Welcome everyone in today’s case we will solve a profitability case where I am the candidate and Dua is the interviewer for those who don’t know him he also has a four years of experience at BCG and they see how it’s going to do as an interviewer yeah let’s get started all right Dennis uh so today’s case is.
Going to be about our client named simeo is a large cement manufacturer in Indonesia they are quite big in size with one one and a half billion dollar revenues but recently in the past two years they had an issue where they solved a big decline I said they saw a big decline in their profits their profit margin dropped by eight.
Percentage points from 10 to 2 percent and the board asked the CEO to identify the main reason behind this profit Decline and come up with a recovery strategy how would you approach this case fantastic thanks for the opportunity so just to make sure to understand the initial ask the client’s name is semio which is a cement.
Manufacturer and we said that they faced profitability decline in the past two years it used to be ten percent now it’s two percent and we’re hard to help them understand some main reasons and also help them devise recovery strategies did I get it right that’s right fantastic just to start off with the definition of cement is it the one that I see as.
Concrete the ones that’s used to build roads perhaps yeah pretty much all kind of infrastructure buildings roads and Etc you can suppose that those are the the main Target customers okay and we say that they’re based on Indonesia but does the client have any International operations yeah they do have they do have a slight operations abroad but.
Mainly in the region let’s say um do we know the splits of their revenues most of their revenues you can suppose that’s in Indonesia okay all right and so for today’s case then is that okay if I just only focus on the Indonesia business let’s go yeah okay fantastic and lastly what does the client see as success here do we have any Financial or strategic.
Objectives with this turnaround strategies sure yeah so they want to generate at least 500 million dollars this within the next three years and that’s cumulative 500 cumulative yeah fantastic that’s quite clear if you allow me a lot to take a second to jot down my thoughts and I’ll share my framework please do yeah okay thank you.
Foreign yeah of course that’s fantastic in today’s discussion I would love to categorize my thoughts under four buckets first of all I would love to understand the context surrounding our client in the market which will then help me my second analysis which is root cause diagnosis section this is the part.
Where I would like to dig deeper into the numbers and really understand where the problems are coming from third based on those issues that we figure out I would love to discuss some recovery strategies and finally as my fourth section would love to discuss some risks now getting into the details to understand our clients context first of.
All we see that the clients in the cements business but we didn’t really hear many numbers earlier would love to understand their business splits in terms of could be the product segments within cement if there is some high tech and low-tech product segments and I would love to discuss the geographical split we set to focus on Indonesia but.
Maybe within Indonesia with the regions behave differently and then would love to get to the customers so I would imagine that some construction sites developers might be interested in our products so would love to see the split of our revenues right now and lastly we should look at the competition there market share I would love to emphasize.
That the areas that I mentioned so far are just the snapshots I don’t want to get into the trends yet this will just help me really understand the problem at hand yeah now to dig deeper in the root cause identification area I would like to divide it into two quantitative and qualitative it goes analysis on the quantitative part we say that there is a.
Drop of eight percentage points in the margins does it come from the revenue drop or a cost increase or both we should definitely take a look at this based on different Revenue splits based on customers geographies and such if there is any specific segment that is suffering more than the other and as we do this we should compare it.
With the competition we should see if this issue is only specific to our client or whether we also see it marketwide and as we do those numerical analysis we should also understand the underlying drivers behind it so more of a qualitative root cause analysis what I mean by this is.
Say our profitability is going down specifically our costs are going up in one segment we would love to dig deeper into understanding is it because of the labor union problems or perhaps just the wages overall increase throughout the country so really just digging deeper into those issues sure in terms of the recovery strategies I don’t know the.
Problem yet but just broadly we can categorize it under direct and indirect strategies so on the direct based on whatever problems that we will figure out whether it’s on the revenue or cost side we can look into ways to improve it by directly solving those issues and on the indirect strategies say our profitability is going down but we can’t.
Do much about it can we make up for that loss via focusing on other regions some Revenue Improvement ideas and such would be useful to discuss and loss in terms of the risks so these are the risks of those strategies that we will develop which I don’t know yet but perhaps we can look into the likes of customer adoption or regulatory aspects how does.
My framework sound like that sounds quite comprehensive I really loved it and yeah then my question is which specific section in the framework you would like to focus now let’s delve into our Canada’s performance during the case study so far starting with his strengths the candidate showed strong business Acumen by avoiding the common mistake of.
Immediately delving into revenue or cost Trends in profitability case studies instead he took a thoughtful approach first trying to grasp the fundamentals of the case like understanding the nature of the cement product identifying key customer segments and examining the geographical coverage in terms of communication he was very.
Effective at making complex Concepts in his framework easy to understand he first outlined the broad components before going into detailed specifics maintaining Clarity throughout moreover he consistently used non-verbal communication often making eye contact with the interviewer which helped keep the conversation engaging and personal.
