Case Structuring

Question

Hey guys, in some profitability cases where the revenue is increasing but the profits are decreasing, I find it challenging to structure the framework using the buckets method (e.g. company, customers, competition, etc.) because a lot of these usual buckets are not relevant (e.g. competition is not relevant here because revenue is already high in our company), so how would you approach such cases? or do you go for the profit = revenue - Costs and drill down in each part as the framework instead of the “buckets” method?

sorry if I'm not explaining it thoroughly, hope its clear

Answer 1

If you want to be MECE then drilling down into revenues and cost drivers make sense.

Often, if a interviewer has said that revenues are increasing but profits are declining he wants you to focus on cost drivers.

But this this may not be true always and you have to eliminate that revenue is not a problem. For example

(1) If the revenue mix has changed from high margin to low margin products

(2) Raw material costs are increasing and if the company has not been able to pass on the incremental costs to the consumer through appropriate price increases

You should have a hypothesis for each branch of analysis and talk about what analyses you would conduct to test that hypothesis

Answer 2

Hi!

Please allow me to start with a very blunt statement:

>> The term "profitability case" is nonsense! <<

Now, please read the above sentence again... This is super important to understand, because practically the entire "case preparation literature" is teaching this crap. What we are actually looking at here is a class of strategic problems that can be called "Diagnostic situations" - and it can comprise any observed phenomenon (a decrease in profit is just one out of hundreds of possible variations). All of these problems can (and should) be attacked by the same core logic.

The most important thing here is to understand the purpose of a structure:

Structuring a case does NOT mean to tell the interviewer what you're going to look at! This is not a structure - it's just a bucket list... and a pretty random one most of the time!

Structuring a case means to explain to the interviewer the LOGIC according to which you will answer the question at hand. "Areas to look at" are just a byproduct of this logic.

Therefore it is not very helpful to start with defining qualitative "buckets" to look at (e.g., "I'm going to start with looking at the market, then I want to understand the customers etc."). This is, at the end of the day, quite random, with no clear logic from which your areas are derived (other than "experience" or "gut feeling", both of which are not what MBB interviewers are supposed to assess!). If you think about it, this approach is the opposite of how you should work as a strategy consultant. Defining buckets and then hoping to find something interesting in there is pure explorative working - another word for this is "guessing".

Before delving into rather qualitative and contextual analysis (such as understanding industry phenomena), you should ALWAYS first isolate the numerical driver of the problem. This means that you have to turn around your approach! First you do a numerical analysis to unerstand what is MATHEMATICALLY driving the profit decline.

One fundamental things that needs to be learned in order to rigorously disaggregate the value drivers of a business and, hence, business-related questions, is how to set up rigorous driver trees. The driver tree allows you to identify the numerical drivers and sub-drivers of your focus metric (e.g., profits), and to identify the “problem path”. This means, you only drill into the problematic areas of the tree. The remaining 95% of the tree are IRRELEVANT and should be excluded from the further analysis! THIS will then invariable lead you the numerical problem driver!

Once you have isolated this problem driver, then you do a qualitative analysis to understand the UNDERLYING REASONS for this negative development of this specific driver. If you don't do it like this and stick to what is recommended in the books, you will always be extremely inefficient in your analysis, since this approach is essentially the definition of "boiling the ocean". First narrow down what area you have to understand, and only then try to understand it!

In your concrete case, knowing about competitors, the industry, customers etc. ("the buckets") is more or less useless at the start! This information has ZERO impact on your first layer of analysis if done rigorously. First you have to understand what is numerically causing the problem. Only once you have found out the problem driver, then investigating on whether competitors have the same problem is effective and helpful (because you now already know WHAT the root cause is - you just need to find out why it has emerged)!

