Profitability Case Walkthrough- BCG Style

Profitability cases are very common in case interviews. Many businesses are looking to consultants to guide them toward increased profitability. That of course means firms are looking for candidates to be familiar with how to handle this type of case. In particular, BCG has their own style when it comes to these profitability cases. See how Matt, an ex-Bridgespan consultant, plays the interviewee candidate and breaks down and thinks through a case out loud. Jenny Rae, ex-Bain, plays the interviewer and gives him feedback. A lot of valuable insights can be gleaned from seeing how they approach this profitability case.

Profitability Case Walkthrough Video

BCG Style Profitability Case Walkthrough- Transcription

JR:

Hi I’m Jenny Rae Le Roux, the Managing Director of Management Consulted and an ex-Bain consultant. I’m here with Matt Plummer. Matt thanks for joining us today. So Matt is an ex-Bridgespan consultant and also an alum of Yale for all of y’all out there that are huge Yale fans and I’m gonna walk through a case today where Matt is going to be in the hot seat as the interviewee, thank you for volunteering.

Matt:

Sure.

JR:

Very glad to have you. And we’re going to run this case as a BCG style case today so it’s going to be a little bit different than some of the other things that we’ve worked on but it’s one of the styles that we employ in training at Management Consulted. It’s actually the first style that we recommend when people are engaging with case interviews that they do because as you’re gonna notice, I’m gonna put a lot of the burden on you. I’m gonna ask you to defend everything that you think, to walk through your structure, to identify what data you want, and to come up with your own conclusion so no pressure but you have to do all the work.

Matt:

All right. Good to know in advance.

JR:

Great. So we’re going to just begin with the case. I’m going to give you the prompt and then as we normally would do just as you have questions and dialogue. If this is an interview your whole future is on the line no big deal. So there we go. All right. You ready?

Matt:

Yeah.

Case Prompt

JR:

Good. So our client today is a company that is a medical device manufacturer. The company we’re going to call the very fancy name of Needle Needer. Okay. And Needle Needer manufactures a large variety of needles for different medical applications. We’re going to focus on one of their segments today because something is changing in their market.

This segment is the segment where they supply blood draw needles to laboratories. And they manufacture and they sell so they do the full integrated supply chain for that. They have a market that is about 200 million units today, and in total there are two competitors. Needle Needer and one other competitor that share the market in a duopoly.

Now, what’s changing in the market is that federal health care regulations are coming in that are mandating a different schedule of frequent blood draws for chronic patients. So they’re gonna move this down on average about five percent of the market so the demand rate is going down by five percent. This will decrease blood from let’s say, somebody who’s chronic would be 12 times a year, they’d move down to 11 or 10 times a year. Of course, there are other segments of the market but in aggregate, five percent down and it’s because of the frequency of the blood draw mandates.

Our client, this is an important part of their business, they don’t want to lose profits but they’re willing to get them in different ways and so our job is to be creative about how they can maintain their current profit with these health care regulations that are coming down.

Do you have any questions about the background?

Matt:

Yeah absolutely.

Do we expect that the five percent is in a steady state, like that it’s going and if so, is it going to go to that in like the next year? Or is it going to be a progressive decline?

JR:

Great. So the reason that we know about this is that it was actually mandated a few years ago, but it’s actually coming into effect next year, so now that we believe it’s going to be realized, it should be realized in one year and it should be the new steady state.

Matt:

Okay. And do we know if this since it’s already been mandated previously, has the competitor already taken action on the basis of that or do we not know?

JR:

So far, nothing has changed in our market, so we are where we were, but the question is where are we gonna go?

Matt:

Okay, sounds good. So it sounds like we want to know how they can maintain their profitability in a shrinking market.

JR:

Yep.

Matt:

So is it alright if I take a minute or two to put together a structure for that?

JR:

Take all the time you need.

Matt:

All right. Okay. So the profitability is going to be a factor of four different variables. So, first price clearly. Then the variable cost, so how much cost are they spending on a unit basis, and then obviously the volume and the fixed costs.

My sense is that those first two are going to be the most important. From a fixed cost standpoint you know, they’re already creating 200 million units and so I would expect that they’d be operating at a pretty good economy of scale in a sense, since that’s quite a good volume already and you know an incremental volume increase won’t dramatically change the fixed costs. So I’d expect that to be stable and not much to be done there unless there’s some technological advances that can be done, which we don’t know.

The volume is going to be pretty much the same and we’re talking about a five percent decline. So I would focus on the price and the variable cost. And on the price what we would want to know is how does their price compare to the competitor’s price. And so is that something that you can provide?

