CASE FRAMEWORKS

Note: The following section has been compiled by Nishant Kedia, Vijayalakshmi Vaithianathan,
Pranav Mathur and Sarvesh Rathi. This is a concise version of important frameworks that were
used by them. However we would recommend you to go through the earlier case books as well
to cover all possible case approaches used over the years.

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I - Profitability Framework

Profitability cases are the most common type of cases that you will see. The importance of the
case stems from the fact that profit-making is the final goal of every business problem. It is
always recommended to think on first principles when you approach a case-problem. Here we
will try to run through the anatomy of a profitability case.

Breaking profitability down to its simplest components is the key in consulting cases. Dividing
profitability into components such as revenue and cost can be helpful in discovering the causes
of a less than favorable bottom line. It is to be noted that many a time, the interviewer will not
specifically mention the type of the case. The candidate is expected to follow a sequence of
logical steps by gathering information (by asking relevant questions). The structure shown
above will be useful in exploring how to go about exploring the case.

Deconstructing the case-problem

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The profitability problem is very vast and generally comes in varied dimensions. Thus, scoping
of the problem becomes very important in order to make a structured headway in the case.
This could be done by asking a sequence of logical questions. The idea behind these questions is
two-folds – a) to scope the problem, b) to gather relevant information available with the
interviewer.

Defining the problem

1. What is the magnitude of loss/profit? Since when has the trend occurred?

Also, it is noteworthy to inquire if profits are declining or profitability has been affected. (These
are two different things. Profits are merely a difference of Revenues and Cost, while
Profitability is a measure of profit margin.

Q2) Ask if gross margin/operating margin or net margin which is facing the decline?

Now, going ahead with the framework, we first define profits as ‘Revenues – Cost’. Thus, it is a
function of two drivers. We deep dive into one driver and hold on to the second one for the
time being.

Q3) What is the target of profit / profitability? Any other constraints or secondary objectives
(e.g. market share)?

Q4) Is there a timeline that the company wants to solve the problem in?

Q5) Just to get a background of the company, I would want to know the product mix and
revenue streams for the company.

Q6) Ask for data on trends of each product and ascertain the product(s) which is leading to the
problem.

Q7) Is the profitability problem across the industry and trends for the product? If problem is
across the industry ask for context

• Demand

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 - Macroeconomic factors
- Changing priority of customers – change in demographics
- Regular market disruptions

• Supply

- Regulatory – change in policies

- Increase in fragmentation (high supply, low demand) – leading to commoditizing the
- product

Q8) Competitive landscape – No of competitors, market share and its trend

Define and reiterate the statement: Improve Profits in X product from A% to B% by n years.

A brief structure as below would help to landscape the problem –

- The problem may lie in two areas - revenue and costs. What are the trends of
revenues (up or down) and costs (up or down)?
- Depending on the response, choose which one to go in first and take buy-in of
interviewer

REVENUES
Revenues are dependent on two factors –

1. Average Price - Thus, if revenue side has been affected then either Average Price across the
product mix has decreased (majorly due to competition or company policy). Quantitatively, we
can see that

Average Price = Price of all the products/Total number of products =

Here, the advice is to stick to first principles and be aware of the fact that price of the products
in the product mix and total number of products could also affect the revenues.

 Internal factors

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 o Company tried to reduce price to increase revenues but it backfired
o Increased price because costs increased
o Transfer pricing (may be relevant if problem is limited to a division of a company)

 External Factors
o Price war
o Other stakeholders demanding more in value chain e.g. – increased distributor margin
o Government regulation (price cap)
o Customer preference changed. Had to reduce price

Resolution:

- Product Differentiation

1. Better features

2. Better brand

3. Better packaging

- Innovative Pricing Methods

1. Loss Leader Pricing/ Captive Pricing (Razor Blade),

2. Bundle Pricing

- Different methods of pricing:

1. Value based pricing (Premium Pricing & Price Skimming)

 Aspirational value of a similar product

 Opportunity cost of not getting the product/service
 It is also a function of the size of the target customer segment. As larger size
would allow us to charge lesser than the maximum aspirational value in
order to penetrate into the new market

2. Cost plus Pricing

 R&D Costs
 Manufacturing/servicing/construction costs – Fixed and Variable Costs
 Break-even costs, WACC

3. Comparable (Parity) Pricing

 Existing products with similar features => Marked Price + Mark-up

 Existing products with superior features => Marked Price of the existing
product + Value of additional feature to the customer
 If no similar product exists, then consider => NPV of substitute product

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- Bundling & Cross selling

- Consolidation: Acquire other markets players – Charge premium price, Have more units sold.

