Stuck on This Case Question

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Question:
I have a question regarding a case I had in an interview with AT Kearney last month.  It started out as a simple profitability problem, which I worked through, and drilled it out to be that raw materials had spiked in cost over the past two years.

I then broke it down to find out that the raw materials really depended on the price of natural gas, and oil (where I was told to not take into account the plummet in these prices after the recession). (ps, the product was the film on top of tables, cabinets etc.)

At this point I got a bit flustered, as I had found the problem but didn't know where to proceed.  If you morph into a business situation framework, which I did, I found out that the competitors were experiencing a similar trend, due to the unplanned for spike in energy costs.

My question is how would you proceed?  I figured that looking at the customer wouldn't particularly help because that wasn't where the problem was (revenues were up, profits were down) nor looking at the competitors (experiencing same problem).  I basically looked at the product (could there be alternative materials used), and the company (ways to hedge against fluctuations in commodity prices).

While I did ok in the interview, I did not make it past the round.  I wasn't expecting to, as I started jumping around at solutions after finding it was only tied to raw materials, and definitely wasn't structured that well.

My Reply:

Sounds like you do reasonably well in the first part of the case. You isolated the root cause of the client's problem which was an INDUSTRY-wide spike in energy costs.

So in this case, the business situation framework is not the best fit as that's most appropriate for analyzing the business situation for ONE business.

The right thing to look at next is to do an analysis at the industry level.

Whenever I get a number in a case situation that I want to understand, I always try to compare it to something else. My two favorite things to compare a new number against are historicals of the same number and then cross-company or cross-industry (in this case cross industry).

So if energy prices for this industry are extremely high (which is depressing industry-wide profits), I want to know how energy prices have changed over time. Have they always been high? Is it cyclical? Or is this a recent thing?

Next are energy prices for other industries equally high (making it an economy wide issue) vs. an industry specific issue.

Notice the trend of trying to find the right level of the hierarchy to analyze. (e.g., is this a firm specific problem, an industry problem, or an economy wide probelm)... as the solution will vary wildly depending on this answer.

Then I would want to analyze WHY energy prices are so high. Are they to stay high permanently, or is it just a temporary thing. If permanent, it suggest a major permanent change in cost structure for the industry (suggest possible changes in either industry capacity or prices or both) which would lead you back to either a business situation framework or the industry capacity framework... or a cyclical problem. If cyclical, then the issue is who has the most financial capital to withstand the cycle.

The other framework that would be useful here is "Porter's Five Forces". You might want to Google it to learn more. It's very useful for understanding industry dynamics and the health of an overall industry.

I never used it when I was interviewing, but have used the framework on-the-job.

The big takeaway from Porter's model is the level of supplier concentration at every level of the supply chain. So if there are only a few energy producers, but lots of competitors in one's industry... and only a few customers, then the profit of the entire supply chain gets squeeze in the industry.

The best example is the PC industry. Intel and Microsoft are suppliers to the PC industry... but they have near monopoly positions. If buyers of PC slow down demand, it disproportionaly impacts the margins of PC manufacturers but less so of Intel and Microsoft.

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