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Frameworks for declining financials

BCG Bain McKinsey profitability Revenue analysis Structure
New answer on Nov 06, 2023
5 Answers
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Anonymous A asked on Nov 01, 2023

Dear community! I've come across numerous scenarios where the primary concern is understanding the reasons behind declining revenues/profits and determining the next steps. 

To address the 'why' aspect, I often categorize the causes into external and internal factors. Should I incorporate solutions (the 'what to do' part) into my initial framework, or should I only propose solutions after identifying the root causes? 

Additionally, are there other frameworks or structures that can be effectively used for these types of cases?

Thank you!

(edited)

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Sidi
Expert
replied on Nov 01, 2023
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi!

The purpose of a structure is to clearly explain how you will answer the precise question that has been asked by the client.

The question is: "What is the cause of the revenue issue?"

Structuring a case means to explain, HOW you will answer his concrete question. In order to do this, you have to outline the LOGIC according to which it can be answered.  

Hence, you should outline a clear logic that will ultimately and invariably lead to the root cause of the revenue problem.

  • For this, you first need to isolate what (sub-)driver causes the decline. Revenue is too high level, you need to find out whether it is an issue with pricing, or the product mix, or the quantities. If, e.g., lower quantity is the problem, then you drill deeper to understand the concrete numerical driver (e.g., the average number of items per purchase has not changed, but the number of purchases has gone down --> then you drill deeper to understand what is driving this (the "sub-driver") --> e.g., the number of customers has not changed, but their average frequency of purchasing has gone down --> this is the numerical problem driver! You isolated it just by means of a driver tree).
  • Once you have isolated the problem driver (WHAT is the problem?), then you check on the qualitative reasons that might have caused this very problem driver to develop negatively (WHY does the problem exist?). You exclude all other areas of the tree because they are not relevant! This is how you run effective and efficient diagnostics. This second step of qualitative analysis might indeed require some extra structuring once you reach it!

What aspect that is very important (and usually violated in Case Coaching books) is the principle of first isolating the numerical problem driver, before asking qualitative question. 

Never start your analysis with asking qualitative questions ("First I would like to get a general understanding of the market development", "I would like to look at internal/external factors" and such phrases)! This is practically the very definition of "boiling the ocean", i.e., working in an extremely inefficient way. First, you should seek to narrow down the area that you need to qualitatively understand - and this can be done very quickly by doing a numerical analysis as described above. 

Once you know where the problem comes from, THEN you can start to understand the qualitative reasons that underlie the negative development of this driver, and this analysis will be far more focused and concrete than if you would have tried to do it at the start.

Cheers, Sidi

_______________________

Dr. Sidi Koné 

(🚀 Ex BCG & McKinsey Sr. Project Manager, now helping high potential individuals join the world's top Strategy Consulting firms (McKinsey | BCG | Bain))

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Raj
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Content Creator
replied on Nov 06, 2023
FREE 15MIN CONSULTATION | #1 Strategy& / OW coach | >70 5* reviews |90% offers ⇨ prep-success.super.site | MENA, DE, UK

When it comes to understanding the reasons behind declining revenues/profits and determining the next steps, it is generally advisable to focus on identifying the root causes before proposing solutions. This approach allows for a more comprehensive analysis and ensures that the proposed solutions are tailored to address the underlying issues.

In your initial framework, it is recommended to first analyze the external factors that may be impacting revenues/profits. This could include factors such as changes in market dynamics, competitive landscape, customer preferences, or regulatory environment. By examining these external factors, you can gain insights into the broader industry context and potential challenges that the company may be facing.

Next, it is important to delve into the internal factors that may be contributing to the decline. This could involve analyzing aspects such as operational inefficiencies, cost structures, pricing strategies, product/service offerings, or customer satisfaction. By understanding these internal factors, you can identify areas where improvements or changes may be needed.

Once you have identified the root causes, you can then propose solutions that are specifically tailored to address those issues. These solutions should be practical, actionable, and aligned with the company's overall strategy and objectives. It is important to consider the feasibility, potential impact, and risks associated with each proposed solution.

While the approach of identifying root causes before proposing solutions is generally recommended, it is important to remain flexible and adapt your approach based on the specific case context. Different cases may require different frameworks or structures, depending on the industry, company, or specific problem at hand.

For example, in addition to the external and internal factors framework, you may also consider using frameworks such as the 4Ps (product, price, place, promotion) or the value chain analysis to gain a deeper understanding of the company's revenue/profit drivers. These frameworks can help you identify specific areas where improvements can be made.

