Deep Dive into solving Profitability Cases

6 minute read

Profitability is one of the most common problems you will encounter in case interviews. Additionally, It is often a sub part of longer cases. 

An example statement: “Your client company A has been facing a decline of 10% in profits for 6 months. You have been asked to intervene to find the problem. Also, suggest some recommendations to resolve the problem.”

With this article, we intend to give you a basic roadmap for solving profitability cases. 

Note: Remember the end goal to case-solving preparation should always be to have your own frameworks. More on this in the upcoming articles.

1. Preliminary questions: As we discussed in a previous article, the Problem Statement presented to you in an interview would often be concise and lack details - “Your client company A has been facing a decline in profits. You have been asked to intervene to find the problem. Also, suggest some recommendations to resolve the problem.”

You should always start by asking relevant probing questions to understand more about the business, product/services and the metric which is specified in the problem statement.

Goals of asking preliminary questions are: 

1. Understand more about the company

2. How the business works

3. Relevant things about the business problem

In this process, you begin to broadly identify potential problematic areas.

Here are a few examples of clarifying questions you can ask in a case interview. 

Note: This does not mean that all of these questions would be relevant for every problem statement.    

1. Clarify the objectives : You may think that the objective is clear but there may be some nuances:

   1. Increase Profit

   2. Increase Revenue Alone

   3. Cut Cost Alone

   4. Increase number of units sold

2. Know more the company:

   1. Which geography do we operate in?

   2. What is the business model? (This is a very helpful question to ask!)

   3. Where do we lie in the supply chain?

3. Understand the issue:

   1. Do we know if competitors are facing the same issue?

   2. Since when we are facing the issue?

4. Numbers, numbers, numbers: Always ask if there are any numbers associated (valid throughout the case)- What is the % decline in profits?

2. Layout Framework:

Every case solver should aim to have their own framework to solve case interviews. It is an incremental process, you reach that stage after solving n number of cases. Fundamentally, profit can be split into,

Profit = Revenue - Cost

One basic further which can be held true for every situation is: 

Trivia: Understanding Supply Chain 

While solving Profitability cases(or solving any business case for that matter) understanding the overview of how a company’s value chain operates is very handful. Let’s cover broad aspects of a company’s value chain. 

3. Giving Recommendations:

While giving your final recommendations at the end of Case Interview, there are few things which you should keep in mind,

1. Give recommendations in clear and concise words.

2. Always support your recommendation with a reasoning discussed during the case.

3. Limit your recommendation to the content discussed during the interview, if you feel some further analysis is needed mention it separately. 

Generally recommendations lie in one of these five brackets, 

• Political or Administrative

• Economic

• Socio Cultural

• Technology driven

• Legal

• Environmental

Now, Let’s take an example and solve it together. Before reading the solution to the case, Please solve it independently with a friend. 

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Problem Statement: Your client is a consumer goods firm, they have been seeing a decline in profitability. You have been hired to help them figure out what is happening and how to turn it around? 

(Note: A similar case was asked in a reputed consulting firm recruitment process)

Clarifying Questions

Where is our client based? And what is the geography of its current market?

They are based out of India, and they sell their products across India

Where do we lie in the Value Chain?

We source the raw material and manufacture our products. Post that, we are not directly involved in the value chain. 

What sort of products do we manufacture and is there a particular product incurring losses?

We have a variety of brands ranging from hygiene, health, nutrition and beauty. We are facing losses in our toilet cleaner brand. 

Okay got it, Is our product similar to what Harpic is in India?

Yes you can imagine our product similar to Harpic for your analysis. 

Understood. Is it a company specific issue or industry wide issue?

We are not aware of any of our competitors who are facing this problem. It is company specific. 

Okay, thanks for your answers. I think I have a fair understanding about the company and would like to take 30 seconds to lay out a framework for my further analysis. 

Framework

So Profit = Revenue - Cost

So we are aware that our profits have declined. That means either our revenues have gone down in a disproportionate manner or costs have gone up. 

Fair enough

Firstly, I would like to dig deep into the revenue side of things for our toilet cleaner brand. I think Revenue would be given by:

Revenue = Price per product * Volume

What are the trends with these two in the last two quarters? Do we have numbers associated with it?

Price per product has remained the same but actually volume has gone up. Let's keep this a qualitative discussion. 

That means revenue has increased, yet profits have gone down.I would quickly jump to the cost side to expand our analysis further. I am breaking my costs into fixed costs and variable costs brackets, and will analyse them one by one.

Sounds good

According to me, we have been incurring losses since two quarters only. So, there should not be a change in fixed costs that would be causing this.

Makes sense. But can you list down what according to you are fixed costs involved. 

Sure. Rent/Lease of property,  employee salaries, insurance, apart from these we could also include certain taxes and interest payments on capital acquired and marketing costs.  

Yeah, you summed up most of the things. Fixed costs have all remained the same as before. You can go ahead. 

For variable costs, I would lay out the value chain to determine the key costs involved.

Yes, go ahead. 

1. Raw Materials and Inbound Logistics

2. Manufacturing

3. Storage

4. Distribution

5. Sales and After Service

Am I leaving any relevant costs involved here?

This looks like a fairly holistic list. Go ahead

I will start with Raw Materials for our product. I would like to understand the raw materials involved here and do we have any data wrt costs of the same that indicates any increased trend. 

Raw material involved is acid, and few other chemicals. Any of these has not experienced any major increase in their prices. Actually, you can say the same for manufacturing and packaging. 

Got it. Next I would like to analyse distribution costs involved. Have we experienced a change there? 

Yeah right, actually our distribution costs have increased in a significant manner. 

And I assume that we are not aware of the reason behind it. Can you tell me more about our distribution model

Sure. So we have 8 centres across India, we receive an order from them based on the demand and we map the nearest factory to fulfil the order, if they are not able to, we move to the next closest one. 

I believe the cost of supplying would be dependent on distance between centre and factory and time taken. Have petrol prices increased in the last 6 months here?

No

Okay. My hypothesis is that with increased demand we are not able to supply our product in a cost effective manner. 

Correct. We end up at the 3rd or further priority factory on a regular basis nowadays. 

Understood. Have we considered opening up new factories to solve this?

No, we do not want any major capital outflow at this point. Do you have any other suggestions?

Yes, firstly I want to understand the pricing point at which we sell our product. Is it possible to increase our selling price while maintaining the market share?

No, our customer base is price sensitive. This is not possible. 

I understand. We can try to optimise and allocate factories in the most effective combination to minimise costs.

Can you elaborate further on this?

Let’s take two distribution centres a and b and we have two factories x and y. We will have to minimise Ca*x + Cb*x + Ca*y + Cb*y. We will have some constraints on supply and demand on each centre and factory.

Great, this is very helpful. But this would be a short term solution. Any long term solution you want to add?

The brand should carry out a proper demand forecast for the future demand and if it finds it favourable, we should go for capital expenditure in addition to this short term measure. 

That is a good point. Thank you, let's end the case here. 

Hope you liked the example, do tell us in the comments how you approach Profitability cases and any challenges which you face.