JR:

In a second. Okay. Tell me everything you want first.

Matt:

And then at a variable cost level and so related to price we would want to know both the price but we’d also want to know the profitability of the competitor. Okay. And so to do that we would also need to know roughly their if we assume their fixed costs are roughly equal to our own, then we want to know basically what is their price and what is their variable cost?

Then we would also need to know our own variable cost of needle needer. That alliteration is getting me! Yeah but so that we could understand how our costs compare to theirs, because essentially the two main strategies will be either to drop our own costs, or to lower our price in order to gain market share. And so in that with those being the two levers, yeah.

JR:

Okay, so now you can ask for data.

Matt:

Okay.

JR:

By the way, you said all the things that it could be, but if you had to pick one, what would you say it would be? It’s the only one you get to pick to go after, what is it?

Matt:

So my guess would be that if these two, you know two companies are controlling most of the market, that their price are roughly similar. And so, I would be most interested in understanding if the cost structure is different underneath it. So it seems like the biggest opportunity would be to understand if the price can be reduced. Okay. And to gain market share. Yeah great, all right good.

JR:

So what do you want to look at first?

Matt:

So first I would like to know, is my assumption that both entities are pricing the needles at roughly the same amount?

JR:

That’s a fair assumption.

Matt:

Okay. What is that price?

JR:

Yeah, you bet. And so it’s two dollars per needle.

Matt:

Okay. And then do we know the variable cost of our client?

JR:

We do, yeah. So we looked at the way that they source, they actually source differently than we do, they outsource everything from beginning to end. Their price per unit is one dollar and forty cents.

Matt:

Okay, so that’s for the competitor is one dollar and forty cents. And then our own and that variable cost there. And for Needle Needer itself, the variable cost there.

JR:

Yes, it’s one dollar and twenty cents.

Matt:

So this is a good starting place, the fact that our costs are lower than theirs, which suggests that you know before we think about trying to reduce our own costs, which we haven’t looked into yet but is still an option. It suggests that if we were to drop the price we would be able to, that they would lose profitability and eventually you know lose their margin before we would.

JR:

Okay.

Matt:

And so that seems like the first area that I would want to look into.

JR:

Okay, let’s do it.

Matt:

So let’s assume in a duopoly and there’s a lot of assumptions here so just follow along with me that if we wanted to drive them out of the market, we would be interested in lowering the price, but we actually want them out entirely. So I want you to tell me if we get them out of the market, where do we need to price and what profit do we get in that new situation versus where we are today. Okay and can we assume that they are looking at this, this needs to be a profitable venture for the competitor, or you know instead of like they might subsidize this for other business reasons.

JR:

Yeah, fair question. Let’s assume that once they start losing money they would be out of the market.

Matt:

Okay so we can assume that they would start losing money if the price went down to a dollar forty, so I’m gonna, can I take a minute to structure it around that assumption?

JR:

Sounds good. As you’re going through this why don’t you walk me through what you’re doing on your paper.

Matt:

Okay. So I’m putting together an equation for profitability. So what I’ve used here is margin, so m for margin to indicate that. So the equation would be what is the price, and then minus the cost and then times volume there, and you know cost would be the sum of, so if we break cost out then it would be and we’ll see what we can how we can simplify this in a second but, if this is price per unit minus the variable cost. Variable cost, and then that’s times volume and then…

JR:

Great, let’s assume that fixed cost is the same between them. So you can remove that from the equation.

Matt:

Okay right. So then you know we’re talking about the price change here, and so we’re talking about going from today… So today we make you know so two dollars minus 120, so we make 80 cents on every needle. And in the future state maybe a dollar forty we would make 20 cents on every needle. So this is going so our our marginal profit is going to decrease by it’s going to drop by 25, well it will go to 25 percent of what it is today.

But our volume if we assume that we’re gonna take the whole market which, is it safe to assume that we have fifty percent of the market today?

JR:

We don’t actually, we have more, we have seventy percent.

Matt:

Okay, okay, so if we have seventy percent of the market today, which is two million and we’re going to a hundred percent of the market, then we would calculate that which…

JR:

So 70% is – the 200 million is the total market – so we have 70% of the 200 million. So we have 70% of the 200 million so we’ll be going to 100% so that is 200 million.

Matt:

So if we calculate 70% of the 200 million is what we have today, so today this is the volume we’re talking about. Today we have 140 million units and that will be going to 200 million. And so then if we’re talking about and so you said what’s the new price was one of the questions.

JR:

New profit.

Matt:

And so a new price would be $1.40 and then moving on to the new profit, so then today we’re making 80 cents and we’re selling 140 million of those and then in the future state we’ll be making 20 cents and selling 200 million of those.