If Product/Service mix – volume has changed, Identify which product’s relative volume increase
has led to overall revenue decrease. For that product, following parameters could be assessed –

Product Related Problem

• Poor product quality

• Problematic product mix

 Inadequate breadth of product line

• Depth of product line

• Network effects with other products/complementary products

Service Related Problem

• Poor service quality

• High cost of service

• Training adequacy

-Curriculum

-Frequency of training

• Depth and Breadth

2. Volume

Ascertain changes in number of units sold. The two potential reasons for a volume decline are –

a) Market share decline

b) Market size decline

a) If Market share declines

Market Share = %Aware X %Preference Buyers X %Available X % Time for adoption X %Repeat
Purchase

• Price

o Have these increased? What is the elasticity?

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• Product

o Share of Mind (Likeability)

 Poor quality
 network effect with other products
 substitutes
 product mix
 better product in market
 quality of service
o Perception of poor quality but good product
 Check perception and preference map
 If problem in perceptual map, check for accuracy in positioning
 Training adequacy (curriculum or frequency of training)
 Remember – The final consumer might not always be the purchase decision
maker. There might me other stakeholders involved, for whom we might
need to make the product attractive.

• Promotion

 Share of Voice (Awareness) – how to increase awareness. Check for failures in

each of the following stages.

Build Ad Decide Decide

Segmentation Target Positioning
Message Medium Frequency

Try to think in terms of the customer purchase funnel –

Awareness

Knowledge/Perception

Consideration

Preference

Loyalty

Advocacy

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 • Place
 Share of Distribution (Accessibility) – Penetration, trade mix, lead time, distributor
margin (agency problem), sales force (less or not trained), Skill and will of sales force

b) If market size declines

Market Size
Decline

Due to Demand Due to Supply

 Demand (mature stage in PLC)

o Check product life cycle
o Demographics change
o Product obsolescence
o Usage rate gone down

Solution – Ansoff Matrix

• Supply (still in growth stage of PLC)

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  Are you the only supplier and constrained by supply?
 Are the SKUs being offered being liked by consumer? Change in consumer
preference for another SKU

Solution:

 Short term
 Increase distributor margins
 Target new segments
 Long Term
 Launch new SKUs

COSTS
Following approaches can be used for cost analysis:

a) Fixed costs and variable costs

a. In a high fixed cost business there is very high temptation of price wars (Remember
MADM fundas). For Fixed Costs, following considerations need be made –

 Capacity Utilization
 Increasing the scale of business/manufacturing – What causes it?
 Complex Product: High Costs - What causes it?

Complexity arises from additions to the number of products or activities managed -

 Often without increase in overall volume

 That cannot be added at low marginal cost or minor adjustments in production/staffing

Complexity can arise in numerous parts of cost structure –

 Manufacturing: machine change-over and setup; increased inventory

o Starter runs: Machine changeover and setup
o Higher inventories: especially if little interchangeability
o Additional/longer product lines: often at lower volumes
 Sales/distribution
o Sales force requires in-depth knowledge of full product line
o Increased storage facilities, distribution logistics
 Administration
o Tracking and coordination issues

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Remember it can be a product specific problem or a product mix problem something such as
that we are selling more of higher cost product

b) Value chain analysis

Albeit simpler, FC and VC approach is considered limited in considering the entire set of costs
related problem. Here Value Chain analysis helps us to consider all the costs in detailed.

Inbound Outbound
Raw Material warehousing Manufacturing Distribution Customers
logistics logistics

The value chain depicted above represents a manufacturing setup. However, thinking on first
principles one can easily construct a value chain for any business mentioned in the case. For
starters, think of Suppliers, Distributors (inbound/outbound), storage/warehouses, end
customers (VERY IMPORTANT)

c) Costs income statement wise (COGS, SG&A, Interest, Depreciation, Tax)

What is the percentage split of costs across these different processes?

 In case one particular head has highest % say 50% or more then you can ask the
interviewer that you would want to look at this head to start with.
 Many a time there might not be one major head and there could be two heads with
30%-30%split. In these cases you’ll need to explore both heads and also see that the
profitability decline could be partly because of one and partly because of another.