However even with these strengths there is an area for improvement despite not greatly affecting his overall performance the candidate could enhance his root cause analysis incorporating factors such as price trends volume changes and variable and fixed cost Trends into his framework would give it more depth and offer a more holistic.
View of the situation yeah for sure I mean let’s start with the First Column we said earlier that our clients the cement business do we know how big they are and whether we have any segmentation regarding his geographies or product split okay um so this size uh regarding the so our size is 1.5 million billion dollars as I.
Said and regarding the geography it’s you can suppose that it’s mainly within the country Indonesia and regarding the products we used to have some other products but now we only have one type of product and which is ordinary Portland cement that’s called and this type of product is sold to the large companies that we work.
Traditionally uh with and we can suppose that this is the market that we are targeting with only one single product got it and when you send that we are only operating in Indonesia or that is the number we should take do we have any further segmentation into certain cities or should I just look into it Countrywide yeah Country-Wide you can’t.
Close the country fantastic and then we said that the only product is ordinary important cement and you said that we’re selling it to large companies so what kind of companies do we deal with do we have any segmentation Yeah so basically we have three groups of companies first one is the construction firms that work in a big or infrastructure projects uh.
Like roads Subways Etc and then we have have heavy construction firms that build large buildings private or public funded and we have small construction firms so three segments okay so just to clarify I got the second and third so the second one is heavy construction companies the third is small customer segments the small construction companies what was.
The first one again uh the construction firms work on large infrastructure got it okay fantastic and do we know the splits by any chance uh not the trend perhaps but as of today yeah so um I can show you an exhibit and you can find the related information in exhibit number one sure let’s do that thank you please find the exhibit number one okay.
Let’s take a second to take a look at it yeah sure brilliant here we see that out of this 1.5 billion dollars of the client’s total revenues the vast majority of the business is with large infrastructure companies and I would say some around almost 70 percent then it’s followed by heavy construction light construction.
Company so we’re dealing with a huge issue here of profit margin decline so perhaps the issues come from the large infrastructure given how big they are but to further validate this hypothesis do we have any data regarding the revenue or even the cost trends for each of those custom segments yeah sure good summary so we don’t have information on.
The cost side related like segment specific information on the cost side but we have segment specific information regarding revenues right I can show you another exhibit if you like showing the trend of the revenue evolution by segment let’s do that you can find it at exit number two thank you so much I’ll again take a second pressure.
Fantastic it seems that besides having the revenue level data we actually have one level deeper which is quantity and price side and it seems that looking into the quantity first then I’ll discuss the price Evolution on the on the quantity side we see a drop in large infrastructure as well as the heavy construction projects over time but the.
Issue within large infrastructure is bigger here and in terms of the price side it seems like we’ve actually increased the price so I’m not really sure if this is an issue so I would love to further discuss why we see a drop in the volumes of those two segments here there are only two possibilities either the market is going down or that we’re.
Losing market share do we have any data regarding those yeah very good analysis actually and so um former hypothesis is correct so Market is going down especially in the big projects so those projects were are traditionally funded by the government and in the past years and it’s an issue across all emerging economies but.
Especially in the Indonesia there have been also a decline in the public spending on infrastructure so it caused a lot of um like reaction from this manufacture construction firms they cut the demand as a result and that that’s how we we struggle at this point as well and it’s not due to covet or is there any other.
Reason uh no it’s it’s a general code contributed to that a little bit but it’s just like General trajectory um across emerging market economics so this in the coming crisis and that led to a market shrinkage and then as a result our client was unable to sell as much in the past several years but just to be sure do we see any decline in the.
Market sure did it stay stable it’s uh the same I have the same for that segment fantastic um so then this would mean that other competitors also face the similar issue very similar issue okay um that’s fantastic looks like now we’ve exhausted our Revenue diagnosis now let’s move on to the call so you said.
That we don’t have any data on the segment level but do we have anything on the Consolidated level by any chance because I want to make sure that there is nothing wrong on the call side sure I can show you our piano for the past three years if it works yeah thanks for that awesome so please find exhibit number three where you can see the.
Variable cost fixed cost and okay that’s great I’ll just take a second great here I see ebeta which I think is profits right and then we have fixing the variable cost and if we sum all of those three figures we should get to revenues right which is at the top of the bar sure okay it is clear that there is a revenue decline we’ve discussed.
This before now moving on to the cost side uh so let’s get started first with the fixed costs it used to be 272 which then increased to 80. in terms of the percentages though it is a very minimal increase so I’m not too bothered by it I would imagine that it might be even due to inflation or other reasons uh of course it it probably contributed to an.
