How to structure and identify the root cause of a drop in sales volume?

Hi!

Frankly: starting with generic “buckets” of reasons like internal/external is not very good. 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.

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

For example, if the client's question is

"How to determine the cause of declining revenue?"

Telling the client what you want to look at does not address this question. Frankly, you may look at whatever 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 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 revenue problem.

• For this, you first need to isolate what (sub-)driver causes the decline. Revenue is too high level, you need to find out whether it is an issue with pricing, or the product mix, or the quantities. 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).
• 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 areas 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!

What 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 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™

Hello there,

This issue tree is more focused and comprehensive than the previous one, and it covers a broader range of possibilities. It is also more specific about the types of factors that can affect sales volume. This will make it easier to identify the root cause of the problem and take corrective action:

Market Factors

• Customer Demand
  • Changes in customer preferences, needs, and behaviors
  • Increased competition
  • Changes in competitor strategies
  • Regulatory changes
• Product/Service Quality
  • Changes in quality, features, or benefits
  • Customer perception and satisfaction
• Pricing/Positioning
  • Pricing changes
  • Product positioning relative to competitors
• Promotion/Marketing
  • Changes in marketing strategies
  • Promotional efforts
• Distribution Channels
  • Changes in distribution channels
  • Product availability
• Internal Factors
  • Sales Team
    • Sales skills and training
    • Motivation and compensation
    • Sales process and tools
  • Management
    • Leadership and vision
    • Planning and execution
    • Culture and values
  • Operations
    • Manufacturing and supply chain
    • Inventory management
    • Customer service
• External Factors
  • Economic Conditions
    • Recessions
    • Changes in disposable income
  • Technological Advancements
    • New products and services
    • Changes in customer expectations
  • Social/Cultural Changes
    • Changes in lifestyle and values
    • Changes in demographics
  • Environmental Considerations
    • Sustainability concerns
    • Regulations
  • Political Factors
    • Political instability
    • Changes in government policies

Remember that these categories can sometimes overlap, and that's okay. The goal is to provide a concise yet comprehensive way to systematically investigate the root causes.

Hope this is useful!

Hi there,

You're absolutely right - there are a ton of factors!

Use the clues/context in the prompt itself and your clarifying questions to figure out the best structure

RULE 1: Never ever ever make your entire framework about root cause.

If your spouse loses their job, is the only solution for your household to get their job back? Of course not! You could 1) Get their income back up in general 2) Increase your income 3) Cut expenses

Same applies for profitability.

RULE 2: Never ever have 1 generic structure for any case type that you squeeze into every single prompt.

GENERAL PROFITABILITY APPROACH
 

You need to understand the industry + company context from the prompt itself to figure this out...cases and case types cannot be memorized...you have to adjust every single time!

Example: LOOKING FIRST at Economy/Industry

In my Hot Wheels case, you're a Korean OEM with falling profits. You operate in the US and Japan. The FIRST thing you have to look at here is the general market AND how competitors are doing. Otherwise, you will never learn that US OEMs are doing well in the US while Korean OEMs are NOT doing well in the US. Then, you'll never solve the crux of the case which is that transport times+costs are prohibitively like (Just in Time delivery is the #1 product characteristic).

If you don't look at economy/industry first here, you will not solve the case in a time effective manner.

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/hot-wheels-186

Example NOT looking at Economy/Industry

Take my "Chinese Airline During Covid" case example. We know that the airline is in trouble due to covid. We can make the deduction that this is caused by a reduction in demand. As such, we don't really need to look into rest of market/industry

So, we want to "repair" existing revenue streams as much as possible. So, first let's see what we can do. Then, whatever "gap" is remaining, we want to fill it with alternative revenue streams. Finally, whatever we can't make up for, we have to fix through cost cutting (ideally cutting unused capacity). See the logic here?

And it'll change every time based on the case itself...think critically!

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/chinese-chess-airline-business-during-covid-19-191

GENERAL PROFIT DRIVERS

Volume Down: Competition reduced prices or improved their product (outcompeting you), competition just launched effective marketing, regulation has slowed you down, economic decline, environmental disaster, tarrifs, suppliers disrupting your production, your product no longer applies to the customer (i.e. decline has been happening for a while)...and so on and so forth...