Exploring each head one by one

In case of manufacturing Industry,

• Raw Material Cost:

o Start by asking type of good (Perishable/durable)?

o Where does Competitor source from – does it get better prices?

o If says same price, ask about efficiency of utilization – conversion ratio/wastage/efficiency for
us. If efficiency is improved => less RM lead to reduced costs

o If the problem is higher price or higher overall procurement cost then:

Resolutions

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 Specification
o Substitution (Different Raw Material)
o Cheaper material - indigenization/rationalization?
 Quantity
o Value engineering (Use lesser Raw Material)
 Per unit price
o Same Supplier
 Better Negotiation/Bulk Order – Can you provide something in return for
a better price?
 Time of Sourcing (Opportunistic) – Buying when prices are low
o Alternate supplier
 Currency Hedging – Use forwards/futures if prices are expected to rise.
Also use call or put options for the variable part of future
 Standardization of Parts– ordering more of same type of good
 Backward Integration
 Cheaper supplier - china etc?
 Inbound Logistics:
o Do you and your competitor use the same Mode of Transportation?
o Do you incur the same rates and same overall cost?
o Explore Distance Travelled – could be that the rates are same but your factory is
further away from the supplier base.
o Are you ordering at the Economic Order Quantity (EOQ) – Trade of between Set
up cost, holding cost and expected demand
 Production/Operations
o Explore Labour cost and efficiency vis-a-vis competitor.
o Inventory Cost (EOQ)
o Overheads such as Electricity/Rent same or higher?
o Machine Utilization: % Downtime - High?
 Machine broken? Maintenance/spare cost
 Power outage?
 Labour unavailability?
 Total availability will be a function of (% of time labour, % time machine
available, % Idle time)
o Resolution – additional dimensions:
 Outsource
 Economies of Scale/Learning curve
 Labour cost arbitrage
 Distribution/Outbound Logistics:

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  Explore same as (Inbound)
 Post Sales Cost:
o Installation
o Service or Warranty cost?
 Gross margin is same but Operating margin has reduced:
o Marketing & Administration – SG&A
o R&D cost
o Restructuring cost
o Licensing and regulatory costs
 If NOPAT is down
o Depreciation & Amortization
o Interest Expense
o Tax rates – which geographies (VAT) does our company operate in?
o Inventory Write off
o Gains/losses or external investments
o Loss due to some catastrophic event.

SUMMARY

Define the problem by asking the following questions –

1. What is the magnitude of the profit/loss?

2. Since when is the issue happening?

3. Is it in any particular geography or is it nationwide?

4. What is the profit/loss of the product mix?

5. What is the target profitability?

6. What is the target time frame?

You may ask other questions as well depending on the problem type. Once you get a grip of the
problem start structuring your analysis as indicated below –

1. Market –

 How is the market growing?

 Industry wide or company specific issue

2. Customer –

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  Segment customers

3. Competitors -

 Segment competitors

Now proceed with the framework outlined above to identify the root cause of the problem

II - Market Entry Framework

Market entry cases can be quite tricky if the basic factors such as basis of entry, company’s As-Is
position etc. are not understood properly.

This framework broadly outlines the major considerations in a market entry case. Different
portions of the framework may be important for different problems depending on case in
point.

A comprehensive analysis includes the following:

1. Situation Analysis
2. Value chain Analysis
3. Industry Attractiveness
4. Entry Strategy

1. Situation Analysis

Situation
Analysis

Motive Expectation
Current business/
- Profit, Market Share, Current Customers - Target profit,
products
geographic expansion? market share,
geogrpahy etc.
- Which part of
value chain?
- Timeline?

If the situation analysis culminates into finding which part of value chain is appropriate for
entry, value chain analysis needs to be done.

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2. Value Chain analysis

After sales
Parameters Sourcing Manufacturing Distribution
services

Market Size

Sales Growth

Profitability

Competition

Customers

Technology/skills
Investment required

Value of Synergy

 That part of value chain must be chosen which maximizes profits of the firm. It must be
in-line with the firm’s primary objective

3. Industry Attractiveness

Once the firm’s objective and its role in the market entry is understood it is essential to
evaluate the industry attractiveness. It has two major components:

 Fundamental Attractiveness – Is the industry attractive irrespective of the firm’s current

business, products, customers, performance etc.?
 Competitive positioning – How is the firm positioned to perform in the industry by
virtue of its present status?