Extent but probably not the major concern of ours yeah in terms of variable costs I see variable costs going down similar to the revenues but we don’t know whether it is going down proportionately if you allow me a lot to just take a second and would love to compare those two years maybe 2020 and 2022 just to.
Make sure that the variable costs remain the same in terms of Revenue uh ratios yeah okay let’s try to calculate the unit’s uh variable cost change fantastic all right so on 2020 I need to divide uh 1.35 or 1350 by 1800 to get to the ratio so those two values should be divided by 450 so that’s three divided by four seventy five percent is the variable.
Cost of Revenue ratio on 2020 now moving to 2022 is that okay if I skip 2021 yeah that’s that’s only compared 22 2020. okay fantastic that saves me some time now let’s do the similar calculation here and divide 1200 by 1500 each values could be divided by 300 so it’s 80 percent sense interesting it seems like there is an increase in the ratio of.
Variable cost of revenues from 75 percent to 80 okay what this tells us is the following in a normal business in in a normal business cycle you would expect variable cost to revenues ratio to remain the same but in this case there is an increase so I would love to understand what might be some causes to that do we have any data yeah what might.
Be the main reasons for this so we said earlier something about the economic crisis right so this means there’s a lower demand and I would imagine that if there is lower demand for such raw materials whatever we use to make concrete or cement in this case due to a lower demand if the supply doesn’t change the cost or the price would go up.
The procurement cost so that’s that could be one reason or maybe the client recently changed the supplier and now they have any inferior deals do we have any information regarding those yeah so um both of those reasons and potentially a correct on top of that we have another issue which is the change in the the currency rate so the currency.
Depreciated against dollars and it increased actually um some cost cost of some items that we’re using as a variable cost so that’s also one of the reasons contributing to this trend so our client is procuring their products based on the foreign exchange denominated products interesting so just to.
Summarize our learning so far there are two main issues one of them is on the revenue side we’re selling less to our major accounts because there is economic crisis right and the second issue we discussed is our Rising especially the variable costs yes there is some issue on the fixed cost but more on the variable cost that because economic.
Crisis and you know it led to some inferior deals for us if there is nothing else the ads is now okay if I come up with some recovery strategies yes let’s go to the next section okay fantastic for this I would need a minute if you don’t mind to come up with some ideas yeah please take care thank you let’s take a moment to review the key.
Strengths of our candidates performance so far firstly we have case leadership the candidate demonstrated strong leadership throughout the case he adhered to his framework and took the initiative to suggest next steps effectively reducing the need for prompts from the interviewer next let’s discuss exhibit.
Reading the candidate was meticulous in his approach to each exhibit always taking the time to fully understand and digest the information presented this helped him to quickly draw out meaningful insights and articulate potential root causes of the profitability decline finally problem solving here our candidate truly.
Excelled when faced with one of the case’s most complex challenges identifying issues with variable cost structure he didn’t falter instead he suggested comparing variable costs to revenues a strategy that mirrors those used in real-world Consulting scenarios I’m going to use my earlier structure which is direct and indirect strategies.
Here on the direct side let’s look into revenues in the course aspect so on the revenues the issue was the economic crisis and I’m not entirely sure how much we could do for that but when I look into the segments um perhaps there is a way for us to justify a higher price so I don’t really know.
Cement is a commoditized product but if there is anything we can do as an added on maybe service the maintenance services or payback guarantees and such then we might be able to increase our price point but in terms of the volumes I’m not entirely sure if there is anything to be done there especially on the segments that we’re losing in terms.
Of the cost sides we can look into ways to reduce our variable costs because we learned earlier that we’re currently having it on foreign exchange rate so is there any way for us to perhaps fix the exchange rates something we’ve seen many developing countries and get better deals for us or simply change the supplier that could also be another way.
Of doing it on the fixed costs and maybe there’s a way for us to optimize our labor or you know rent payments and so on in terms of the indirect strategies I do not fully recall the name of the segment but that was one segment in one of the previous exhibits where we see an increase in the sales I think it was light construction companies yeah right.
And so I know that it is a small business but at this stage any increase would help our clients if there’s any way for us to double down on the segment that could also be useful what do you think of the ideas okay so um regarding new products we don’t have a good experience in launching new products in the past so I don’t think.
That the management team will welcome this idea much and regarding cutting costs so you’re right with this suppliers actually it’s one of the one of the key areas where we can potentially cut some costs but we renewed almost all of our projects with new suppliers in the past year so that option already tried and regarding new.
Segments um so this is not our strong arm and we don’t think that we can still much market share if we focus concentrate on this small uh manufacturing small construction companies even though we increase our revenues we will face huge competition there so neither of the options will help much actually okay.
Um so I’m a bit puzzled here if we cannot do anything what could we do I don’t know something maybe extraordinary solution that we can come up with I I really don’t know that’s why we are asking you okay um May I just take another second then to think about some additional ideas sure please interesting.
