Consulting Case Interview: A Profitability Case Study with ex-BCG Consultants

Summary

In this case interview, the candidate addresses a profitability decline for a cement manufacturer in Indonesia. The client's profit margin dropped from 10% to 2%, prompting a strategic analysis to identify the root causes and propose recovery strategies. The candidate systematically examines market context, revenue and cost trends, and suggests strategies such as price justification and cost reduction. The discussion highlights the impact of economic downturns on the construction industry and the challenges of meeting a $500 million recovery target.

Takeaways

• 😀 The case involves a cement manufacturer named Simeo in Indonesia, experiencing a significant drop in profit margins from 10% to 2%.
• 📈 Simeo has annual revenues of 1.5 billion dollars, but the board is seeking a recovery strategy to address the profit decline.
• 💡 The interviewer, with experience at BCG, guides the candidate through a structured approach to diagnosing the problem and proposing solutions.
• 🏭 Simeo's business is primarily in Indonesia with some international operations, focusing on ordinary Portland cement sold to large companies.
• 📊 The candidate's framework for analysis includes understanding the market context, root cause diagnosis, recovery strategies, and risk assessment.
• 📉 The decline in profitability is attributed to a decrease in large infrastructure projects funded by the government, affecting Simeo's sales volumes.
• 💼 The candidate suggests examining both quantitative and qualitative factors, such as revenue and cost trends, to identify the root causes of the decline.
• 🔍 An increase in variable costs as a percentage of revenues is identified, possibly due to economic crisis, unfavorable exchange rates, and procurement costs.
• 🛠️ Recovery strategies discussed include potential price increases, cost reduction, focusing on growing market segments, and asset sales.
• 🚫 The candidate acknowledges the challenges of achieving the 500 million dollar target due to the current market conditions and company size.
• 🔄 The conclusion emphasizes the need for Simeo to consider strategic shrinkage and asset sales to weather the economic downturn and prepare for future recovery.

Q & A

What is the main issue faced by the client Simeo in the case study?

Simeo, a large cement manufacturer in Indonesia, is facing a significant decline in profits, with their profit margin dropping by eight percentage points from 10% to 2% over the past two years.

What is the primary objective of the turnaround strategy for Simeo?

The primary objective of the turnaround strategy is to generate at least $500 million within the next three years, which is a cumulative target.

What is the current revenue split of Simeo among different customer segments?

The majority of Simeo's revenue comes from large infrastructure companies, accounting for almost 70%, followed by heavy construction and small construction firms.

What are the main factors contributing to the decline in Simeo's market?

The decline in the market is primarily due to a general economic downturn, leading to reduced public spending on infrastructure projects, which has caused a decrease in demand from construction firms.

How has the economic crisis affected Simeo's variable costs?

The economic crisis has led to an increase in the variable cost to revenue ratio due to factors such as unfavorable exchange rates and potentially inferior deals for raw materials.

What was the candidate's approach to understanding the context surrounding Simeo before diving into the numbers?

The candidate first sought to understand the nature of the cement product, identify key customer segments, and examine the geographical coverage to grasp the fundamentals of the case.

What was the candidate's framework for analyzing the case?

The candidate's framework consisted of four sections: understanding the client's context, root cause diagnosis (both quantitative and qualitative analysis), discussing recovery strategies, and identifying potential risks.

What insights did the candidate gain from analyzing the revenue and cost trends for different customer segments?

The candidate identified that there was a drop in volumes for large infrastructure and heavy construction projects, and despite an increase in prices, the variable costs were not decreasing proportionately to the revenue decline.

What potential recovery strategies did the candidate consider for Simeo?

The candidate considered direct strategies such as justifying a higher price point through added services and indirect strategies like focusing on segments that showed an increase in sales, such as light construction companies.

What challenges did the candidate face in devising a recovery strategy that could meet the $500 million target?

The candidate faced challenges in identifying feasible strategies to meet the target, given the shrinking market and the company's current variable cost structure. The candidate suggested shrinking the business and selling assets as potential solutions.

What were the candidate's final recommendations to Simeo based on the case analysis?

The candidate recommended that Simeo consider shrinking its business to an extent that would provide shelter until the economy recovers, while also looking into the sale of certain assets to generate cash. However, the candidate also noted that the $500 million target might not be feasible through asset sales alone.