Generalized approach:

Firstly you need to identify the numerical driver of the below-benchmark profits of the company (the WHAT?-question). --> Identify the different income streams of the company; then for each income stream, draw a driver tree to find and isolate the core of the problem (compared to industry average: less customers? less revenue per customer? lower margin products sold? lower pricing? higher operational costs? etc.) If you find a below-benchmark driver, you need to dig deeper to isolate the sub-driver who is responsible for this negative performance --> the numerical problem dirver!
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 underlying trends and developments, competing offers, substitutes etc.
Based on your quantitative (WHAT?) and qualitative (WHY?) analysis, you can develop/brainstorm strategic measures to address the qualitative reasons.
Do not forget to outline potential risks of your strategic recommendation

This is how such problems are typically structured and tackled in top strategy consulting. NEVER start with qualitative questions - it is the most inefficient approach thinkable! First narrow down the (sub-)area that mathematically causes the problem (quantitative analysis) and THEN start asking qualitative questions to understand the underlying reasons.

Cheers, Sidi

_______________________

Dr. Sidi Koné

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

Answer 3

Hi there,

Indeed, the second approach works better here.

But as Sidi is suggesting as well, I'd recommend that you work to develop frameworks outside of the standard ones.

What I work with my coachees to do is to develop structures with zero-based thinking, literally starting from first principles and structuring every problem on its own. That's a bulletproof method which will also help you be a better consultant once you're on the job.

Best,

Cristian

Answer 4

Hi there,

You are totally and completely right.

Gone are the days of pre-memorized buckets/frameworks.

Now, you have to think for yourself!

When you create a framework, you need to tailor it to the case. Why are you looking at x thing? How will it help you solve the objective?

Revenue + Cost is generally a bad framework. Company/Customers/Competition, just as those words, is generally a bad framework.

You are at the very beginning of learning how to framework properly…keep up this thinking!

Structuring Mindset - How do I use frameworks in a case?

If there's anything to remember in this process, it's that cases don't exist just because. They have come about because of a real need to simulate the world you will be in when you are hopefully hired. As such, remember that they are a simplified version of what we do, and they test you in those areas.

As such, remember that a framework is a guide, not a mandate. In the real-world, we do not go into a client and say "right, we have a framework that says we need to look at x, y, and z and that's exactly what we're going to do". Rather, we come in with a view, a hypothesis, a plan of attack. The moment this view is created, it's wrong! Same with your framework. The point is that it gives us and you a starting point. We can say "right, part 1 of framework is around this. Let's dig around and see if it helps us get to the answer". If it does, great, we go further (but specific elements of it will certainly be wrong). If it doesn't, we move on.

Answer 5

Hello!

you are SPOT ON! That is precisely why you would never pass the cut leveraging those “standard” frameworks.

Think it this way: you are presented with a very particular and detailed business issue, and you need to solve it. Most of the times, general and standard frameworks only provide YOU with some guidance, but you need to build your own approach to it.

Hope it helps!

Cheers,

Clara

Answer 6

Hi there,

You're on the right track!

The reason we can't give you an answer on how to approach this is that we don't have the actual case prompt, which is the key point in all of this. Here's some important pointers:

A good framework will be guided by the specific case context and objective - even a small variation in the wording may have a big impact on the structure
A good framework is objective driven and every bucket with its various end-points (typically analyses of some sort) will have a very specific purpose - there's no room for redundancies or vagueness
As for the “profit framework” with revenue/cost breakdown, it's really just an empty structure and the magic happens inside the buckets where you need to have relevant, well prioritized, and concrete end-points (see previous point)

If you follow the above pointers, you're not running the risk of using something generic off the shelf, which is a typical red flag for interviewers.

Keep it up and best of luck!

Answer 7

Hi there,

without knowing the case we cant help you, but I dont think anyone will solve it for you. You should at least try and then ask…. But each of us can eventually a use different approach to solving the case… this is precisely what consulting looks for, not standardized frameworks (that usually limit the options), but a new way and out of the box ideas, eventually a combination of different frameworks that would fit this particular case… If standardized frameworks would solve complex problems that MBB solve, companies will unlikely to hire them.

I would recommend putting the CEO hut and thinking how would you approach it if you would want to buy such a start-up? What things would you look at to maximize the investment?

Good luck,

Lucie

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Answer 8

Hi there, and thanks for asking, Indeed, setting up the framework for a profitability case can be a bit confusing, ho... (read entire answer)

Hi there, and thanks for asking, Indeed, setting up the framework for a profitability case can be a bit confusing, however, I would advise you not to think of “THE” framework wh... (read entire answer)