We hope you will enjoy today’s episode, a brainstorming exercise, “Consulting case interview example (McKinsey, BCG, Bain, Deloitte): How can Porsche increase their margins?”
This consulting case interview example particularly focuses on the profit margin on an individual Porsche. The profit margin on an individual product is different. How do you raise a profit margin for an individual product? You have to focus on the price at which the product is sold and the cost to make that product.
Keep in mind that Michael stops the candidate before she completes the case. This is a teaching technique that Michael uses, stopping the candidate when enough is heard to evaluate the candidate’s performance. This helps to keep sessions more productive and focused. Especially if the candidate’s performance in a case is weak it is not a good use of a consulting case interview session to allow such candidate to continue with the case once the coach heard enough to provide feedback and teach the candidate concepts, approaches, etc to help candidate improve.
Also please keep in mind that in the interest of moving the case along and focusing on what matters, some simplification is introduced. Such as that 1$ = 1 Euro. Obviously, the actual number fluctuates. But this is not the point of the case.
Sizan started off in this consulting case interview example with the wrong definition. Michael specifically said for an individual car. You have to be very careful with the definition. If you get things wrong it hurts your credibility. Sizan did a couple of things well. She identified she needed to pay attention to price and cost. However, there was a problem with Sizan’s logic. While Porsche is a luxury car, it has competitors. When it comes to pricing you have a vertical limit and a horizontal limit. So Porsche is constrained by the competitors and by the category they are in. Porsche is boxed in. If it increases the price it has to increase the perceived value of the car.
The cost for luxury car brands is quite heavy. This includes labor costs. Luxury cars are often made in high-cost locations. Luxury cars spend a lot of money automating key processes. A lot of effort goes into R&D. Materials are also a big cost. Luxury car manufacturers buy better materials. We hope they buy better materials. They take more time to evaluate their suppliers. They go through more testing. So the cost side for a luxury car is very high. When you go do a turnaround study for a luxury car manufacturer you automatically look at costs.
Lastly, Sizan was signaling that she was quitting. That is something you should never do in a consulting case interview.
Below is a transcript for this consulting case interview example. This transcript was created automatically so may include minor mistakes. Using automatic transcriptions will help us add transcripts more often to the videos for members of FC community who prefer to read versus listen/watch.
Sat, 10/10 4:08PM • 16:11
price, luxury cars, costs, car, Porsche, luxury brands, high, luxury vehicles, competitors, increase, luxury, margin, buy, company, pricing, Lamborghini, wrong, competing, labor costs, category
Right. So remember that you have to take control of something.
Okay, now we do a brainstorming exercise. You want to show me your favorite cars a BMW X five, right? Yeah. So we’re not gonna do about we’re not gonna do a case about a BMW X five, we do a case about a Porsche now, right? Okay. Sure is your other favorite cars? Well, let’s brainstorm how Porsche could increase their margins.
So when we’re talking about margin, could you tell me what kind of margin exactly we’re talking about? Profit margin? Okay, the profit margin on an individual Porsche? Okay.
So, okay, so the profit margin, just to be sure, is the net income divided by the revenue? No, is that? Am I correct?
The profit margin on an individual product is different? How do you raise the margin on the product on the sale of one product?
Well, you either lower the costs, or increase sted? Well, it has to be with the the price of the the final product. Yeah. And the costs, you have to make it
good. That is correct. Right. That’s what I want you to focus on.
Okay. Okay, so this,
so, I’m just going to, I’m going to try to do it right away, okay. So, um, question is how Porsche can increase a match margin on individual cars or I mean, the margin on each car. So, as we see, there are two ways of of having an effect on on the margin. So, the first way is to increase the price to have a an an action on the price and the second would have to be to have an inaction on the costs, right.
So, um, if I have to prioritize one of those two levers, so Porsche is a very expensive car make her So, I would assume that people are actually ready to pay for, for for that car, and the market is quite attracted to that. So, I would think that increasing the price in a luxury market, which is I would have enough hypothesis here that is the that luxury markets are quite price insensitive. So they can accept you have high increase in price to have the in there actually driven the increase in price. So I would assume that increasing the price of a Porsche would be first way, a good way to increase the margins.
