PROFITABILITY CASE:

Interviewer:
Our company has experienced a decline in profits over the last year, and we’d like
your help in understanding why and identifying possible solutions. How would you
approach this?

You (Candidate):
Thank you for the question. I'd like to break this down by analyzing both revenue
and cost components, as profits are essentially revenue minus costs. To begin, may
I ask:
1. Revenue Trends:
Have revenues been declining, or have they remained stable? If they have
declined, are we seeing drops in sales volume, pricing, or both?

Interviewer:
Revenues have been relatively stable. We haven’t seen any significant drop in sales
volume or pricing over the last year.

You (Candidate):
Thanks for clarifying that. Since revenues are steady, it sounds like the issue may
be on the cost side.
2. Cost Trends:
Could you tell me if there have been any notable changes in the company’s
cost structure? Are there specific areas where costs have risen, such as
production, raw materials, or labor?

Interviewer:
Yes, costs have been rising, particularly in the areas of production and raw
materials. Our supplier costs have gone up, and we haven’t adjusted our prices yet
to account for these increases.

You (Candidate):
Understood. It seems the issue is primarily cost-related. Let me dig a bit deeper.
 3. Internal Operations:
Have you observed any inefficiencies within the production process? For
example, is there an increase in waste, higher production times, or any
quality control issues?

Interviewer:
There have been no major inefficiencies reported in production. It’s mainly the raw
material costs that are affecting us.

You (Candidate):
Got it. Let’s explore external factors now.
4. Market Conditions:
Are there any external market factors at play that might be driving up costs,
such as changes in supplier pricing due to economic conditions, supply chain
disruptions, or new competitors in the market?

Interviewer:
Yes, there’s been some disruption in the supply chain, and suppliers have raised
their prices due to global demand for certain materials.

You (Candidate):
That makes sense. It sounds like the increased supplier costs are the primary factor
here.
5. Pricing Strategy:
Have you considered adjusting prices to offset some of these cost increases,
or is there a concern about how customers might react?

Interviewer:
We’ve been hesitant to raise prices because we’re concerned about losing
customers, especially since our competitors haven’t increased their prices yet.

You (Candidate):
Thank you for that clarification. It’s important to maintain competitiveness while
managing costs.
Summary and Strategy Recommendation:
Based on the information you’ve provided, the company’s profitability issues seem
to stem from rising costs, particularly in raw materials and production, without
corresponding price adjustments. Here's how I would proceed:

1. Immediate Focus on Cost Reduction:

 Supplier Negotiations: Begin by negotiating with your current suppliers to
see if there’s any flexibility in pricing, especially for long-term contracts. If
suppliers aren’t flexible, explore alternative suppliers who may offer better
pricing without compromising quality.
 Supply Chain Diversification: Consider diversifying your supply chain to
reduce dependency on a small number of suppliers and mitigate risks from
future price hikes or disruptions.
2. Analyze Internal Operations for Efficiency Gains:
 Although you mentioned that production is efficient, a thorough audit could
help identify hidden inefficiencies or opportunities to streamline operations
further. This might include automation or optimizing production processes.
3. Pricing Strategy:
 Conduct a Price Sensitivity Analysis: To better understand how much
room you have to adjust prices without losing customers, conduct a price
sensitivity analysis. This will help determine the level of price increase that
customers are likely to tolerate.
 Selective Price Increases: Consider selectively raising prices on high-value
products or those less sensitive to price changes. If competitors are also
feeling the cost pressure, you may not be alone in needing to adjust prices
eventually.

Follow-Up Question:
Would you like me to focus on any particular element of this plan, such as diving
deeper into supplier negotiations or perhaps detailing the price sensitivity analysis?

Interviewer:
I’d like to understand more about how we could approach supplier negotiations,
especially since we’ve been working with some of our suppliers for a long time.
What would be your recommended strategy for negotiating better terms?
You (Candidate):
Certainly! When it comes to long-term supplier relationships, maintaining a balance
between cost-saving and preserving the relationship is key.
For Supplier Negotiations:
 Review Contractual Terms: Begin by reviewing the existing contracts to
identify any clauses that could allow renegotiation, such as market price
fluctuations or bulk order discounts.
 Volume-Based Discounts: If the company has enough demand, consider
negotiating volume-based discounts or long-term agreements that guarantee
supply in exchange for better pricing.
 Alternative Suppliers: Even though you have established relationships,
researching and identifying alternative suppliers can provide leverage during
negotiations. You could highlight this possibility as a way to encourage better
terms from existing suppliers.
 Partnership Opportunities: Explore if your suppliers might be interested in
joint cost-reduction strategies, such as working together on improving
logistical efficiencies or co-developing new materials that could lower costs
for both parties.
Follow-Up Question:
Does this level of detail help, or would you prefer further exploration into how to
approach price sensitivity analysis next?

Interviewer:
That sounds like a good strategy for suppliers. I think the price sensitivity analysis is
another key area. Could you explain how that would work?

You (Candidate):
Absolutely. Here's how I would approach price sensitivity analysis:
Price Sensitivity Analysis:
 Customer Segmentation: First, divide your customer base into segments,
as different customer groups will have different sensitivities to price changes.
For example, some segments might be willing to pay more for premium
features or better service, while others are highly price-sensitive.
 Test Price Increases: You can run small-scale tests by raising prices in one
region or for one product line and observing customer behavior. The goal is to
find the threshold where price increases lead to a drop in demand.
  Competitive Benchmarking: Compare your pricing against competitors to
understand how your price changes might affect market positioning. This will
give you insight into how far you can push prices before customers switch to
competitors.
 Surveying Customers: Collect feedback directly from customers through
surveys or focus groups to understand their willingness to pay more for your
product, especially in light of rising costs.
Follow-Up Question:
Would you like me to assist with setting up the testing framework for price changes,
or would you prefer to start with customer segmentation first?

Interviewer:
Let’s start with customer segmentation first, but everything sounds great so far.
Thank you for your analysis and questions!

You (Candidate):
Thank you! I look forward to diving deeper into the customer segments and helping
to implement these strategies.