Objective = Generate more money

Question

Hi everyone.

If our client's objective is to invest $5M in his business, and wants to have full control of the business (aka make money from his business), does it mean that our client wants to:

1. increase the overall profit (both the analyses of revenue and cost will be included in my structure);
or
2. increase the overall revenue (both the analyses of price and volume - Market Size and Market Share, will be included in my structure only);
or
3. decrease the overall cost (both the analyses of fixed and variable costs will be included in my structure only)?

Which one would be the most suitable way to help our client analyze and achieve this goal? Thank you

P/S: the client does not have any specific financial target in mind

Answer 1

Hi!

I believe you confuse the objective with the case question! "Investing 5m $ in his business" is not the objective! It is most probably the starting point of the question (e.g., "Should our client invest the 5m $ in his business?" or "How much return will a 5m $ in his business yield?").

Now depending on what the actual question is, the underlying objective may need to be clarified and quantified in order to be even able to even start crafting approach for the required analyses.

For example, if the question is indeed "Should our client invest the 5m $ in his business?", we first need to understand, what the client wants to achieve at all! So under which condition would this investment be seen as beneficial? If, for example, the client needs a 50% ROI over 5 years, (THIS is the objective!) then this means we will have to verify whether this investment would yield an additional operational profit of at least 12.5m $ (5m $ x 1.5 - 5m $). To run this analysis, we need to disaggregate the business into its value levers and quantify, which levers would/could be impacted by the investment.

Rigorously disaggregating the value drivers of a business is indeed one of the fundamental things that candidates need to learn in order to approach cases in a mature way (avoiding to look through the junior lens of "buckets" and "factors"). The driver tree allows you to identify the logical drivers and sub-drivers of the value metric. The qualitative elements (such as consumer demand, market structure, company operations, etc.) then have to be mapped to the sub-branches of this tree.

Cheers, Sidi

_______________________

Dr. Sidi Koné

(Former Senior Engagement Manager and Interviewer at McKinsey | Former Senior Consultant and Interviewer at BCG)

Answer 2

Hi there,

I agree with Sidi - your client doesn't necessarily need to increase or decrease anything!

Essentially, the case is saying "Will I get more money than I put in, and will this be more than I can get elsewhere?". In essence will the ROI be positive, and will it be larger than anywhere else my $5M can be spent?

This could mean the business represents $7M in NPV, zero changes to profits are made, and the owner gets a nice ROI.

Now, of course, if we're buying this company, we'll certainly say 1) What is the value today in $ and 2) Can we get more $ from this if we make changes once we buy it? (i.e. revenue uplift and/or cost reduction)

You've focused on #2 with your question. Don't forget #1!

Answer 3

Without knowing the full context of the case, my initial steer would be to focus on both uplfting revenue/market share and keeping costs low/lowering costs.