Ah okay I think that is something we could do if there is not much we can do maybe there is a way for us to reduce our recurring expenses whether it is fixed on the variable cost Side by shrinking the business um I I do see it in many cases especially recently as well due to.
Covets and many of the retail oriented and statement oriented businesses actually did have to shut down but then they’re starting to open back their business so I’m wondering if the client would consider some drastic measures like this maybe not a full shrinkage but um you know a reduction of their certain operations especially where we are.
Unprofitable may help us in saving some of our recurring costs maybe fixed costs especially and ideally once the economy starts to recover we can again double down on the segments that would give us a good profitability okay so it’s it’s like it’s because we have an objective of 500 million so you try to find some ways to generate 500.
Millions by by shrinking like our size selling something yeah is that what you mean exactly so I would also Imagine you raise a great point we can even make money through sales of certain assets perhaps to get to that level but in any case I find this very challenging because the class total revenues are 1.5 billion and we’re seeing that we want to.
Generate a cumulative total cash of 500 million in the next couple years I’m not entirely sure if this is even feasible to start with yeah that’s that makes a lot of sense actually so correct yeah great um would you like me to discuss some risks as well in addition to the ones that we discussed before we conclude please if you allow me I’d like.
To actually walk you through out loud now the first thing I’m thinking about is this economic downturn element we need to make sure or at least we need to do more forecasting to understand in how many years we would expect the economy to go back because if economy continues behaving the way it is right now there won’t be any more business so we need to.
Make sure that we look into this and the second aspect is the competition here we said earlier that our market share declined as per the overall market and hence our market share didn’t change meaning probably other competitors are doing similar business to us but in the future if there is another ordinary Portland segment maybe there is a new.
More Innovative product um we may actually see a decline in our sales more so I would also love to check with the client if they have any other you know more uh maybe a high-tech solution and Alternatives that they can also work in parallel to their day-to-day operations how does it sound yeah it sounds good actually but like um.
For the economic downturn I won’t be much concerned because we already experienced that and we don’t have an investment we don’t have an expansion plan so I will not be concerned much about it I think it’s good time to cut some costs and for the competition our issues a little bit more internal it’s not like.
Um like Market facing initiative we are taking so um competition in shrinkage will not will not hurt much actually so neither of the risks are very vital for now so I think you found the conclusion and we can go ahead and close it at this point yeah okay may I just take a moment for it please do yeah.
Fantastic based on our analysis I would tell the client the following first of all it seems that there are two major factors behind this profitability decline of eight percentage points first of all the overall Market is shrinking in the past two years and as a result uh there is now less spending on heavy construction large infrastructure.
Projects and as a result we’re making less of a sale second problem contributing to this is our recent variable cost structure yes our variable costs are going down but it’s not going down in proportion to the revenue Decline and that is just simply because our deals were fixed on or our deals were based on foreign exchange.
Rate now in terms of coming up with the solutions we’ve looked into many Alternatives but it seems like the one that we can really do at the stage is to shrink our business to an extent that ideally it will give us some of a shelter until the economy recovers but at the same time through sales of certain assets we might be able to make.
Some money however I would love to emphasize that given how big they are right now a sales of 500 million dollars or the objective of it rather may not be feasible through a simple sales of assets so it is a number that they need to look into a little bit closer and in terms of the next steps I would love to tell the client that we are here to help.
Them in the implementation of the strategies and of course we can looking to further on what other ways we could improve their profitability sounds good perfect great conclusion thank you so much thank you thank you overall the candidate demonstrated a strong performance throughout the case showcasing a variety of essential skills.
Let’s delve a bit deeper into the details under problem solving and insights his structure was comprehensive but could have been further strengthened with the explicit mention of price volume and variable and fixed costs his judgment was marked by strong business Acumen which aided him in pinpointing the causes of profit Decline and.
Devising potential turnaround strategies as for rigor despite the case not being heavily number oriented he showcased his analytical prowess by running the variable cost ratios and pinpointing that the 500 million dollar cash objective might not be met in terms of creativity he successfully identified the underlying drivers of the.
Revenue Decline and cost increase and adeptly proposed effective turnaround strategies finally his synthesis skills were on point as a proficiently interpreted each exhibit and delivered a conclusion that covered both the diagnosis and proposed turnaround strategies moving on to communication and presence.
His presence was marked by a commendable level of confidence and by taking occasional pauses to gather his thoughts he was able to maintain his composure throughout the case Precision was another strength his concise responses and prompt insights ensured the case was completed in less time than usual in the realm of active.
Listening he responded well to the interviewer but could have clarified earlier whether the 500 million dollar objective referred to profits cash or revenues lastly under relationship management he successfully established a positive rapport with the interviewer keeping him engaged throughout the case foreign.
