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)!
- 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.
Dr. Sidi Koné
(Former Senior Engagement Manager and Interviewer at McKinsey | Former Senior Consultant and Interviewer at BCG)