JR:

Let me ask one more question. Yeah. In the future will there be a 200 million in the market?

Matt:

You’re right, there is a five percent decline in the market, so we’ll have to deduct this from, so that will be 190 million. So that’s… well let’s see. 28, so 140 minus 28 is 112 million. And this is dollars that we’re making today, roughly how much we’re making today.

JR:

Pretty nice huh.

Matt:

Yeah and then the future state, 190 times 20 cents that we’re making and so that is 38 million. Let me just make sure that this is right math here. I think that is roughly right. Yeah looks good to me. So yeah our new profit would be 38 million. Okay, what do you think about that? So that’s about a third of what we were making today. And so I’m just thinking through what I want to compare it to is what is the profit if we did nothing. So that means if we assume both we’ll both lose five percent in the market. Then I’d take the 80 cents and multiply it by 140, minus that five percent so the 95 percent.

JR:

Just take five percent off of the 112, how about that.

Matt:

That works better. And so that would be you know we’re talking about five or six million off of that. Okay. And so in a do-nothing scenario we would make you know let’s say 106 million, assuming that the competitor also did nothing.

JR:

Okay, so what should we do?

Matt:

Well I think from a profitability standpoint we would not want to do a price war with them.

JR:

Okay, I would agree. Yeah. What else can we do?

Matt:

So if we’re trying to we’re you know we’re only trying to make up about six million dollars here, which if we think about our reducing our variable costs, so if we’re selling it’s we have we’re selling 140 million units today, so then I would want to know is how far would we have to reduce our cost in order to hit the 112 million. Great. Should I go ahead and do that?

JR:

I’m interested if there are other options too, before we calculate that one, tell me if there’s other choices that we have.

Matt:

So we talked about price and that doesn’t seem like a good option. We had talked about fixed costs and whether we can change that, it sounds like we both have the same fixed costs there, even though they’re choosing a dramatically different way of sourcing the product so it doesn’t seem like that’s like there’s an alternative that’s much cheaper from that standpoint. From a volume standpoint, you know, if the market is shrinking by five percent does it have to shrink equally across both of us or and so I mean one of the places where I go with it is are there certain customer segments that we work with or that will not be as affected by this that we could focus on or that we can double down on so that five percent is being lost with the competitor versus us.

JR:

I like the way you think, what else?

Matt:

I’m not sure.

JR:

Could we raise our price?

Matt:

Yeah we could. If we raised our price, we might expect that we might lose some market share, so it would have to be a balance between those two of how much market share we would expect to lose, and if there’s only two choices and both are well established players, needle needer and the other, then I would worry and if right now and historically we’ve been pricing them at the at the same, I would worry that if there was all of a sudden a price difference that it would be an easy switch to the others and I mean that thing I’m thinking about from a customer standpoint is like what is the cost of switching for medical needles.

I wouldn’t guess that there’s a ton of medical equipment that is needle specific in the sense of like oh we need to have these needles because we have this other equipment that is based on that, so my guess is that it wouldn’t be that the cost of switching for a customer would not be huge and so that if there was a price difference they would go with the lower price especially if they knew that the other player was a big established player as well. So I would be hesitant to do that, unless we’re also talking about the option of trying to think about how to expand the market, Which I don’t know if that’s kind of within the…

JR:

Anything’s within the scope.

Matt:

Are there areas where you could think about expanding that market where it’s not currently being utilized or at the frequency. But another, I wonder if there’s other ways of like bundling where and maybe that’s a way to gain market share too, if if we’re like oh we’ll sell you packs of, I don’t know what the packs would be, say a thousand and because it comes in a thousand, we’d have to understand what what would be of value to the customer but if we could sell it to sell them a thousand, just as an example, at a lower price per unit, but in doing so gain market share then that might be a way of doing it, so there might be some creative ways of bundling or packaging it. That could be interesting.

JR:

I think I’m ready for a final recommendation. We’ve thought about a lot of things, tell me what you would do in light of the changes that are happening in Needle Needers market.

Matt:

So I mean, the first thing I would look at is whether we can easily reduce the cost. I think my guess is that since our cost is lower than the competitors that there maybe hasn’t been a ton of pressure internally to keep costs low because it already felt like it was low and we’re making more than the competitor. So my sense is that there probably would be some opportunities there based on that. So I would look there first and then and if that doesn’t prove fruitful, then I would look outside to understand the customers more and if there’s opportunities to either expand the market or to add more value to them in a way that would allow you to gain market share.

JR:

Great, any next steps that you’d pursue?