So in so in way, ways to increase the price, there would be different strategies here, for the for the for the company to manage to increase the price. The first one would be to extend their portfolio
with a new car that would be sold at a much higher cost and another one A second way to, to increase the prices would be to just increase the price in existing existing portfolio of car. And let me think if they’re if I see another way to increase the price, they could also play on on the volume of production. What I mean here is that if the if if the company decides they would produce less car, they could sell it for a much higher price, or whatever the the brand of the car is, it’s this cars as cars too cheap kind of principle. So I would go as I would assume that the company is quite happy. And they can actually launch a new model that would TECHO, that would have a price higher than their current model with the same price, the same costs. So I would have this as a priority, where the company can launch a new, a new model on a new car model and develop something that fully targets. I can’t say higher, but the one that wins the most exclusive models for the big end, try to market it for higher, higher revenue.
Okay, so let me stop here, right? Yes. The way you said yes. implies you didn’t think you did a good job, right? Yes. So that was the observation here is that you gotta remember that I should not have the ability to guess to know what you mean, when you say what? Right, the mere fact that I can do that means it is a communication issue. That’s the fundamental thing we’re trying to deal with. And we are now in a position. I’ll give you feedback at the end. But I’ll give you feedback on two things. I want to give you the answer. Don’t forget it. Okay. I want to repeat things. Not that. But say, let’s focus on this case. Right? Mm hmm. I think obviously, you started off again, incorrectly with the wrong definition. Mm hmm. Yeah. Because I was very specific to say an individual Porsche car like not the company margin, the definition you gave was for the company. Yes. Not for an individual car. So you have to be very wary of that plane. Yeah. Because when you get things wrong at the beginning, it kind of hurts your credibility a little bit. Not much. Okay, but it hurts your credibility more than the average person because you take those things. Personally. If I get something wrong, I don’t really care. I move on. Right? Yeah. But yeah. So that’s why I try to minimize your mistakes at the beginning. You identified a, you did a couple of things very well, you identified that, you know, it’s the price and cost you went with price. Of course, I would be okay with both. But I’ll talk you to the economics of luxury cars in a minute. Okay. You enter prices. And instead of breaking down the drivers, and you mentioned that Porsche is a luxury car, and because the luxury cars price insensitive, so you can raise the price as much as you want, right? Yeah, but there’s a problem with that logic, because we’re proud. While Porsche is a luxury car, it has competitors. So you can raise the purchase price as much as you want, provided that the switching cost to a competitor doesn’t become low, then Mm hmm. I don’t know what a Porsches competitors, but I would guess, who competes with Porsche? Bentley, maybe
Lamborghini? No, I wouldn’t say Lamborghini. That’s how to iron sports cars. Right?
Then I don’t know, I don’t know much about cars.
No, but so disappoint is gonna make so there’s two issues you’re going to remember. So imagine you’ve got when it comes to pricing, you’ve got a you’ve got what is known as a vertical limit. And you have what is known as a horizontal limit, a horizontal limit, or your direct competitors, okay, you can only increase your price in as far as use as long as you don’t make competitors more more attractive. Because at a certain price, you wouldn’t buy a Porsche if you don’t think it is worth the price they are charging, it will just say Oh, let me buy this other car. Maybe it’s a Bentley, I don’t know much about luxury cars. I don’t know much about cosplay. That bad. So my point is, I don’t know much about cars. But they’re not competitors to Porsche, right. As much as Porsche would like to think they have no competitors. They are competitors. When someone is paying whatever the price was $80,000 for the bottom of the range, Porsche Kai and the SUVs, these moms like driving? Yes, they’re not gonna want to pay $100,000. Because $20,000 is a lot of money. It’s 20,000 euros. So when you increase the price between 1000 euros, these moms are going to say, Well, why should I spend 20,000 euros when I could buy another luxury SUV? Like maybe a Mercedes, right? Which I think a Mercedes and BMW and Audi would be competitors in that level, right? I guess. Yeah. So those are what we call horizontal horizontal competitors that they compete on the same plane, then we have what is known as a vertical competitor. When you increase Porsches price to a certain level, you take it out of its current category and start competing with a new category. Yes, now I don’t know again much about cars, but I believe that I believe what’s his famous car company as an Aston Martin? Is it Aston Martin? I think Aston Martin or someone is launching a new SUV. I think Lamborghini is also launching an SUV right? And they would price themselves at a level above so Lamborghini Ferrari at priced above Porsche there to go there’s more luxurious cars, right? Mm hmm. So if Porsche now keeps on raising its price, it now starts competing with Lamborghinis. Right? Yeah, someone looking at a Lamborghini and a Porsche. I can see why should I pay this amount for the Porsche when I could buy a Lamborghini? You see, so that’s when you are correct. A luxury brand has more pricing ability than a normal brand, but it’s constrained by the competitors and by the category of luxury it’s in because as soon as you price it too high, you start switching categories. Trade and the comparisons become very different. It’s a Porsche is boxed in it can it like to think it can price itself to whatever level it wants, but if it increases the prices is going to increase the perceived value but perceived quality or luxuriousness of the car. Okay, it’s the same reason why and Lexus couldn’t go crazy and it’s pricing like, no one is going to pay the same amount of price for a Lexus SUV versus top of the range Mercedes SUV. I don’t know what the differences are between the cars but the market seems to think there’s a difference.
