This is a diagnostic case requiring structured problem decomposition. The case teaches proper hypothesis development by first diagnosing symptoms (falling profits), then isolating root causes (traffic vs. share of wallet), then identifying competitive threats. The key insight is redefining the competitive set from 'video stores' to 'home movie entertainment,' revealing that digital distribution technologies (PPV, cable, Movie on Demand) are the true competitors—not direct retail competition.
Two business school classmates laud their entrepreneurship intentions and mock your interest in entering the management consulting industry. They decide that despite trends that indicate otherwise, what is needed is a video rental store closer to the HBS campus. They try to convince you to join, but in your infinite wisdom you instead join a prominent strategy consulting firm in Boston.
Their first two years meet unprecedented success. They buy matching Porches and a townhouse in Beacon Hill. Needless to say, each time you meet up for social occasions, they share with you (mostly with tongue in cheek) their success and a “I told you so” attitude. You handle their jabs well, as you feel you have had a terrific experience at your consulting firm.
The story, however, changes in about 12 months. Despite two and a half years of dramatic profit and revenue growth, profits have dramatically fallen. They call you (with a fair amount of egg on their face) and say “we don’t know what happened and our mortgage and car payments are getting tougher to meet. Can you help us? We know that you help CEO’s of large companies get to the bottom of their issues.” With more than a little satisfaction and justice in your voice you agree to help.
What do you think the problem is?