Profitability case - should I purely focus on just on side (revenue or cost)?

Question

Hi all, I would like to clarify whether it is okay to focus on just revenue or cost side in a profitability case. I was told that in consulting I need to solve the most impactful topics in a case. So usually you will try to figure out - revenue or cost side problem, or a mix of both. In the case I did today, it clearly states cost has not changed, so I decided to purely discuss on revenue part. However, there is a question asking me to calculate the "profitability per store", which was quite unexpected and requires discussions about the cost part.

Another question is, if a case asks whether the client should enter a market (in order to increase revenue), should I explore the cost & profitability part? Or, I should purely focus on the "revenue" part, and cost / profitability is actually out of scope?

Thanks a lot!!

Answer 1

Hello!

Before jumping into one of the branches, you need to totally discard the other one.

Hence, think of the issue tree as a "way" to find the solution, that is at the end of this path. Hence, first, you will find yourself in the 1st crossroads > revenue or cost? Once the cost one is discarded, you continue to the revenue branch of this 1st crossroad, and forget about the other one. This way, you keep advancing, discarding.

Hope it helps!

Cheers,

Clara

Answer 2

Hi,

In your first question, you should first understand what are the specific stores that have issues with profitability. It can be that the total costs remained the same, however, the costs of several stores increased while the costs of the other decreased.

Re your second question - you should:

First, even before drawing the structure, ask the clarifying questions: What is the criteria for the success (market share, ROI, something else? What is the market entry mode? (organic / non organic)? What kind of financial resources constraints we have?
Depending on the answers to these questions you will know whether you should consider the investments or not

Best

Answer 3

Hello,

Here there are my answers:

1) You have to start from the bucket that seems to be the root cause. Then, if you need to drill down also the other part because of a question, it's completely fine.

2) I would give priority to the increasing revenues section. The only case where you should put a specific focus on cost part is when the price is one of the most important drive in your analysis.

Best
Luca

Answer 4

I recommend presenting the whole framework, then start with a branch by prioritizing your analysis or stating your first hypothesis. After having identified a root cause find some initiatives to improve it and understand if it achieves the target of the client. Otherwise, recap and start with the next branch.

Best,
Antonello

Answer 5

Hi,

On the first question here:
While 80/20 is important, you need to do enough work to know what is the 80 and what is the 20, and only prioritize cost when you are sure it is not an issue. "Cost has not changed" doesn't always mean cost is not an issue. E.g. the avg cost might not have changed, but many some stores' costs are going out of control while some others are doing well. Or maybe the total revenue goes down but total cost hasn't change, that means unit cost actually has a problem. So don't brush it aside just based on that surface information. You need to drill down more to truly understand the issues.

On the 2nd question:
Ask your interviewer does the client wants to look into profitability, or does the client only care about the revenue for now. Based on that answer then you decide whether you should focus on revenue only.

Best,

Emily

Answer 6

Dear A,

I would recommend you first to explore both of the branches, before going deeper into one of them.

As ofr your Q2- agree with Emily here, that you can ask the interviewer, on what you client want to concentrate - on a profitability or revenues?

Best,
André

Answer 7

Honestly, it depends! You need to think about the industry/business context, the company context, and the situationally/problem context. Only then can you create an appropriately tailored cost breakdown.

In general, for determining cost issues, you need to break down the problem into a tree/root-cause analysis and ask the highest level (but specific) questions first! In this way, you essentially move down the tree.

How do you identify where to look? Well, you need to look into whichever of the following 5 make the most sense based on where you are:

What's the biggest? (i.e. largest piece of the pie...most likely to change the end result)
What's changing the most? (I.e. could be driving the most and most likely to be fixable)
What's the easiest to answer/eliminate? (i.e. quick win. Yes/No type of question that eliminates a lot of other things)
What's the most different? (differences between companies, business units, products, geographies etc....difference = oopportunity)
What's the most likely? (self-explanatory)