How should I approach structuring and presenting a profitability case ("root cause analysis")?

Question

I often find myself unsure how to make this part of the structure clear and insightful, especially given the limited information available at the start of a case. After conducting an initial quantitative analysis to determine "where the problem is," I aim to delve into "why it’s happening."

My challenge is that common frameworks, like analyzing "company, customer, product, and competition," often feel generic and lack depth. Should I include specific examples or hypotheses about potential causes to make my structure more concrete and impactful?

Additionally, how can I make the "root cause analysis" and the "potential solutions" segments feel sharper, more practical, and more business-focused? I'd really appreciate any advice!

Answer 1

Hi!

What is extremely important to understand in order to craft super strong structures: the purpose of a structure is not to provide a list of things you want to look at. This is a HUGE misguidance given in the old mainstream case interview resources like Victor Cheng or Case In Point!

The purpose of a structrue is to clearly explain how you will answer the precise question that has been asked by the client.

You can NOT achieve this by listing “buckets”! Never!

The client's question is

"How to fix the profit decline issue?"

Telling the client what you want to look at does not address this question! Frankly, you may look at whatever buckets you want, but this does not help the client understand, HOW you will answer his concrete question.

In order to address this question, you have to outline the LOGIC according to which it can be answered. And this is fundamentally different from just defining buckets and topics. (And to anticipate your next question: yes, the solutions provided in popular case books, in the Victor Cheng Material, and even on the MBB websites are oftentimes very very weak!)

Instead of falling for such weak thinking, you should outline a clear logic that will ultimately and invariably lead to the root cause of the profit problem.

For this, you first need to isolate what (sub-)driver causes the decline. “Revenue or Cost” is too high level, you need to drill deeper. You need to find out whether it is an issue with pricing, or the product mix, or the quantities, or some sub-drivers of cost. If, e.g., lower quantity is the problem, then you drill deeper to understand the concrete numerical driver (e.g., the average number of items per purchase has not changed, but the number of purchases has gone down --> then you drill deeper to understand what is driving this (the "sub-driver") --> e.g., the number of customers has not changed, but their average frequency of purchasing has gone down --> this is the numerical problem driver! You isolated it just by means of a driver tree and comparing values from this year vs. last year).
Once you have isolated the problem driver (WHAT is the problem?), then you check on the qualitative reasons that might have caused this very problem driver to develop negatively (WHY does the problem exist?). You EXCLUDE all other branches of the tree because they are not relevant! This is how you run effective and efficient diagnostics. This second step of qualitative analysis might indeed require some extra structuring once you reach it!

One aspect that is very important (and usually violated in Case Coaching books) is the principle of first isolating the numerical problem driver, before asking qualitative question.

Never start your analysis with asking qualitative questions ("First I would like to get a general understanding of the market development" and such phrases)!

This is practically the very definition of "boiling the ocean", i.e., working in an extremely inefficient way. First, you should seek to narrow down the area that you need to qualitatively understand - and this can be done very quickly by doing a NUMERICAL analysis as described above.

Once you know where the problem comes from, THEN you can start to understand the qualitative reasons that underlie the negative development of THIS (and only this) driver, and this analysis will be far more focused and concrete than if you would have tried to do it at the start.

Cheers, Sidi

___________________

Dr. Sidi S. Koné

Former Senior Engagement Manager & Interviewer at McKinsey | Former Senior Consultant at BCG | Co-Founder of The MBB Offer Machine™

Answer 2

Hello!

In terms of framework you can use to structure the case, I would suggest the following (please see important note at the end of the message):

Level 1
1. Overall - Is this a problem across the entire company / all of its segments?
2. Segment - Is the profitability issue in / driven by a specific segment (e.g., a specific product/service/geography)?
Level 2
1. Overall:
  1. External - Is the profitability issue driven by changes in the industry landscape?
  2. Internal - Is the profitability issue driven by internal problems?
2. Segment: Analyze Level 2 and Level 3 from 'Overall' for each segment of the company
Level 3 (this is where you need to be more industry-specific / show industry knowledge)
1. External:
  1. Supply-driven - E.g., new/existing competitors are increasing the supplied quantity so prices are going down across the industry
  2. Demand-driven - E.g., population preferences are shifting, leading consumers to move away from the client's category
2. Internal:
  1. Revenue decline - E.g., decline in volume due to inefficient promotion/channels/distribution or production issues (e.g., high share of faulty products due to change in production process), or decline in revenue due to negative change in pricing structure
  2. Cost increase - Identify key costs of the company (e.g., COGS/SG&A/marketing and sales/R&D or variable/fixed) and why they could have increased (inflation not reflected in price increases, change in suppliers, increase in raw material costs, etc.)

This framework will help you identify the root cause of the profitability problem. Once identified, you will need to come up with solutions to solve the problem (e.g., if it is an increase in raw material costs, what can the company do to rectify the problem).

It is important that, before laying out the framework, you ensure that the prompt is asking you to identify the profitability issue first, and not asking you to solve a known profitability problem (e.g., the prompt says that the client is experiencing a decline in profits and wants to restore profitability without modifying their cost structure - this is an example prompt that was used for a growth strategy case).

All the best with the preparation!

Answer 3

Hi! To tackle a profitability case effectively, you can approach structuring and presenting your analysis with a clear, focused framework. Here's a strategy that might help:

Initial Quantitative Analysis:
- Start with a high-level breakdown of the key drivers impacting profitability: revenue, cost of goods sold (COGS), operating expenses, and other non-operating costs.
- Use financial ratios and trends to quickly identify areas with significant deviations from expected performance.
- Prioritize issues based on impact, focusing first on those with the highest financial impact.
Root Cause Analysis:
- Framework: While traditional frameworks like "company, customer, product, and competition" are good starting points, customize them with specific metrics and data points relevant to the case.
- Hypothesize: Develop specific hypotheses about why the profitability issues are occurring. For example, is the problem due to declining customer satisfaction, pricing pressures, inefficiencies in operations, or shifts in market conditions?
- Example-driven: Include specific examples or case studies to illustrate potential causes. For instance, if pricing is an issue, analyze how pricing strategies compare with competitors, customer price sensitivity, or changes in product features.
- Focus on Business Impact: Make sure to connect your root causes directly to the business’s broader strategic goals. For instance, if customer churn is identified as a root cause, assess its impact on long-term profitability and customer lifetime value.
Potential Solutions:
- After identifying the root causes, propose targeted solutions that are feasible and impactful. Focus on solutions that address the identified issues directly and have a clear path to implementation.
- Prioritize solutions based on their cost-effectiveness and potential for improving profitability. For example, if pricing is an issue, recommend pricing adjustments, bundling strategies, or launching new products to capture higher margins.
- Be practical and pragmatic in your recommendations. Demonstrate how each solution aligns with the business’s broader goals and challenges.

By combining a robust quantitative analysis with a deeper, more tailored root cause analysis, you can create a more compelling and insightful profitability case.

Alessa :)

Answer 4

Hello there,

Adding to the points above, remember to consider the drivers specific to the industry of the client when doing such cases. You will not evaluate how a supermarket makes profits the same way an airline does, and that should be reflected in the way you structure your profitability tree. That means it should go some levels deep beyond the revenues - costs --> quantity * average price and variable / fixed costs. To understand those drivers, I recommend you to read about the main industries and also try to reason it. ChatGPT may also help you with that if you want a list of main drivers per most common industries.

Your question shows that you're worried about the right things, keep going!

Best,

Mari