How to structure Profitability Cases?

Let me answer specifically the question of clarification questions.

In general, clarification questions are there to make sure you fully understood any technical terms in the prompt, the business model, the context and also to make the goal (and any constraints) as clear as possible. In other words, what is the situation and what is the problem you are trying to achieve and the desired goal.

When you ask questions on whether this is a market problem or a cost/revenue problem you are already jumping to problem solving mode.

You should only ask these questions AFTER having clear what the situation and objective is. And you should lay out some structure before asking them.

I.e., “first we need to know whether this is an external/market or an internal problem. To know whether this is external or internal, we should compare profitability across players. If this is impacting the whole industry, we would analyze xyz; otherwise we look into abc…"

If you ask these questions as clarification questions, it will seem like you are trying to “guess” the answer and are not following a structured approach, and that is something you should avoid. It also seems like you are asking to interviewer to give you the answer without doing the analysis.

So what will happen is that the interviewer will not give you an answer. You ask whether the problem is market wide or not and he will answer “that is your job to find out” or “what do you want to know to assess that?”. In both cases, you didn't get an answer. And most importantly, the interviewer will think you are not structured.

Regarding the best structure… it should be a customized one. There isn't a rule or a specific expectation, as long as it is MECE and is objective-driven. So you may start at trying to find out whether it is a revenue/cost isse or an internal/external issue, or even whether it is something on the demand, on the competition, or on your own company. All fine. It's about how you relate them to the case objective, and how you proceed after that.

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