How can I analyze profitability cases in an outstanding way?

Hi there,

You seem to be looking for a specific “technique” that would allow you to solve the case well every time. That does not exist. If it did, consulting firms would not use case interview.

So the first thing you need to realize is that you need to CUSTOMIZE your approach to the specific problem, and then you need to decide the best course of action during the case with the specific information you have at any given point in time. So even if you have a great structure, how you proceed along the structure DEPENDS on the specific case (and information you collect along the way). 

How to do this can be learnt, but cannot be memorized, as there are too many possibilities. 

In terms of overall approach, this is what you have to do:

1. What is happening: Identify precisely where the problem is (i.e. what specific driver(s) is/are causing that change in profitability). You solve this through a quantitative approach.
2. Why is it happening: Identify the root cause of the problem. What caused that specific change in the underlying driver (this is usually qualitative).
3. How to improve: Identify potential courses of action and decide which one is the best. Please note that it doesn't matter whether the root cause is internal or external, there is always something you can do about it. 

Finally, you should NEVER ask whether the problem is company driven or market driven. It is your job as a candidate to perform the necessary analysis to find out the answer, not the interviewers job to answer that question. If your peers are answering, they are not representing what a real interviewer would do in a real case (I would never answer that question).

So when you present your “structure”, what you should be laying out is actually the set of potential analysis that you would perform to understand whether the problem is “internal” or “external”.

So you have to ask yourself the question: what set of analysis do I need to perform to understand whether the problem is internal or external, and where it lays exactly? You need to lay out a comprehensive set of hypothesis (and underlying analysis) to answer that question.

This is hard to explain in writing, and is part of the core of good coaching sessions.

So I hope this was helpful, and feel free to reach out if you want a more personalized session to help you improving your approach to case interviews.

Pedro

Hi there,

GENERAL PROFITABILITY APPROACH
 

You need to understand the industry + company context from the prompt itself to figure this out...cases and case types cannot be memorized...you have to adjust every single time!

Example: LOOKING FIRST at Economy/Industry

In my Hot Wheels case, you're a Korean OEM with falling profits. You operate in the US and Japan. The FIRST thing you have to look at here is the general market AND how competitors are doing. Otherwise, you will never learn that US OEMs are doing well in the US while Korean OEMs are NOT doing well in the US. Then, you'll never solve the crux of the case which is that transport times+costs are prohibitively like (Just in Time delivery is the #1 product characteristic).

If you don't look at economy/industry first here, you will not solve the case in a time effective manner.

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/hot-wheels-186

Example NOT looking at Economy/Industry

Take my "Chinese Airline During Covid" case example. We know that the airline is in trouble due to covid. We can make the deduction that this is caused by a reduction in demand. As such, we don't really need to look into rest of market/industry

So, we want to "repair" existing revenue streams as much as possible. So, first let's see what we can do. Then, whatever "gap" is remaining, we want to fill it with alternative revenue streams. Finally, whatever we can't make up for, we have to fix through cost cutting (ideally cutting unused capacity). See the logic here?

And it'll change every time based on the case itself...think critically!

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/chinese-chess-airline-business-during-covid-19-191

GENERAL PROFIT DRIVERS

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

================================================

REVENUE ISSUES/IMPROVEMENTS
 

Remember, you need to apply your revenue improvement ideas to the specific case at hand. You cannot be generic.

That said, some major ways companies boost sales include:

• SAAS (software as a service)
• (Relatedly) Subscription revenue
  • Get people onot subscription plans (i.e. Netflix)
• Behavior-changing "memberships" - i.e. Amazon Prime
  • When people enter Prime membership, they actually actively spend more than they did before
• Bundling
  • I.e. sell a few things together
• Radiation
  • Sell products similar to the current one
• Low-price entry
  • Get someone in with a super cheap/good deal, then, now that you have them as a customer, sell additional, higher-margin products (insurance companies do this, for example)

==================================================

COST ISSUES
 

In general, for determining cost issues, you need to break down the problem into a tree/root-cause analysis and ask the highest level (but specific) questions first! In this way, you essentially move down the tree.

How do you identify where to look? Well, you need to look into whichever of the following 5 make the most sense based on where you are:

1. What's the biggest? (i.e. largest piece of the pie...most likely to change the end result)
2. What's changing the most? (I.e. could be driving the most and most likely to be fixable)
3. What's the easiest to answer/eliminate? (i.e. quick win. Yes/No type of question that eliminates a lot of other things)
4. What's the most different? (differences between companies, business units, products, geographies etc....difference = oopportunity)
5. What's the most likely? (self-explanatory)

https://www.preplounge.com/en/consulting-forum/structure-breakdown-for-costs-7963

https://www.preplounge.com/en/consulting-forum/when-should-i-break-down-costs-as-fixed-and-variable-as-opposed-to-over-the-value-chain-5990

Major Costs - Areas to Cut

FC

• Rent
• Labour (salaried employees)
• Transport (if we own the trucks, etc.)
• Capex
• Utilities (for the office, warehouse, etc.)
• Cbsolescence (wrong word...this is amortization/depreciation)
• Stolen objects (but shocked you heard this in a case)

VC

• Labour (hourly employees)
• Transport (if we pay a company per load)
• Fuel/truckers (if we own our own trucks etc. for transport)
• Utilities (if you need more energy to make more widgets)
• Raw Materials (why wasn't this included? Big one to miss)

(editiert)

Hi!

I agree with Sidi and his approach to profitability cases. This methodology will give a direction to your problem-solving and give you an edge over the competition. 

It is crucial that you can deeply analyze a company's revenue streams and therefore I recommend practicing structuring drills and market sizing mainly.

Hope this helps.

Best,

Anto 

Hello!

I have a case that focuses very much on profitability, feel free to PM

Cheers, 

Clara