Profitability Case - A Framework for the Most Common Case Type in Consulting Interviews
As you already know, there are several common case types that occur in case interviews you should familiarize yourself with. Profitability case interview questions are the most frequently used case types during case interviews for management consulting roles. Make sure to be prepared for them by internalizing our five steps to crack profitability cases.
Profitability Questions – The Number 1 Reason For Most Consulting Projects
The most common reason why firms instruct consulting firms with their projects is that they struggle with their profitability. You will have to find out the root cause of their declining profitability. Examples are falling sales, rising costs, or both. Your task will be two-fold: performing a structured and quantitative analysis of the data to isolate the problem and then finding a promising solution for the problem.
Solve the Profitability Case Using This Case Example
We will explain the procedure along with a profitability case example just like the one you might encounter in a consulting interview: Your client is a chewing gum manufacturer (you can find the entire case here). The CEO of the manufacturing company is concerned because his company is experiencing declining profitability. Please investigate the reasons for the decline and give suggestions for improvement.
The Five Steps to Crack a Profitability Case Problem
1. Clarify the problem
Remember the 4 commandments!
Take notes! Start with restating the problem: “Just so we are on the same page, our main objective is to determine the reasons behind the decline in profitability for a chewing gum manufacturer and provide recommendations to improve the profitability of the business, is that correct?”
2. Prepare your structure
“Thank you, may I take a minute to prepare my structure?”
As mentioned in the introduction, the terms “declining profitability, falling sales or rising costs” hint at a profitability case. You now have to isolate the problem and quantify it. A good start to analyze a profit problem is by using the profitability equation:
When profits go down, you either have a decline in revenue, rising costs, or both. The best way to find the root cause is to sketch the problem as an issue tree. Start with the more promising part, for instance, revenues - because the market is highly competitive. Obviously, you would share that thought with your interviewer and be on the lookout for hints. E.g. ‘I am going to look at revenues first since in a competitive market like the market for chewing gums I’d expect this to be a big driver.'
You can further break down the profit tree like below:
Now you can start with one of the branches. Let's take the revenue side.
3. Analyze the revenue side
Whenever you get the information that something has changed: quantify it! Ask by how much and in what time period. And very importantly: SEGMENT the revenue streams! You can ask the interviewer whether you can segment the revenues into its component parts. If the interviewer prompts you to do the segmentation, you can think about different customer segments (small business / large business, etc., age group, sex, etc…), product lines, or regions (South America, Asia, etc). This segmentation will help you isolate the root of the problem. You'll be able to develop better and more targeted analyses.
For example, when helping a chewing gum manufacturer improve his profitability, you may ask: “What are the revenue sources?”. The interviewer tells you that all revenue comes from two products: Flavored and non-flavored chewing gums. At this point, you might want to know the development of sales over the past couple of years. “How have sales figures developed over the years for both products?” He shares the following diagram with you:
It now becomes clear that revenue is not the problem because it has grown steadily in recent years. Therefore, it must be costs that rose significantly, leading to a drop in profitability.
If you’ve found the biggest driver of the problem, you oftentimes have to switch to a more qualitative framework like the 4 Cs to find the underlying root cause! For example: when you have less revenue, but the price is the same and units sold dropped you have to find out why. Is there a new competitor on the market? Do you have quality problems, or did you just stop a marketing initiative that you ran for years prior to this drop?
4. Analyze the cost side
Now explore the cost side. You know that costs can be broken down into direct and indirect costs. You can then inquire about the breakdown of costs: "Please tell me about the direct/indirect cost split for the products.” The interviewer hands you the following graph:
As we know that there are two different product lines, it is advisable to calculate their margins to check if there is a more profitable product line. You calculate the margin for both products based on the following formula:
“I'd like to calculate the margins for both products; do you have information on the different prices and costs for each of them?” The interviewer hands you the following graph:
Based on this, you calculate the margins:
5. Close the profitability case
“Analyses show that the product whose sales have increased (flavored chewing gum) is also the one with lower margins due to the added flavor. Therefore, total profit margins have decreased while sales have increased.”
After you have determined the root cause, you must develop a good logical solution (e.g., developing a competitive response, starting a marketing initiative, etc.)
It is important to stay structured even if you think you have reached the final stage. Therefore, categorize your approaches for instance by short-term/easy to implement solutions and long-term ones.
- Negotiate with current suppliers.
- Look for other suppliers (form partnerships or buy greater amounts with batch discounts).
- Vertical integration.
- Release new products with better margins (e.g., low-calorie flavor gum or tooth cleaning gum).
- The client could also increase the price of the flavored gum, risking decreasing sales if customers do not see any added value with the price rise (high price sensitivity).
Your client is ‘Muse 19’, a Museum in Paris with a large collection of 19th-century artifacts, predominantly paintings, and sculptures. The museum is run by a non-profit organization based in France. The museum is quite popular amongst students, artists, and tourists. Last year the museum attracted almost 2 million visitors. Despite this, the museum’s revenue has been declining for the last three years. Surprisingly, other museums of similar nature have been doing much better than Muse 19. The museum director has approached you for advice. Read the whole profitability case.
Style: Candidate-led (usual style)
A wealthy client has recently bought an island in the Caribbean. She has engaged us to identify possible uses for her new island. Read the whole case.
3. Incos Pens
Incos is a global manufacturer of writing products with divisions in North America, Europe, and South-East Asia. Their global sales are $60 m and their profits amounted to around $30 m. Their European division who manufactures and sells disposable pens is experiencing flattening sales and a decreasing profit. The client hired you to help him come up with suggestions to get profits back on track. Read the whole case.
Espresso Whatelse is an Italian company that produces coffee and espresso machines since 1908. It is the Italian market leader and has a strong presence overall in Europe. In 2019, Espresso Whatelse has increased its revenues but it has seen declining profit margin. Your client wants to understand the root causes of this 2019 trend and how to increase its profit margin again. Read the whole case.
Style: Candidate-led (usual style)
A friend of yours recently got promoted to the position of director of a university library. Yesterday, your friend received a call from the Ministry of Education, who offered him to be part of a national RFID pilot with his library. As your friend is unsure if he should pursue this option, he asks you for your advice. Your task is to assess the RFID technology for his library. How would you approach such a request? Read the whole case.
Profitability Frameworks - Key takeaways:
Profitability problems are frequent in consulting case interviews. To solve a profitability problem:
- find the root cause using the profit formula
- use a tree structure
- go down one branch at a time and segment it
- quantify and look for trends
- locate the biggest driver
- find out why through qualitative analysis and additional analysis (e.g., using the 4 Cs Framework).