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LOMS - Profitability Logic

Cédric asked on Oct 15, 2018 - 1 answer
Looking for solid partners to practice primarily real cases. Preparing for OW, ATK and Bain interviews

Dear all,

I have been using the LOMS recently and got confused by the logic proposed when tackling profitability problems.

Generally, VC (Victor Cheng) is totally fine with candidates concluding that if revenues are down and costs are down, then we actually have a revenue (growth) problem in order to turn profits back to profitability. So candidates directly tackle the revenue side regardless of the profitability segmentation i.e. there might be segments that are more profitable than others.

This way of tackling profitability problems is also suggested on the preplounge boot camp and I have been using it successfully. However, in the LOMS Case 4 candidates concluding that the profit problem is a revenue problem (due to decrease in revenue and decrease in costs) is marked as a mistake. According to VC, the company has different business segments and one would tackle first which businesses are profitable and which are not. He also suggests that focusing on the one with the highest profits is the solution instead of turning around the one with the lowest (most negative) profit.

So, I'm quite confused by how to proceed further. Concluding directly that we are dealing with a revenue (not profitability) problem if revenues are down while costs are down as well seems to be a mistake. However, in the cases 2 and 3 candidates solved it in that way and it was corect according to VC. The only difference: Cases 2,3 deal with a company with 1 business segment but various products, while Case 4 has 3 different business lines. In my opinion if we segment into product/business lines etc. does not really matter.

Help is highly appreciated here! Especially from people with LOMS knowledge. Sorry for this very specific question.

Thanks,

Cédric

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Vlad
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replied on Oct 15, 2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School
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Hi,

The answer has nothing in common with the profitability structure.

While asking the clarifying questions at the beginning of the interview, you should check with the interviewer if the business has more than one revenue streams / products.

You should ask the following clarifying questions:

1) Clarify the business model. Ask how the company actually makes the money. For several reasons:

  1. Even if you think you understand the business model, you need to make sure that you understand it correctly.
  2. Some cases have pitfalls related to a business model (re profitability cases with several revenue streams
  3. You need to understand the revenue streams to make a proper structure. E.g. if the case is about oil&gas company which revenues are declining, ask if it is Up / mid / down-stream problem. In this case, defining a revenue stream is critical to setting up the right structure. (At the end of the day it may be the decline of snack sales at the gas stations:). In case of telecom company it may be the problem of the core business (wireless) or non-core (landlines, internet)

2) Clarify the objective. Here make sure that your goal is:

  • Measurable
  • Has a time-framed
  • Has / has no limitations

e.g. Should I invest 100k in this business for 1 year if I want to get 15% return?

3) Ask the questions that will help you build a relevant structure and remove ambiguity.

E.g. in the market entry case ask whether we are entering the country organically or non-organically

!!! Finally - do the recap after asking the clarifying questions. Although most of the case books suggest to do it immediately at the beginning of the interview, it makes much more sense to clarify the situation first and then to make sure that you understand everything correctly.

Best!

Thanks for your reply Vlad! However, I might have been not clear enough regarding my question. What puzzles me is that in the LOMS case 3 (Ex. 3), Cheng concludes that the profitability can be improved by improving revenues (as revenues and cost have declined), where as he marks the same logic as a candidate's error in Case 4 (example 2). VC actually argues that one needs to know the magnitude of the change in revenues and costs to be able to conclude that we have a revenue problem (when profits are down, revenues are down and costs are down). - Pretty confusing, as the prep lounge bootcamp article also concludes that profits are down if either revenues are down, costs are up or both. I hope you understand my problem better know... — Cédric on Oct 16, 2018 (edited)

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