Profitability case - unable to identify root cause

profitability
New answer on Aug 18, 2020
9 Answers
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Anonymous A asked on Feb 26, 2020

I've solved many profitability cases, and I always use the four step process: analyze financial data, find root cause, find solution, risk & next step. However, recently I have done two cases which only provides 1 year data of financial statement, and the focus is purely on the "solution side" (increase revenue or decrease cost). I am a bit confused because without finding a "root cause" or "specific problem", how could I come up with a solid solution to increase profitability? Here's my questions:

(1) For profitability cases, is it common to have no information about the change of revenue / cost / price / quantity?

(2) What information should I ask and how should I proceed with this case?

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Luca
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replied on Feb 26, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

Hello,

Here there are my answers:

  1. Yes, analysing revenues and costs trends is just one of the many ways to crack a profitability case
  2. I always suggest to split the case into revenues and costs and to anayse each of these buckets to find the root causes

Feel free to contact me if you want to discuss it further,
Luca

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Thomas
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replied on Apr 19, 2020
150+ interviews | 5+ years experience | Kearney & Accenture | Sold consulting startup| London Business School

Hey,

It definitely exists and looking for a proxy or benchmark is usually the way to go about it. Alternatively, you can ask or prompt the interviewer that you do a market sizing/revenue assumptions. One has to be strategic about his questions here.

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Antonello
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replied on Feb 29, 2020
McKinsey | MBA professor for consulting interviews

1. yes, you do not always have all the data about today and last years. Leverage what you have, make assumptions and if you are asked to suddenly go into solution go for it. Root cause finding is not always mandatory, especially in an interviewer-led case
2. the target, the trend of last years and benchmark with competitors. Always split the problem into revenue and costs.

Best,
Antonello

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Ian
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replied on Feb 27, 2020
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Some ways to think/brainstorm of possibilities include:

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

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Clara
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replied on Feb 26, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

Reading your post, seems that you are relying only on historical data and change of trends. However, in case these don´t exist, you can always rely on bechmark with competitors, overall changes in the market that could be affecting all competitors, etc.

Hope it helps!

Cheers,

Clara

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Vlad
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replied on Feb 26, 2020
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

Even if the question is not about declining profitability, but about the profitability growth - this does not mean that there are no issues. In fact, there will always be an issue. First, you need to find an insight and then drill deeper by structuring to find a root cause.

There are 3 types of actions you can do with data:

  • Compare with a trend
  • Compare with benchmarks / competitors
  • Segment the data further

Don't forget to structure everything - revenues, costs and any further analysis.

Using a combination of structuring / actions to analyze data you'll find the insight and then a root cause

Best

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Alexander replied on Feb 26, 2020

I can think of two alternative, perfectly valid approaches that you could try.

The first relies on benchmarking the client and the competitors. For example, I recently interviewed with Bain and had a case that could be solved by comparing some of the company's KPIs with those of competitors. In that case, they had a similar number of product lines as the competitors, but were much smaller, which leads to higher relative R&D costs.

Another approach would be to investigate the market itself - which, by the way, is often a good idea. These cases often don't rely on quantitative assessements at all but rather test your business judgement. For example, if the company is located in a market known for high labor costs, moving production to a low-labor-cost market could make sense and could be a perfectly valid solution.

Hope this helps!

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Anonymous replied on Aug 18, 2020

Dear A,

1. I would recommend you to analyze revenues and cost separately, and both in order to find root cause.

2. You can ask claryfying questions to the interviewer - about objective of the case, about business model of the company etc.

Also, recently I've uploaded a profitability case “Deep Water rescue” (available in English & German) here on Preplounge:
https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/advanced/deep-water-rescue-206

I used similar cases when I was interviewing candidates on my own in Central Europe (Germany & DACH Region), Eastern Europe (Ukraine & Russia) as well as Middle East (Dubai, KSA, Lebanon, and Qatar). So, this case is very advanced and could be typically used in the 2nd or 3rd interview rounds by the leading consulting firms.

Try, whether you can crack it.

Best,
​André

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Anonymous B replied on Feb 26, 2020

I have exactly the same problem.......

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Luca gave the best answer

Luca

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