Cummins Sees Strong Threat from Smaller Competitors

Case Type: improve profitability.
Consulting Firm: L.E.K. Consulting first round full time job interview.
Industry Coverage: industrial equipment, heavy equipment.

Case Interview Question #00856: The client Cummins Power Systems LLC is a manufacturer of power generators for recreational vehicles. They are the dominant player with close to 90% market share. They attribute their market share to their high quality products. Of late, the smaller players, who have between them close to 10% of the market share, have improved their product quality over the years. This is posing a strong threat to the client Cummins. Our client has a strong brand and is a trusted name in the market.

Our client Cummins Power Systems sells power generators only to original equipment manufacturers (OEMs). OEM is a company that makes a part or subsystem that is used in another company’s end product. For example, if Acme Manufacturing Co. makes power cords that are used on IBM computers, Acme is the OEM.

There are two types of OEM suppliers: sole source and the dual source. The dual source implies that the customer makes the choice of the power generator. Of the markets they service, close to 95% of their sales comes from the North American region and the rest 5% from Europe.

The client Cummins Power Systems is worried about profitability in the coming years. How do you address their profitability concern?

Additional Information: to be provided to candidate after relevant questions

For the profitability question:

• Current revenues: USD $200M
• Current Gross Margins: 15%

I was asked to assume two scenarios:

• Best Case – Elasticity is 0 and price goes up by 5%; costs remain the same.
• Worst Case – Gross profits remains the same but there is a 25% drop in revenues. Quantity remains same.

The interviewer should ask the interviewee to draw up the revenues, costs and gross margins for each scenario. The entire table has to be made from the above information only.

Possible Solution:

I was first asked to describe a framework to analyze the case. There was no further information provided at this stage.

The framework I used was “Profitability Equation”: profits = revenues – costs = (price x quantity) – (fixed cost + variable cost)

1. Consider the Revenues side

• Analyze the price, quantity, Gross margins.
• Analyze the channels

2. Consider the Cost side

• Analyze both fixed cost and variable cost to see if there is any optimization possible.

3. Other issues

• Competition — how they could involve.
• Market — growth rates, alternate uses, new markets.
• Product — any ways of differentiating the product.
• Product drivers — what determines a customer purchase and choice of product.

For the profitability, I actually drew the data table in the interview. It helped to make the data look neat and was easy to work through.