Activision Blizzard to Move Offices into One Location
Case Type: operations strategy; organizational behavior.
Consulting Firm: Deloitte Consulting first round full time job interview.
Industry Coverage: media; entertainment.
Case Interview Question #00875: Our client Activision Blizzard Inc. (NASDAQ: ATVI) is a large media and video games publishing company based in Los Angeles, California, United States. Formed in 2008 by the merger of Activision and Blizzard Entertainment, the company is the fifth largest gaming company by revenue as of 2014. 
Intellectual property published by Activision Blizzard include the multi-million dollar video game franchises of Call of Duty, StarCraft, and Warcraft.
The client Activision Blizzard currently has two offices. One in Santa Monica and one in Century City. Recently, they have made the decision to combine operations into one building and will choose one of their existing buildings, but are unsure which one to choose. What should they do?
The candidate should look at two main things:
(1) The economics of the move
(2) The softer issues about integration
Possible Answer:
Part 1 – The Economics
The candidate should identify rent, capacity requirements, switching costs associated with the move, the cost to upgrade the existing structure to make it usable by the increased number of employees, etc. The candidate should also ask if the client leases or owns the two office locations and what each office is used for (i.e. what divisions of the operation are housed in each).
Once they ask for these things, the interviewer can provide the following additional information.
Additional Information:
* The client requires 100K square feet of space.
* The client leases the two offices for 10 years.
* The client will sub-lease (rent) any space it doesn’t use.
| Office | Santa Monica | Century City |
| Purpose | Video Games | DVD’s |
| Space (in sq ft) | 200,000 | 400,000 |
| Cost per sq ft per year | $40 | $40 |
| Build-out cost (over 10 years) | $1.5M | $500K |
| Average vacancy rate of city | 10% | 18% |
Key Assumptions:
* Assume they can sub-lease any and all unused space.
* The remaining time on the current leases is 10 years.
Interviewer: Ask the candidate what they think about the vacancy rate as it pertains to the rent they can charge for the sub-lease.
Candidate: Answer should be that the higher the vacancy rate, the more supply, and therefore the lower the price they will be able to charge for sublease.
Interviewer: Given that, allow them to assume that the sublease price they can charge per sq ft is $40 for Santa Monica and $30 for Century City.
If the candidate does not begin to do so on their own, ask them to calculate the financial impact of each option (may be in total or per year):
Note: The candidate should realize that the client is already locked into a 10 year lease with both buildings.
Annual Financial Impact of each alternative:
| Occupy Santa Monica only | Occupy Century City only | |
| Santa Monica Rent | ($8,000,000) | ($8,000,000) |
| Century City Rent | ($16,000,000) | ($16,000,000) |
| Build-out Cost (per year) | ($150,000) | ($50,000) |
| Total Cost / year | ($24,150,000) | ($24,050,000) |
| Sub-lease Income – Santa Monica | $4,000,000 | $8,000,000 |
| Sub-lease Income – Century City | $12,000,000 | $9,000,000 |
| Total Sub-lease Income | $16,000,000 | $17,000,000 |
| Net Impact | ($8,150,000) | ($7,050,000) |
Santa Monica Rent = 200K sq ft * $40
Century City Rent = 400K sq ft * $40
Build-out Cost per year = Total build-out cost / 10 years
Sub-lease Income of client occupied building = (Total sq ft – 100K sq ft) * sublease rate
Sub-lease Income of 100% subleased building = Total sq ft * sublease rate
The candidate should quickly see that moving to Century City is optimal.
Note: A good candidate will note that so far, we’ve only looked at the financial aspects of the situation. This is NOT enough information on which to base a decision.
Part 2: The integration issues
Interviewer: Besides the economics, what else should they consider?
Candidate: Answers should include the following. (Allow the candidate to think about this and come up with a short list of possibilities, explaining each)
* Workforce integration issues
* Proximity to clients/customers
* Proximity to employee homes
Interviewer: Ask the candidate to recommend how he/she would inform the employees of the move, and the pros and cons for each approach.
Note: There is not necessarily a perfect answer but a good candidate will identify several alternatives (which could include a few possibilities from the following list). It is important that they identify the pros and cons of each alternative and clearly communicate the ramifications of each option (business strategy, talent retention, office politics, etc.)
* Office wide-meeting
* Starting with top employees to ensure they are retained
* E-mail or memo
* One on one discussions between managers or employees
Interviewer: Ask the candidate to make a formal recommendation. It should be direct while providing potential risks. Extremely good answers will have next steps such as identifying where employees live using HR to look up the zip codes, drafting up a survey to ask employees where they want to work, etc.