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Cracking Bain cases: Focus on Value!

Cédric asked on Nov 14, 2018
Looking for solid partners to practice primarily real cases. Preparing for OW, ATK and Bain interviews

Dear former and current Bain Consultants,

My Bain Interview is in three weeks. I read in their brochure thats it pretty important for Bain to „Focus on Value“ when solving a case. This is pretty vaguely defined and I would highly appreciate any suggestions/explanations.

Thanks a lot,

Best,

Cedric

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Sidi
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replied on Nov 14, 2018
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 90+ candidates secure MBB offers
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Hi Cédric,

this is excellent advice from Bain! Value is indeed THE single most important notion to consider when thinking about any type of business situation. In 95% of cases, value creation will be the central element. Ultimately, this is nothing else than profit generation over a specific time frame. You then draw a driver tree for profitability in order to isolate the numerical drivers for your solution. And then, only after you have drawn out the driver tree, you can map out the relevant qualitative "framework elements" to the sub branches. This approach, visualized by means of a rigorous driver tree, is much much clearer then any framework you will find in any case book. And, contrary to such frameworks, which are hanging in the air and do not logically relate back to the specific question, this is a bullet proof approach when done rigorously.

The caveat is: this requires time and qualified coaching to internalize. But ultimately, this is how consultants think about problems - how can we optimize for value creation?

Look at this example:

Case Question: Our client is a large producer of PET. PET is a type of plastic that is used mainly for producing bottles, such as the ones you find in grocery stores. The main component of PET is PTA. Our client has a PET plant in the US and serves clients both in the US and Europe. They have made the decision to build a PET plant in Europe to be closer to the clients. They have asked you to evaluate whether they should also backward integrate and purchase a PTA plant and locate both plants next to each other.

A very clear approach would be:

1. Core Question: "Should the client invest into purchasing a PTA plant next to the new PET plant in Europe?"

2. Identify criterion to make this decision: The additional value we can create over the client's investment horizon has to be significantly higher than the investment cost. Moreover, the risks need to be manageable.

3. Compile base information: Purchasing Price of PTA plant / yearly operating cost of PTA plant if purchased / capacity of PTA plant vs. PTA need / investment horizon of client

4. Deep dive into the value bucket by menas of a profitability tree: what are the levers of value here? Compare Scenario A (PTA plant in Europe) to Scenario B (no PTA plant in Europe). Probably the value lever lies on the cost side: how much savings potential due to decreased/eliminated transport costs? How much savings due to eliminated import tariffs? etc.

5. Calculate annual value (delta between Scenario A and B). If a PTA plant in Europe indeed increases annual profits by a certain amount, you then divide the purchasing price of the PTA plant by this additional yearly profit. This gives you the break even point (point in time after which the investment becomes profitable). If this point comes earlier than the investment horizon, then this is a beneficial investment and the client should proceed with the purchase (purely based on financials).

6. Don't forget to compile potential risks and mention them in your summary

THanks again! What about cases where you need some qualitative information before drawing out a driver tree (which firstly looks for increased value i.e. profitability in most cases)? Example: Mining company wants to invest in a new mine, which would increase commodities produced by XM tons. Are we break even in 5 years? -> Here, If I directly jump in the profitability driver tree could be a problem if we do not qualitatively check before what the demand is and the supply? — Cédric on Nov 14, 2018

You DON'T need any qualitative information to draw out a driver tree! A driver tree is universally true, regardless of what information you get! That's the essence of a driver tree. In your examplre, the driver tree disaggregates additional profits into its components and subcomponents (and one of the subcomponents of quantity sold is the demand that we face - actually it is MIN[Capacity, Demand]). — Sidi on Nov 14, 2018