Case Interview Question: Help! Our Profit Margins are Shri

by Derek Loosvelt | March 10, 2009

You are the consultant to a company that produces large household appliances. Over the past three years, profit margins have fallen 20 percent and market share has tumbled to 15 percent of the market from 25 percent. What is the source of the company's problems?

This is an example of the type of question an undergraduate student (or an MBA student in an early interview round) might receive. The interviewer has done you the favor of defining the problem - your client is in something of a slump! This dialogue illustrates how you, the perspicacious candidate, might drill down into the core of the woes besetting the firm.

You:How would you characterize the current marketplace for these products? Emerging? Mature?

Interviewer:The product line is considered mature.

You: How would you characterize your manufacturing process relative to your competition? (You're looking to see if the company has a strategic advantage.)

Interviewer: Can you be more specific?

You:Do you benefit from an advantage in technology, economies of scale, exchange rates, or other manufacturing element over your competition?

Interviewer:We have not updated our manufacturing process since 1988. We manufacture our products exclusively in the United States. As one of the oldest manufacturers of these products, we have a reliable customer base and a good reputation. As for price, we are one of the lower-priced in the market, though not the lowest.

You: Do any of your competitors manufacture overseas?

Interviewer:Our number one competitor produces all of its appliances in Indonesia. (Here's your clue - manufacturing outside the country significantly lowers costs.)

You: It probably suffices to say that some of your decline in profit can be attributed to the increased costs you are facing relative to older manufacturing techniques and higher costs associated with manufacturing domestically. This is especially toxic in a mature market where consumers are mostly aware of the product category and the product may be considered a commodity. (A commodity marketplace is one in which customers make their purchasing decisions largely on price. For example, toilet paper is largely a commodity market, where consumers buy whatever's on sale.)

~Let's talk about market share now. Can you tell me about any recent market research you have regarding the strength of your brand, price, your products' position, and any promotional activity you have had?

Interviewer:Our market research department has told us that consumers are confused about the product category, that they do not understand the differences between our brand and our competitors' brands. We sell to all major appliance retailers in the U.S. We promote aggressively twice a year, and have smaller promotions once a quarter. (This is consistent with the description of a commodity product. The ways of breaking out of commodity markets include promotions and making value-added differences in the brand - like, in the case of toilet paper, introducing new designer colors and specially quilted cotton-blend paper.)

You:What form does your promotional activity take?

Interviewer:We offer a price discount to consumers twice a year. We regularly advertise in major magazines targeted to our consumer, and we have an active outdoor campaign underway.

You: It would appear you are competing in an undifferentiated marketplace and there may be an opportunity to capture additional share through an aggressive brand differentiation effort. I believe it would also be worth investigating the efficacy of your current promotional programs, relative to your competition. The consumer may be responsive to other types of promotions that haven't been utilized by the company as of yet.

Filed Under: Finance


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