Every organization needs to make a profit. If there’s no profit, the company is finished. Even nonprofits, though not in business for profit, can’t be continually in the red and stay operational.
Companies are not strange to profitability issues, and of course, it’s every CEO’s objective to keep their company profitable. Failure to meet this objective, everything can go south, including losing their jobs or withdrawal of key shareholders.
So, profitability is one of the top issues, and perhaps the most difficult, a business faces. And as such, consultants often step in to help. When they do, they first find the root cause and then provide a way to turn the situation around.
Nowadays, whether you are seeking a position at a consultancy, tech or finance, case interview is a common practice. However, in your consulting interview, you won’t miss a profitability case study. But how do you approach it?
In most cases, consultants use frameworks. So, if you are reading this as a way to prepare for a case interview or just for knowledge, you are on the right page because we take a dive into how to tackle profitability case interviews.
Handling Profitability Case Interviews
A profitability problem, whether it’s a part of academic work or consulting interview, or applying theory in practice, is tricky. One step off the rail, and it turns impenetrable. So, you must get it right from onset.
To crack the profitability puzzle, you need to employ rational thinking. The best approach would be MECE segmentation scheme to stay clear of confusion as it breaks the problem into smaller easy to handle problems.
In consulting it’s a bit different. Nevertheless, MECE still applies but with a few things in mind. Here are a few things you should consider when cracking profitability problems in case studies:
Profitability forms the core part of interview
The primary reason why a firm procures the services of a consultant would be to increase profitability or turn the fortunes of the firm from losses to profitability.
Thus, as a future consultant, expect simulated real-life profitability problems in your case interview. Your services would be needed to help the firms to undo the problems eating their bottom line.
Exploit the paid and unpaid resources in your preparation
Joining top consultancy firms may not be a walk in the park, but if you prepare adequately, you won’t have any problem.
For starters, you must successfully crack the case studies. To do that, you need to exploit all the available resources to hone your skills. As a by-product, this industry has generated a lot of publically available resources as well, so is a great place to look for a profitability analysis framework or similar.
And talking about resources, there are a whole lot of them. Some are paid-for while there are equally good free ones. Any aspiring management consultants, or even those facing case interviews with other industries, get resources relevant to their preparations.
Understand the firm’s business concept
Before you tackle the case study, first understand the firm’s business model, precisely how it makes profit.
Profit is simply the difference between revenues and costs. However, you can break this down further into various sub-components.
But there are different revenue streams. Getting profitability relies on how well you divide the different streams of income and the respective cost components.
So what causes the profitability problem?
Well, there are three possible causes, including:
- The increasing costs of production outpaces the revenue growth.
- Revenues declining faster than costs
- Revenues might be falling but the costs are rising.
Segment Business Activities to Solve crack a profitability puzzle
There are different frameworks to breakdown revenues to identify the problem. There are multiple ways to do this, but they are not equal. Some are more accurate than others, whilst others can quickly expose the problem within income cash flow.
When it comes to cashflow problems, you can easily identify the problem if you round down to each individual business activity within a company. With streams from each activity, it is then easier to identify the non performing part of the business.
Example: Hotel Chain with a Profitability Problem
For a hotel chain with a profitability problem, we can divide its operations (activities) by the regions it operates. Alternatively, we can go with the different types of room services it provides, let’s say double and luxury rooms.
Suppose the hotel’s comfy room service doesn’t bring in money as expected. The impact will be felt on business’ overall profitability but it would be impossible to outighly tell the source of the problem.It’s true, breaking down the firm’s income stream helps in identifying and solving the profitability problem. However, only a specific segmentation can help you isolate and sort this issue.
In our above example, you’ll not isolate the problem if you choose to go by region. You can only identify the issue if you break the income streams into the types of room service the company offers.
So you need to be a bit more creative. While there’s no straight way to tell which segment will work, your analytical skills will quickly point you to the most preferable approach to address the problem.
You’ve Diagnosed the problem, what’s the solution
Identifying the problem is the easy part, providing the solution is the main issue. Sometimes, the solutions run deeper than just how the business runs.
Back to our example, you may discover the expenses are higher on the luxury room sides, owing to the expensive cost of heating oil, but which is also a fixed cost.
While the hotel cannot influence the cost of heating oil, it can evaluate other ways to cut the cost of operating the luxury room service. But this may require restructuring of how the business operates.
Exercise More Often
There are many cases that resemble our hotel example. The more you practise the better you get in cracking these cases. Practice effectively and deliberately, and do it more often to sharpen your skills.