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How to Structure this case ?

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New answer on Aug 08, 2020
1 Answer
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asked on Aug 08, 2020
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Curious how you would structure that case taken from Case In Point. I am not fan of Cosentino structure on that one.

Our client is a global automaker headquartered in Detroit. Its motor parts division, with 20% industry market share, carries almost 500,000 parts, options, and accessories for vehicle customisation. The client has not been profitable for several years and the CEO suspects that the company's high degree of ventical integration is hurting it. The client makes about 80% of its own parts, compared with 40% at its primary competitors. The CEO has asked for our help. How would you approach this issue ?

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replied on Aug 08, 2020
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Hi Raf,

Even though I do like the way it was structured in Case in Point, I think it just assumes that the client hypothesis is correct from the beginning (assuming that it is a cost cutting case), while it might not be a cost issue, but rather a revenue one. Therefore, I would still structure it like any other profitability case: following the revenue and cost framework, but since the client already has a hypothesis on cost (because of vertical integration), I would investigate the cost branch first. Looking at the cost, I would look at fixed and variable and then I would look at trends (how did cost change over time) and I would compare this info to what our competitors are doing and why.

Once we do realize that it is a cost problem (i.e. our profits are down because the costs are higher than competitors), then the framework in Case in Point works quite well considering strategic value, alternatives, and potential exits if necessary.

I hope this helps.

Best, Abdelrahman

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raf on Aug 08, 2020

Hi Abdelrahman, My confusion comes from the fact that it's a sub department within a bigger company. The mother company profits are suffering because of a potential non optimal vertical integration. How are you going to run a profitability framework on this one ? Would you do it on the mother company ? If yes, there would be a lot of factors that would not lead to solve the case. If you do it on the department, you'll miss the big picture.

Abdelrahman on Aug 11, 2020

I think this is a fair point. I see two solutions to this: 1- that could probably be asked as a clarifying question to the interviewer at the beginning of the case in real life. 2- You run the framework on the big company, but you start with revenue first and analyze if there were any changes relative to competitors. That way you eliminate the possibility of the problem being revenue-driven. I hope this helps!

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