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 Industry Attractiveness

Fundamental Attractivenss Competitive Positioning

Revenue Synergies
Market
- Cross selling existing products to
- Size, Growth, new segment
Profitability
- Cross selling new producs to
Industry
existing customer segment
- Competitors
- Effect of increased product
- Customers quality (if any) on pricing and
- Value Chain volume
Cost Synergies
Entry Barriers - Economies of scale
- Regulation - Sourcing/ Distribution benefits
- Distribution Technological benefits
- Investment - Savings in SG&A
- Technology - Consolidation benefits
- Brand Loyalty - Value chain integration benefits
(upstream/downstream)

Increase in either of the parameters compensates for the decrease in the other for a threshold
level of attractiveness. A curve can be plotted as shown below:
Fundamental Attractiveness

Enter

Do not
enter

Competitive Positioning

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4. Entry Strategy

Entry Strategy

Mode of Entry
Resources Required
- Greenfield
- Financing
- Franchise
- Technology
-M&A
- Manpower
- Joint Venture

Mode of entry can be evaluated using the following parameters:

Parameters Greenfield Franchise M&A JV

Financial
Profits
Investment
Operational
Management Control
Expertize
Cultural fit
Strategic Vision
Risks
Lock-in
Coordination
Cross effects
Threat of competition

III - PE Investment Framework

This section discusses investment into a business for financial gain.

Whenever asked to evaluate an investment it is essential to understand the objective first.

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  Why? – Objective of investment: direct return from investment, incentives in the
current business, synergies, etc.
 What? – What is the target rate of return from investment
 When? – Timeline of investment

Once the expectation setting is done, rationale to make an investment can be evaluated as
follows:

•Market Size and growth

•Profitability
•Competition
•Customers & Suppliers
Industry •Substitutes
Attractiveness •Entry barriers

•Financial
•Revenues, revenue growth
•Profits, profit growth
•Debt/Equity
•Price per share/ Earnings per share (P/E)
• Operational
•Products & Services
Target's •Capabilities - Sourcing, manufacturing technology, distribution, IP etc.
Potential • Management
•Vision
•Skill

• Value of control - Operational Efficiency (Value chain analysis)

• Synergy (Revenue & Costs) with existing investments
Sources of • Other benefits - Tax breaks, regulatory reliefs etc.
Return

Only if the industry is attractive, target has high potential and expected return from the
investment (from all sources) exceed target ROI, investment is justified.

IV - Sourcing/procurement cost reduction framework

The following framework can be used to analyze increasing sourcing costs and make
recommendations for reducing the same:

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 Sourcing costs

RM Costs Transportation costs

Supply Demand

- Price - Price (Negotiation, LTC/

- Reduce Wastage futures etc.)
- Negotiation
- Operational Network optimization
- Long term/ future
improvement (value - Supplier rationalization
contracts
chain analysis) - Mode of transport
- Volume discounts
- Substitutes - Efficiency of transport
- Suppliers (TAT, load factor, quantity
- Supplier rationalization - Change specification transported per trip etc.)
(alternate suppliers, - raw material specs
consolidation etc.) - finished product specs
- Backward integration

V - Value Chain Analysis framework

Value chain analysis is an extremely useful tool to solve many business problems. The basic idea
here is to understand different parts of the value chain and look for abnormalities/inefficiencies
at each leg of the value chain.

A general value chain structure is as follows (some parts may not be relevant for certain
industries):

After
Demand Warehous Logistics Manufact Logistics Distributi
Sourcing (outbound)
Sales
Forecasting ing (inbound) uring on
service

A few important questions to ask under each part of the value chain will result in insights for
problem solving:

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Demand Forecasting

 How volatile is demand?

 What is the method used for high demand and high volatility raw materials?
 Recommendations – Careful estimation of raw material quantities for high profit margin
and high variability products

Sourcing

 Refer sourcing framework

Warehousing

 Are warehousing costs significantly higher than the industry average?

 Warehouse capacity sufficient?
 Is warehouse optimally utilized?
 Visibility of SKUs?
 Automated vs Manual operations
 Recommendations – apply EOQ to reduce inventory costs, manpower rationalization,
layout modifications etc.

Manufacturing

 Benchmark all costs with industry average

o Direct Labour
o Direct Material
o Overheads
 Reason for higher costs?
o Process (process parameters, sequence of operations, utilization etc.)
o People (Incentives, skill, motivation etc.)
o Technology (obsolete, inefficient etc.)
 Recommendations – Make vs buy (outsource?), Consolidate manufacturing capacity
(Economies of Scale and Scope), upgrade technology, people management and training,
process redesign etc.

Logistics

 Benchmark with industry average

 Price (Negotiation, LTC/ futures etc.)
 Network optimization
 Supplier rationalization (consolidation, alternate suppliers etc.)
 Mode of transport

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  Efficiency of transport (TAT, load factor, quantity transported per trip etc.)

Distribution

 Penetration (no of distributors)

 Shelf space (% of own items vs % of other’s items)
 Recommendation – look at distributor commission structure (push), discount schemes
(pull), expand distributor network etc.