Price Down: We're in a price war, costs have gone down so we're realising this, regulation has created a price cap, we ran a discount program

Variable Costs Up: Raw materials costing more, inefficient contracts, ageing workforce, deteriorating workforce, regulations, quality control

Fixed Costs Up: Recent large investments

================================================

REVENUE ISSUES/IMPROVEMENTS
 

Remember, you need to apply your revenue improvement ideas to the specific case at hand. You cannot be generic.

That said, some major ways companies boost sales include:

• SAAS (software as a service)
• (Relatedly) Subscription revenue
  • Get people onot subscription plans (i.e. Netflix)
• Behavior-changing "memberships" - i.e. Amazon Prime
  • When people enter Prime membership, they actually actively spend more than they did before
• Bundling
  • I.e. sell a few things together
• Radiation
  • Sell products similar to the current one
• Low-price entry
  • Get someone in with a super cheap/good deal, then, now that you have them as a customer, sell additional, higher-margin products (insurance companies do this, for example)

==================================================

COST ISSUES
 

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:

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

https://www.preplounge.com/en/consulting-forum/structure-breakdown-for-costs-7963

https://www.preplounge.com/en/consulting-forum/inventory-costs-how-to-segment-6861

https://www.preplounge.com/en/consulting-forum/direct-and-indirect-instead-of-fixed-and-variable-6272

https://www.preplounge.com/en/consulting-forum/when-should-i-break-down-costs-as-fixed-and-variable-as-opposed-to-over-the-value-chain-5990

Major Costs - Areas to Cut

FC

• Rent
• Labour (salaried employees)
• Transport (if we own the trucks, etc.)
• Capex
• Utilities (for the office, warehouse, etc.)
• Cbsolescence (wrong word...this is amortization/depreciation)
• Stolen objects (but shocked you heard this in a case)

VC

• Labour (hourly employees)
• Transport (if we pay a company per load)
• Fuel/truckers (if we own our own trucks etc. for transport)
• Utilities (if you need more energy to make more widgets)
• Raw Materials (why wasn't this included? Big one to miss)

Hello,

Seems like you have a couple of good framework suggestions here (plus the factors you originally mention are relevant themselves!). I would advise you to use the context provided in the prompt to guide you in narrowing down your framework, making it less generic, and more MECE. It's good to have all these factors in the back of your mind, but they are not always going to be relevant to every single case, so you can be judicious with what you include based on that. Similarly, make sure you're not just talking about ‘customer’ and ‘competition’ in general, but more specifically about what those factors present in the context of the case.

The reason why your internal/external approach does not work is because you are thinking about it as “laundry list” where you want to include everything - instead of thinking about it in a step-by-step / “break it down one level” way.

Internal vs. external means: something you did vs. something someone else did. That's the first step breaking down the problem.

Let's think about the external part.

So this is something someone else did. So how to break this down one level more?

Well, it can be something your competition did vs. something changed in demand.

Then you break down one level more each one of these.

If it is something competitors did, you think about changes in Product, Price, Promocion or Place (4 Ps). 

If something changed in demand, you can think about consumer trands, macroeconomic factors, or substitute products.

I can go on an on on this issue tree, breaking down each step into 2 or 3 other steps. If you use this method, it will always be MECE, and it will cover all the possible explanations - may not be at the detailed level (that depends on how deep you went), but it will be MECE and you will show that with enough time you would get to the answer.

Hi there!

Contentwise, you're looking at most of the right topics. 

But the structure isn't great. 

The main issue is that it's too generic. 

Consulting firms have been making huge efforts over the past few years to give candidates unusual cases because they want to test their thinking on the spot. 

So by still providing typical structures you're going against this trend. Most interviewers shut down or already label you as a below average candidate if you give them a ‘internal / external' sort of structure. 

The best structures are the ones that are creative and tailored to the client situation (while of course getting the job done). 

To create such structures you need to have the right skillset i.e., knowing how to structure from first principles. 

Sharing with you a guide you might find helpful about some of the best structuring techniques:

• Free Guide: Mastering Structuring & Brainstorming

Best,
Cristian

Hi there,

I would be happy to share my thoughts on your question:

• First of all, unfortunately, even if this is only the structure of the root cause and not of the entire case study, it is not meaningful, as it is too generic.
• Moreover, assuming that you have first identified the driver(s) of the decline in sales, I as an interviewer would expect you to present a tailored structure that fits the identified driver(s).

If you would like a more detailed discussion on how to best structure any case study, please don't hesitate to contact me directly.

Best,

Hagen