Our client is a leading TV/film studio. They are concerned about the part of their business that provides post-production services internally as well as externally.
The profits of this division have stagnated in the recent time.
Your task is to find ways to increase the profitability of the business.
This case is made to be interviewer-led. Therefore the interviewer should guide the interviewee through the interview.
The case is split into two parts.
The first part describes more qualitative problems and has more open questions that should make the interviewee think about the problem and its solution.
The second part is more about quantitative problems and calculations. Here the interviewee should try to make his own calculations and solve the questions.
The questions in the big boxes should be read out and shared with the candidate.
Short Solution (Expand) (Collapse)
The following framework/structure provides an overview of the case:
Information that should be shared with the interviewee:
- The post-production services division is comprised of four parts:
- Restoration of old movies for preservation
- Production for cinemas
- Production for home entertainment
- Production of daily material (e.g. talk shows) for on-going production
- It is common to outsource these functions, but as the internal rates are comparable to the market rates there is no monetary benefit from outsourcing. Therefore this is NOT an option.
- The SG&A costs have been stable and are shared equally among the services. The costs seem to be consistent with the rest of the industry.
You can share Table 1 with an overview of the services and market trends if inquired by the interviewee.
1. What could be the major issues for each business unit?
Quality of service
The quality of the provided service is crucial for the company.
This applies especially for the restoration of old movies, but also for the production for theatres and home entertainment.
Speed of service
Regarding the daily production (e.g. talk shows) it is important to provide a fast service.
Price of service
Especially in regards to the production for cinema the price is important as the post-production makes up a big part of the total costs and the total revenue is not sure yert.
However, for restoration of old movies, daily production and production for homes this plays a minor role as it is possible to estimate sales connected with the product. The past success is already known and there is already an audience.
In addition these segments have normally lower total costs and post-production is less complex.
2. What improvements could be necessary to increase sales and profits?
Offer additional services in order to increase the quality of the company’s products.
Marketing (increase revenues)
Increase the brand awareness of the company’s products by advertising and promotion. Compare the company’s actions in this field with the competitor’s.
Lower costs (operations, etc.)
Reduce the costs and therefore the price of the price sensitive business segments. E.g. by reducing the employees or improving the efficiency of the production (more material per time).
Sell or close unprofitable business units in order to reduce overall costs (SG&A) and therefore the prices of the other products.
3. What indicators would you use for recommendations?
A good answer would include:
- Gross margins
- Market trends
- Risks (possible competition responses)
- Ease of implementation of solutions
- Nature of business (core vs. non-core)
- Percentage of revenues vs. total revenues
4. What would you suggest for each business unit given the following information?
You should share Diagram 2 with an overview of the profits in the business units.
You should share Table 1 with an overview of the sold products per business unit.
The profitability of each division can be calculated by looking at the gross profit margin of each one.
- Restoration seems to have a pretty high margin. Therefore this division should be kept and expanded.
- The division of “Production for cinemas” should be kept, as it has still a pretty good margin, but should not be expanded.
- The division of “Master for homes” should be closed or sold, if we would only consider the margin.
However this division is generating a vast share of the company’s total revenues and 50% of the number of jobs in the last quarter. Therefore options should be explored to increase the profitability.
- The daily production should be closed as it the margin is negative and in the last quarter only 5 products have been sold. The running costs are by far higher than the revenue generated.
5. What is your recommendation to your client about increasing the profitability of its divisions?
- There are many possible solutions, but the recommendations should be grounded in reasonable conclusions.
- During the decision process the following values have to be kept in mind by the interviewee:
- Gross profit margin
- Contribution to total revenues
- Nature of service (core/non-core)
- Ease of implementation/risk
- The division “Restoration” should be kept and expanded, as it provides a pretty good margin.
- The division “Production for cinemas” should also be kept, but not expanded.
- The division “Production for homes” has to be improved.
- Distributing the SG&A costs differently among the divisions.
- Trying to lower the costs in this division.
- Increase the prices for the services of this division.
- The division “Dailies” should be sold or closed as the margin is negative and the number of jobs represents just 5% of the company’s total volume.
What could be risks concerning the closing / selling of a division?
- The decision could lead to a total loss.
- Competitors could start offering bundles for lower prices and therefore customers could start switching to our competitors.
- This would not only affect the closed/sold business divisions, as the customers would buy bundles and therefore would not need other services provided by different business divisions of the company.
- The closing/selling of the division could affect the motivation of employees working at other divisions and as a result would lead to a decline in working moral and therefore in lower profits.
- The closing/selling could provide bad publicity for the company, leading to lower sales and therefore lower profits.
More questions to be added by you, interviewer!
At the end of the case, you will have the opportunity to suggest challenging questions about this case (to be asked for instance if the next interviewees solve the case very fast).