Alcoa Assess Cost Curve to Gain Competitive Advantage

Case Type: business competition; industry analysis.
Consulting Firm: Katzenbach Partners (now Booz & Company) 1st round job interview.
Industry Coverage: Mining & Metals Production.

Case Interview Questions #00060: You were hired by Alcoa Inc. (NYSE: AA, name from ALuminum Company Of America). Alcoa is the world’s third largest producer of aluminum, behind Rio Tinto Alcan and Rusal. From its operational headquarters in Pittsburgh, Pennsylvania, Alcoa conducts operations in 31 countries. Alcoa is a world leader in the production and management of primary aluminum, fabricated aluminum, and alumina combined, through its active and growing participation in all major aspects of the industry: technology, mining, refining, smelting, fabricating, and recycling.

Because Aluminum is a commodity, relative cost position is the primary source of competitive advantage. As part of a strategic review, you have been asked by Alcoa to construct an industry cost curve (cost per kg of aluminum produced vs. industry supply), for various plant‑to‑market combinations. There are five major players in the industry, supplying six major geographic market segments. Your model should be flexible enough to enable various future scenarios to be run.

Possible Approach:

1. How to estimate competitors cost management?

• financial accounts
• direct estimates by client management
• indirect estimates by client management

2. How to simulate the market mechanism?

• determine what kind of market structure exists
• oligopoly
• perfect competition

3. Given perfect competition, how to simulate?

• back of the envelope approach (there are lots of combinations!)
• linear programming approach

4. The use of linear programming approach allows considerable flexibility as well as provides insight into questions such as:

• is the industry currently efficiently configured?
• if a new plant is added to the industry, which market segment is most likely to be affected?
• what will the equilibrium price be in the future?