Paragrahps highlighted in green indicate diagrams or tables that can be shared in the "Case exhibits" section.
Paragraphs highlighted in blue can be verbally communicated to the intervieww.
Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.
I - Clarifying Questions and Structure
An excellent interviewee would ask clarifying questions to understand the situation better. Some good questions would be:
- "I understand the client has a limited product portfolio. Is there already additional information on what types of products are included in the portfolio?"
- "Do we already know if there has been a specific one-time event or if there was a general downwards trend in the client's profitability"
- "Do we have historical information on the clients' profit?"
- "What are the clients' distribution channels?"
If the interviewee asks about historical figures, you can share Exhibit 1 here already.
You can share with the intereviewee the following information: Product lines are Fine meats (High-quality meat, e.g. Steak / Filet cuts), Sausages (Lower quality meat sausages), Sauces (Mustard / Ketchup)
Sales channels are Wholesalers + Supermarket chains
A good structure could be tailored along the profitability framework:
- Understand revenue
- Understand cost
Hint for the interviewer: Excellent candidates will have already identified through the clarifiying questions that this is a cost problem. They would hence focus on the cost side during their structure.
II - Cost Problem Analysis
A. Where does the problem arise?
If not done yet, share Exhibit 1 with the interviewee.
An excellent candidate would analyze the following
- The clients' revenue is growing healthily
- There seems to be a cost problem
- Next step: It would make sense to analyze in depth each of the three business segments for their profitability
Share Exhibit 2 with the interviewee.
A good candidate would analyze the following:
- Business segments Sausages and Sauces are both profitable and growing
- The fine meats segment is growing but has recently seen increased cost leading to a negative margin- this seems to be where the overall problem comes from
- (Excellent candidates only) Next step: It would make sense to analyze in depth the cost structure of the fine meats business segment
B. What is the root cause of the problem?
At this point, the key client (the CEO) asks you to analyze in depth the cost structure of that business segment (Fine meats). How would you go about this analysis?
The candidate should take a minute to think about how to analyze the cost structure and (ideally) come up with several methods. If the candidate directly jumps into one framework, you can guide him to think about cost structure analysis methods in general from a theoretical point of view.
Possible options to analyse the cost structure are:
- Fix / Variable cost analysis
- Unit economics analysis
- Value chain analysis
If the candidate doesn't come up with the value chain analysis, explain the framework and ask, which questions he / she would have for you when using this framework. Then make the candidate ask questions along the different parts of the value chain to detect the problem
III - EBIT Contribution Analysis
The client becomes really motivated to reduce this chunk of cost. He tells you that just yesterday, he has been approached by a former study buddy who now runs a fish farm as an entrepreneur. The old friend is desperately looking for ways to reduce his fish food cost. The client would like to start producing fish food out of the fine meats side products and asks you to estimate additional EBIT contribution from starting such an operation.
If the candidate asks for information about revenue and costs estimations you can share the corresponding parts of Exhibit 3.
The candidate can assume for simplicity that the production capacity equals exactly what the fish farm operator would be ready to purchase.
Calculations should be the following:
Revenue: 50000 fishes * 1.5 g / feeding * 3 feedings / day * $ 0.018 / gram * 365 days / year = $ 1,478,250 (~$ 1.5 million)
- Depreciation: $ 10 million / 10 years = $ 1 million
- Labour: 3 workers * $20 / hour * 8 hrs/day * 30 days/month * 12 months/year = $ 172,800
- Distribution: $ 100,000
- Overall: $ 1,272,800 (~ $ 1.3 million)
Additionally, need to take into account the savings from not having to pay the $ 3 million in fines for the disposal of the side products.
Overall, EBIT contribution of $ 3,205,450 (~ $ 3.2 million) to be expected.
IV - Final Recommendation
Candidate should wrap up the case and recommend to start producing fish food. Good answers would include:
- Advised CEO of US-based butchery company on a profitability problem
- It results that profitability issue is caused by cost problem within one of their business segments, fine meats
- The cost problem is rooted in a new environmental law, through which the client has to pay $ 3 million per year in fines for disposing of side products
- Start a fish food production operation using the side products as input materials to offset the $ 3 million
- This will bring additional EBIT of ~ $ 200 thousand (in addition to offsetting the $ 3 million) per year
- Large invest ($ 10 million) for machinery
- Fish farm client could stop procuring from our client in the future
- Next steps
- Secure machine financing
- Initiate hiring process for production workers