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Profitability cases - use standard framework?

Robin fragte am 13. Mai 2019

For ostensibly straightforward profit problems, is there any downside/upside to using anything other than a standard profit framework by itself? Like including a market/customers/competitors as other tier-1 topics alongside financial considerations?

It seems like I could fit these other topics under a profit framework and it would be logically consistent but depending on the case prompt there might be things I'd want to elevate as potential areas of consideration.

Curious to know what the consensus is on this. Thanks!

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Sidi bearbeitete seine Antwort am 13. Mai 2019
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 80+ candidates secure MBB offers
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Hi Robin!

In essence, profitability problems are diagnostic scenarios. As such, you need to first identify the core of the problem by means of a diagnostic, before then outlining the strategic options to address the diagnosed issues.

The first step, the diagnostic, is done as follows:

  1. Firstly you need to identify the numerical driver of the lower profits (the WHAT? question). --> Draw a driver tree to isolate the core of the problem (less customers? less revenue per customer? lower margin products sold? lower pricing? operational costs? etc.)
  2. Once the numerical problem driver is isolated, you need to understand the WHY? question. For this, the analysis depends on what the actual problem is. If it is a cost problem, you may want to go through the entire value chain to diagnose where the difference/disadvantage lies. If it is a revenue or sales mix problem, you may want to scrutinize strategic measures to adapt the offer (or way of offering). All the qualitative examples you mentioned (market/customers/competitors) belong here.

Important to realize that you do NOT start with asking broad qualitative questions ("First I would like to undertstand the market"). This is extremely inefficient ("boiling the ocean") and you would not work like this on a real MBB project (unless the project manager has very weak conceptual skills). You ALWAYS start with the numerical isolation of the scrutiny areas (by means of LOGIC), before then asking qualitative questions to understand the underlying reasons for the numerical problem.

The same approach works for all other P&L-related issues (revenues down? Costs getting out of control?), but also for operational issues (here, the value chain is the instrument of choice as opposed to a driver tree).

Cheers, Sidi

(editiert)

Vlad bearbeitete seine Antwort am 13. Mai 2019
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Hi,

It really depends on the case objective and context. Just a couple of examples. What if the case was about:

  • You profit being lower than planned - then you need to check whether it's the problem of planning or the problem of profits
  • You profit being lower than competitors - then you have to analyze both in the 1st level of your structure.

For standard declining profits cases I would recommend the following approach:

1) Ask clarifying questions:

- Clarify the business model (i.e. how the business works and what are the revenue streams / core products or business lines). Why do you need to know the revenue streams? Because it's one of the most critical pieces in understanding the business model. An example is Oil&Gas with up-, mid- and down- streams that are completely different businesses.

- Clarify the objective both in money terms and timeline (e.g. Our objective is to increase profits by 5M in 5 years). When you have a to select from several options in a case - clarify the selection criteria

- Clarify other possible limitations if you feel that it's necessary

2) You make a classic profitability structure adapting it to the case. Sometimes cases are not that easy as just declining profits. For example, if the profits are lower than planned, it is either because we have problems with profits or we have problems with planning. Try to be MECE here.

3) While you do your structure you split the revenues first by the revenue streams (if you have multiple streams) and then into either:

  • Price and quantity for the production companies. I also recommend to add proactively the 3rd boxn - the "Mix". Thus you show your business sense and demonstrate that you know the most common case traps. Pls note that the "mix" can be anything - geography, customer, product, etc.
  • The number of customers and the average check for retail stores, restaurants, ets. You can further split the customers into traffic and conversion (if relevant, e.g. for a fashion store) and the avg check into the products and prices

3) Costs I would split into Fixed and Variable. VCs you can split futher into costs per unit and units sold

4) I would start the case by checking whether its increasing revenues, declining costs, or both - so that you could eliminate the part that is irrelevant.

Then you dig deeper into the new structure to understand the root causes

Best!

(editiert)

Anonym bearbeitete seine Antwort am 3. Jun 2019

Hi Robin,

I'd say "it depends". What does it depend on? Well, if the one and only thing that you are supposed to do is to determine profits without looking at any risks (i.e. drivers that could positively and negatively affect the result), then use a standard profit framework. However, I would say that this is very rarely the case. You would almost always want to investigate the qualitative side of the case too. If not explicitly asked, you could - and should - propose to also run this qualitative analysis. If time - for whatever reason - does not suffice to look at the problem from a qualitative perspective too, then at least mention in your recommendation that the profits are calculated in an isolated environment and in order to validate the result you would still want to look at qualitative aspects x, y and z in a real case.

Hope that sheds some light on your problem.

Best regards

(editiert)

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