Matt:

So I would do a cost analysis around the variable costs and understand what the different line items are there and maybe if there’s, from what I think you said, Needle Needer produces in-house, and so if they have different manufacturing locations there might be a relative cost positioning analysis where you can see kind of what’s the best in practice across our different locations and understand you know if we can duplicate those savings across the rest of the company.

Profitability Case Interview Feedback

JR:

Great. Okay, relax. All right. All right, so do you want to give yourself feedback or do you want me to do it first? You know how sometimes you get through a case you kind of notice as you’re doing something that you want to call out.

Matt:

I think the biggest thing in terms of that is getting a little tunnel vision around the framework and not thinking more broadly about what some of those opportunities are until you pushed me a bit. And so I think that that felt like the biggest thing of being more open-minded, you know even at that point.

JR:

Cool. Yeah. Well, overall I thought you did a good job, which is why I didn’t make you do bonus math. You didn’t have any math errors, there weren’t any issues, otherwise we could have done some extra math, I would have given you a second chance with that, but I will poke on a couple of things.

So, first of all I thought your opening was really good. I thought that you had a pretty confident grasp of the subject, you didn’t seem afraid of the problem, you didn’t seem nervous, your clarifying questions were specifically intended to reduce the complexity of the problem which I always love to see, when people want to add in extra analysis, I always get worried about that.

So for example you asked, can we assume that this has already changed, or is this the steady state, so rather than saying you know, hey could we look at this in three different phases, you were trying to say can we just look at this once and figure out a simple way? So I really liked that and I thought that that was an important nuance at the beginning of the case.

The fact that your hypothesis was reducing the price at the end of your structure, I’d want you to just call that out directly, especially in a BCG case, because you’re going to be now testing that hypothesis so it’s going to be incredibly important. And just for your structure. Your structure, I didn’t time it. We’ll look back at the video and the video will actually have the timing on there, but my guess is that you took too little time and you could have actually built out your structure in a more robust way to get away from that tunnel vision that you had inside the case.

So, if you had taken the full two minutes and you had built the second level that you verbalized on paper, I think we could have referred back to that throughout the case a little bit better.

Matt:

Yeah, makes sense.

JR:

And then as we went through the data I was a little surprised when you asked for the competitor data first and I was worried that you weren’t going to ask for ours. You got the competitor data after that and one thing that you did really well there that was you did a few times but it was inconsistent throughout the case, is that you gave me commentary as you were receiving the data. Or, as you were coming up with insight so there you said, I really like the fact that we’re lower than the competitor this puts us in a good cost position to start with. And so starting with and layering on those kind of insights were really valuable.

And there were a couple of other times that you didn’t do it that I was looking for that a little bit more. So for example, when we said you kind of said, hey you know we are going from 80 to 20, we’re going to divide it to 25%, and then if you look at the numbers from 70% up to 100%, or really effectively up to 95% of the market, there’s no way before you do any calculations that that’s going to outweigh that decrease, and I think you knew that but you didn’t say anything about it.

Matt:

Right.

JR:

So you kind of were going through the mechanics to prove out something that you already knew and you could have just impressed me by saying what you knew in the first place.

Matt:

Yeah.

JR:

The final piece is around creativity. So I asked you at the end, what else can we do? The answer to this is no. We don’t do a price war. Bad idea. But then with all the other things you started out with again one idea, but that’s where the tunnel vision kind of came in. So I would recommend that you write down some of your ideas, because I could tell that you couldn’t remember when we got up to about three, which ones you’d already said and which ones you hadn’t said, and it was a little difficult to go sideways or deeper or beyond the that level. You stuck with me, you had a great attitude about it so that was fine, but I would have loved to have seen a little bit more detail around some of those creative points.

Matt:

Yeah.

JR:

And just to see you keep pushing on some of the ideas, how it could be possible or what would be feasible. Your final conclusion was really good, you just didn’t say next steps so always I would say that, but other than that, I think the main things were just building out that structure to be more robust, because in the BCG case you’re gonna have to follow it more, and then in that creativity really chronicling exactly what you’re doing.

Matt:

All right.

JR:

Thanks again for going through the case with me.

Matt:

Absolutely.

Wrap Up

Matt did pretty well in this BCG style profitability case interview. Do you think you could do as well has Matt did? Are you familiar enough with the different frameworks to be able to create a robust structure to guide your thinking? Are you prepared enough to the point that you’re not dependent on the frameworks? Case interviews are tough, and you have to go in confident that you have all that you need to crush it. If you’re not there yet, that’s ok! It takes practice, coaching, good feedback, and yet more practice. If you want expert help let us know. We’re here to help make you successful!