Okay, you see that? I see. I understand.
Vertical and Horizontal pricing locks in luxury brands.
Yeah. Now, costs for luxury brands are actually quite heavy. Do you know why costs are so heavy?
Um, I would guess that most of those brands in luxury B have heavy labor costs. As the the Hampson surfer know how that is precisely from heavy, heavy cost countries like Italy, like. So that can be a big, big red
right there. That’s correct. labor costs are high because luxury SUVs and luxury cars are generally made in Italy, Germany, the UK, I think also makes luxury SUVs and so on. Your labor costs tend to be higher, but there’s other issues here. Now, you notice we’re talking about luxury cars and luxury handbags, right? Yes, luxury cars spend a lot of money automating processes, they are just as automated. In fact, they are probably more automated than non luxury vehicles. Okay. A lot of effort goes into r&d is a big cost for luxury vehicles. And second, they spend a lot of money automating key processes. Materials are also more expensive. Of course, yeah, they would buy better, you would you would hope they’re by better. They would, you know, take more time to vet their suppliers go through more quality assurance go through testing. So the cost side of a luxury operation for cars is very high. When you’re going to do turnarounds for luxury companies, you automatically look at costs usually first. Yes. But this is not a terminal. Right. This is just trying to raise their margins. Yeah, the reason why you’d go and look at price is because price is a long term margin change. You can cut your costs in the short term, but whatever savings you’re getting, cutting your costs you’d reinvested in r&d. So it’s a it’s a transient cost reduction. Okay, so you don’t actually cut your costs, you simply reposition your costs from non essential expenditure to essential r&d expenditure. So you don’t actually see a cost cut, but you see a reallocation of costs. So there’s no cost cuts. Okay. That is why cost cutting in luxury brands is important, but it’s more reallocation. Does that make sense? Does Yeah, I mean, have you driven? You’ve driven I think you’ve driven BMWs? and so on, but,
uh, no, I’ve been in it. You’ve been in, you’ve seen the difference? I’ve seen it. Yeah, it’s a very different experience. I mean, there are many different luxury brands. I’m using these because they are well known, but the experience feels different. A lot of research goes into all of those things. Yeah, makes sense. Yes. Now there’s one other thing you’ve got to understand about luxury cars versus any other luxury industry in a lot of other luxury industries. When something is more luxurious. It usually offers less example, if you are buying the most expensive facial cream like lumber, right? Have you used elimate is horribly expensive.
I don’t know that brand anyway. So is it expensive? what they normally do in other luxury categories is they offer less, but they specialize in one thing. When you do with luxury vehicles, you can’t cut on the sound system, right? You can’t skimp on the braking. Question. You can’t skimp on anything. People expect everything in a luxury car. Yes, the barrier to entry is enormously high. It’s also highly regulated. Okay, anything that’s highly regulated means the government does not trust you because you will kill someone and therefore the cost of playing that sector is very high. Yeah. So one of your thinking a luxury brand was good. Wasn’t deep enough for me.
Okay, you did not infer enough about this. You don’t have to know anything about luxury, but because I probably know less about cars than you do. I know that’s hard to understand. But it is actually probably true. Like, probably, have you ever changed the kind of tire on a car? Sorry, have you ever changed the tire on a car? No. Okay, then we at least equal in that one regardless?
Yes. Okay, fine. So brainstorming, communication was not good. You got the question wrong. I need you to be more focused on these basic things. Okay. And don’t give away what you see. The issue here is that you are basically quitting. When you decide to communicate in that way. You’re basically signaling to me you don’t mind what I think about you because you’ve given up okay, don’t quit. Right? Yeah. And that’s actually what you are doing when you do that. I’d be very wary of that. Okay.
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