Urban Households 0.36/4 = 90 Million and No. of Rural Households = 0.84/6 = 140 Million 7).Now we need to figure out how many can afford a two wheeler and remove the elite population that only owns four wheelers. Hence, we shall have to find out the income level and figure out the number of two wheelers in households hence.
8). Lets say that no. comes out to be 30 Million
Now , based on the current no. we can find out the expected replacement demand Replacement Demand (Domestic) = 30/4 = 7.5 Million
New Demand = 30*2% (growth rate of eligible population segment) = 0.6 Million
Hence total domestic market = 7.5+0.6 = 8.1 million/year
9). To calculate Professional Demand, we can use proxy and bottom up combination So, first assumption is professional usage is primarily urban
Then take a city and categorize various types of uses (This is bottom up approach):
1). Police 2). Dominos 3). Postal Services 4). Others
Then employ proxy method as under
Total Professional usage = (No. of vehicles in the city)*Urban population in the country/
(Population of the city) * Correction factor
Supply Side: Similar approach as Example 1, please try it yourself
Similar Example: Estimate the pet food market in India
Estimate the luxury home market in Chandigarh
Example 3: Can two dogs have identical no. of hair in the world?
Short Answer is YES!
This one is an application of pigeon hole principle (Such problems have been asked in Oliver Wyman in past)
http://en.wikipedia.org/wiki/Pigeonhole_principle#Hair-counting