After Sales Service

 Service time, quality and cost

 Variety of services
 Accessibility/Availability
 Benchmark with industry average
 Recommendations – improve the metric (time, cost and quality) which is most
important to the customer, open more service centers, relocate centers, acquire other
service centers, outsource etc.

VI - Pricing Framework

Product
Pricing

Cost Plus Value Based Competitive

Defining the problem

Start with the basic questions on the product, company, customers. Ask specific questions on
the product like –

1. Differentiated or Commodity product

2. Who is the consumer and who is the customers (customer and consumer can be different)

3. Is it a luxury product or a necessity?

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Once you understand the nature of the product, then try to assess what kind of pricing
methodology would work best (in any case you should price the product based on all the
methods and give your final recommendation based on a price range based on the three
methods)

Product type: Standard/Commoditized Differentiated

product product
Pricing Methodology: Cost Plus Competitive Value Based

Tips:

1. Many pricing problems are masked ‘market size’ estimation problems. When the
conversation goes in that direction, ensure you specify that you’d calculate the market size
before pricing the product

2. There’s no single price – Always offer a price range. Mentioning the sensitivity metrics in
calculations would fetch additional brownie points.

3. Think about competitive reaction in the market

4. Topics like bundling and other innovative prices (discount scheme etc.) will fetch brownie
points

5. Price the product based on consumer psychology (for example - use $5.99 as the price to
indicate that consumers are more willing to buy at $5.99 instead of $6)

VII - M&A Framework

The following are the main steps to evaluate a case which for an acquisition:

 What is the need for acquisition

o Type 1: If there are operational needs – revenue increase/ cost decrease explore
other than M&A options also
o Type 2: The other reason could be deployment of capital – if it is the case,
explore alternatives for investment in the decision making process
 What are the list of businesses which are available for acquisition – In case of Type 2, it
can be further classified as related businesses and non related businesses
 Acquisitions are like make or buy – always question what would it cost to build the
business in-house v/s acquiring it

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  List down some criteria to select the businesses to acquire and rank them. This
approach can be used either when there are multiple businesses to select from or same
business but different companies to select from. Some criteria could be as follows:
o Synergies from costs
o Synergies from customers in terms of revenue – you can add a wow factor that
you would generally be cautious here since revenue synergies are hard to
materialize
o Level of competition
o Extension of existing strengths into the new business
o Use of existing competitive advantage
o Risks in the business
 Compute the net benefit of such acquisition based on the costs incurred to acquire
them v/s the potential synergies that could be realized. Remember to mention that
estimating synergies is a tricky business (this is the wow factor here)
 Once you have identified the synergies you would like to focus on the valuation
o Discounted cash flows method
o Market multiple method (has the issues associated being a historical number and
also the possibility of being inflated)
 The next thing that you would want to focus on is how you plan to finance the
acquisition
o Finance acquisition through stock – to be used when the acquiring company
stock is overvalued
o Finance acquisition through cash (a combination of equity and debt) - to be used
when the acquiring company stock is undervalued
o Finance acquisition through both stock and cash
 The next step would be to perform the due diligence and then consummate the
transaction.

VIII - General Frameworks

Prioritization Matrix (2 by 2’s): Can be used to evaluate any project/R&D activity. There are
number of ways to do the same a few are outlined below –

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Guess Estimates: Do not neglect this section and be thoroughly prepared with the same. A
guess estimate can be asked in multiple ways, even while solving a normal profitability case.
Once you have completed the guess-estimate then try to include the following to make your
analysis much richer –

a. Verification of data – Identify a few sources from where you can get the right numbers to
further refine your estimate.

b. Sensitivity Analysis – Conduct a basic sensitivity analysis and identify the most critical
assumptions you made.

Such an extended analysis shows that you have thought through all the assumptions made and
are not arbitrarily using any number to estimate. Although the numbers do not matter here but
having a basic sense of the numbers used and identifying the potential areas of over/under
estimating helps a lot.

Sales Force Effectiveness: You may use this to identify the reason for low sales force output.

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 Sales Force
Effectiveness

Motivational Efforts/Skills

Monetary Non-Monetary Training

Salary Perks Recruitment

Organization
Incentives Career/Growth
Structure

Recognition/Awards

Sourcing Strategy: Such types of cases are relatively rare however can be solved using a
standard approach outlined below –

Sourcing
Strategy

How much to Whom to source Mode of

What to source How to Source Others
source from transport

Same Raw
Backward
Material Wastages Centralized Govt
Integrate
sourced

Alternate Raw Current

Process redesign De-Centralized Macro trends
Material Suppliers

Quantity
New Suppliers
Bundling

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