Heckmann Construction is a major German construction firm, mainly handling government civil engineering projects.
Different arms of Heckmann operate in different regions of the country. In the past few years, Heckmann has been returning healthy profits in all regions, except for Baden-Württemberg. In that region, the local arm of Heckmann has been suffering from profitability issues whilst working on a long-term autobahn project.
We have been engaged to establish the root of Heckmann’s issues in Baden-Württemberg and propose solutions.
Note that we will be looking only at Heckmann’s Baden-Wurtemberg business. We will not be concerned with the wider company in the rest of Germany.
To begin, the candidate should discuss the general options available to a company like Heckmann experiencing profitability issues.
Next, the candidate should address Heckmann’s concerns directly, analysing profitability with a particular focus on costs.
1. What are the options for dealing with this kind of profitability problem?
The candidate should be instructed to discuss whatever springs to mind as regards options to respond to a profitability issue. However, what they do say should be presented in a systematic, structured fashion.
Ideally, some form of tree structure should be presented, likely beginning from a decision as to whether to continue operating the company or not.
This structure should be developed and elaborated before moving on to the main case question.
2. Dealing With Heckman’s Profitability Issue
Start from the standard profitability equation:
Profit = Revenues – Costs
Inspecting the exhibits, we can see that:
- In terms of revenues, Heckmann is around average.
- In terms of margins, Heckmann has much worse margins than any other firm.
Thus, we can see that there is a problem with Heckmann’s costs and should move on to analyse these.
Materials and components are by far the largest portion of costs. As such, this is where our primary focus should be directed. Strategies to reduce other costs can be discussed after dealing with this main element.
Of Heckmann’s suppliers, companies C and D have anomalously high margins for firms operating in the relatively commoditised market of construction supplies.
This is what lowers Heckmann’s margins and which will, in turn, be responsible for their profitability issues.