Deacresing Profits - Industry Trend

Declining Profitability Case industry trend
New answer on Jan 10, 2020
4 Answers
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Anonymous A asked on Jan 10, 2020

Hi Guys,

I have a question regarding profitability cases. So if we have declining profits and it comes out that it is actually an industry trend. How do we move on?

I would propose have a deeper look into the industry to understand what exactly is going on and what factors have an impact on our revenue (sales volume and price) or costs.Then I would consider measures trying to overcome them. If that's not possible, I would think of other ways to increase revenue, e.g. enterin new markets, products etc.

Any suggestions on that would be highly appreciated :)

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Sidi
Expert
replied on Jan 10, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers

Hi!

I feel I have to explain a couple of points here. Your approach corresponds to what is outlined in the usual case preparation books (mostly written by authors who have been very junior when they left consulting or did not even work in consulting!). But unfortuantely this approach is not how a real consultant should tackle such questions!

Before delving into rather qualitative and contextual analysis (such as understanding industry phenomena), you should ALWAYS first isolate the numerical driver of the problem. So 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, and 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 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 whether it's and industry problem or not is more or less useless at the start! 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!

Generalized approach:

  1. 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!
  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 underlying trends and developments, competing offers, substitutes etc.
  3. Based on your quantitative (WHAT?) and qualitative (WHY?) analysis, you can develop strategic measures to address the qualitative reasons.
  4. 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

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Clara
Expert
Content Creator
replied on Jan 10, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

Knowing that it is an industry trend issue, I would 1st try to understand if it´s affecting all players the same:

  • If it´s not, I would deep-dive on the best practices that the companies that are better taking the hit are implementing and prep my contingency plan based on that.
  • If it is, and all companies are struggling the same way, I would move directly to contingency plan:
    • Before starting, make sure you understand very well the company and what makes them unique
    • Draft the plan (e.g., M&A, new products or markets, investment on I+D, etc.)

Hope it helps!

Cheers,

Clara

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Antonello
Expert
Content Creator
replied on Jan 10, 2020
McKinsey | MBA professor for consulting interviews

Hi,
I agree there are 2 main steps to focus on:
- Identify the issue (e.g. macroeconomic trend, suppliers, customer needs shift, product life cycle, substitutes, regulatory change, ...)
- Resolution strategy (e.g. M&A or invest new technologies for improve the cost structure, differentiate the product focusing on most profitable customers, enter the service market, divest less profitable businesses, ...)

Hope it helps,
Antonello

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Luca
Expert
Content Creator
replied on Jan 10, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

Hello,

Your approach sounds good, but if it's a trend of the whole industry it's usually really hard to find a solution looking at the actual situation.
80% of the times the solution will be to differentiate or enter a new market, so be careful to drill down the right section of your initial framework.

Feel free to contact me if you want to discuss it further.

Best,
Luca

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Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers
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