Profitability case - unable to identify root cause

Question

I've solved many profitability cases, and I always use the four step process: analyze financial data, find root cause, find solution, risk & next step. However, recently I have done two cases which only provides 1 year data of financial statement, and the focus is purely on the "solution side" (increase revenue or decrease cost). I am a bit confused because without finding a "root cause" or "specific problem", how could I come up with a solid solution to increase profitability? Here's my questions:

(1) For profitability cases, is it common to have no information about the change of revenue / cost / price / quantity?

(2) What information should I ask and how should I proceed with this case?

Answer 1

Hello,

Here there are my answers:

Yes, analysing revenues and costs trends is just one of the many ways to crack a profitability case
I always suggest to split the case into revenues and costs and to anayse each of these buckets to find the root causes

Feel free to contact me if you want to discuss it further,
Luca

Answer 2

Hi,

Even if the question is not about declining profitability, but about the profitability growth - this does not mean that there are no issues. In fact, there will always be an issue. First, you need to find an insight and then drill deeper by structuring to find a root cause.

There are 3 types of actions you can do with data:

Compare with a trend
Compare with benchmarks / competitors
Segment the data further

Don't forget to structure everything - revenues, costs and any further analysis.

Using a combination of structuring / actions to analyze data you'll find the insight and then a root cause

Best

Answer 3

I can think of two alternative, perfectly valid approaches that you could try.

The first relies on benchmarking the client and the competitors. For example, I recently interviewed with Bain and had a case that could be solved by comparing some of the company's KPIs with those of competitors. In that case, they had a similar number of product lines as the competitors, but were much smaller, which leads to higher relative R&D costs.

Another approach would be to investigate the market itself - which, by the way, is often a good idea. These cases often don't rely on quantitative assessements at all but rather test your business judgement. For example, if the company is located in a market known for high labor costs, moving production to a low-labor-cost market could make sense and could be a perfectly valid solution.

Hope this helps!

Answer 4

Hello!

Reading your post, seems that you are relying only on historical data and change of trends. However, in case these don´t exist, you can always rely on bechmark with competitors, overall changes in the market that could be affecting all competitors, etc.

Hope it helps!

Cheers,

Clara

Answer 5

Some ways to think/brainstorm of possibilities include:

Volume Down: Competition reduced prices or improved their product (outcompeting you), competition just launched effective marketing, regulation has slowed you down, economic decline, environmental disaster, tarrifs, suppliers disrupting your production, your product no longer applies to the customer (i.e. decline has been happening for a while)...and so on and so forth...

Price Down: We're in a price war, costs have gone down so we're realising this, regulation has created a price cap, we ran a discount program

Variable Costs Up: Raw materials costing more, inefficient contracts, ageing workforce, deteriorating workforce, regulations, quality control

Fixed Costs Up: Recent large investments

Answer 6

1. yes, you do not always have all the data about today and last years. Leverage what you have, make assumptions and if you are asked to suddenly go into solution go for it. Root cause finding is not always mandatory, especially in an interviewer-led case
2. the target, the trend of last years and benchmark with competitors. Always split the problem into revenue and costs.

Best,
Antonello

Answer 7

Hey,

It definitely exists and looking for a proxy or benchmark is usually the way to go about it. Alternatively, you can ask or prompt the interviewer that you do a market sizing/revenue assumptions. One has to be strategic about his questions here.

Answer 8

I have exactly the same problem.......

Answer 9

Dear A,

1. I would recommend you to analyze revenues and cost separately, and both in order to find root cause.

2. You can ask claryfying questions to the interviewer - about objective of the case, about business model of the company etc.

Also, recently I've uploaded a profitability case “Deep Water rescue” (available in English & German) here on Preplounge:
https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/advanced/deep-water-rescue-206

I used similar cases when I was interviewing candidates on my own in Central Europe (Germany & DACH Region), Eastern Europe (Ukraine & Russia) as well as Middle East (Dubai, KSA, Lebanon, and Qatar). So, this case is very advanced and could be typically used in the 2nd or 3rd interview rounds by the leading consulting firms.

Try, whether you can crack it.

Best,
André