Ultimately, the key is to have a structured and logical approach that allows you to systematically analyze the reasons behind declining revenues/profits and propose effective solutions. By combining a thorough analysis of root causes with tailored solutions, you can provide valuable insights and recommendations to address the client's challenges.

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Ian
Expert
Content Creator
replied on Nov 04, 2023
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Hi there,

Please get coaching. You need a fundamental mindset shift in frameworking/profitability

Imagine I'm a financial advisor. Your wife/husband loses their job. You ask me to find a solution to your family finances.

Are you happy if I say “Let me break things down into internal and externl” OR if I say “ Let me look at your root causes".

Please. Re-read the above.

Would you hire me?

Nope.

And NO FIRM WOULD HIRE BCG/MCKINSEY/BAIN if they say “let's look at your root causes”.

Solve. The. Problem.

Framework

1) Get income for your spouse back up

2) Increase your income

3) Cut household expenses/spending.

=========================================

GENERAL PROFITABILITY APPROACH
 

You need to understand the industry + company context from the prompt itself to figure this out...cases and case types cannot be memorized...you have to adjust every single time!

 

Example: LOOKING FIRST at Economy/Industry

 

In my Hot Wheels case, you're a Korean OEM with falling profits. You operate in the US and Japan. The FIRST thing you have to look at here is the general market AND how competitors are doing. Otherwise, you will never learn that US OEMs are doing well in the US while Korean OEMs are NOT doing well in the US. Then, you'll never solve the crux of the case which is that transport times+costs are prohibitively like (Just in Time delivery is the #1 product characteristic).

 

If you don't look at economy/industry first here, you will not solve the case in a time effective manner.

 

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/hot-wheels-186

 

Example NOT looking at Economy/Industry

 

Take my "Chinese Airline During Covid" case example. We know that the airline is in trouble due to covid. We can make the deduction that this is caused by a reduction in demand. As such, we don't really need to look into rest of market/industry

 

So, we want to "repair" existing revenue streams as much as possible. So, first let's see what we can do. Then, whatever "gap" is remaining, we want to fill it with alternative revenue streams. Finally, whatever we can't make up for, we have to fix through cost cutting (ideally cutting unused capacity). See the logic here?

 

And it'll change every time based on the case itself...think critically!

 

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/chinese-chess-airline-business-during-covid-19-191


 


 

GENERAL PROFIT DRIVERS

 

Volume Down: Competition reduced prices or improved their product (outcompeting you), competition just launched effective marketing, regulation has slowed you down, economic decline, environmental disaster, tarrifs, suppliers disrupting your production, your product no longer applies to the customer (i.e. decline has been happening for a while)...and so on and so forth...

 

Price Down: We're in a price war, costs have gone down so we're realising this, regulation has created a price cap, we ran a discount program

 

Variable Costs Up: Raw materials costing more, inefficient contracts, ageing workforce, deteriorating workforce, regulations, quality control

 

Fixed Costs Up: Recent large investments

================================================

REVENUE ISSUES/IMPROVEMENTS
 

Remember, you need to apply your revenue improvement ideas to the specific case at handYou cannot be generic.

 

That said, some major ways companies boost sales include:

  • SAAS (software as a service)
  • (Relatedly) Subscription revenue
    • Get people onot subscription plans (i.e. Netflix)
  • Behavior-changing "memberships" - i.e. Amazon Prime
    • When people enter Prime membership, they actually actively spend more than they did before
  • Bundling
    • I.e. sell a few things together
  • Radiation
    • Sell products similar to the current one
  • Low-price entry
    • Get someone in with a super cheap/good deal, then, now that you have them as a customer, sell additional, higher-margin products (insurance companies do this, for example)

==================================================

COST ISSUES
 


 

In general, for determining cost issues, you need to break down the problem into a tree/root-cause analysis and ask the highest level (but specific) questions first! In this way, you essentially move down the tree.

 

How do you identify where to look? Well, you need to look into whichever of the following 5 make the most sense based on where you are:

  1. What's the biggest? (i.e. largest piece of the pie...most likely to change the end result)
  2. What's changing the most? (I.e. could be driving the most and most likely to be fixable)
  3. What's the easiest to answer/eliminate? (i.e. quick win. Yes/No type of question that eliminates a lot of other things)
  4. What's the most different? (differences between companies, business units, products, geographies etc....difference = oopportunity)
  5. What's the most likely? (self-explanatory)

https://www.preplounge.com/en/consulting-forum/structure-breakdown-for-costs-7963

 

https://www.preplounge.com/en/consulting-forum/inventory-costs-how-to-segment-6861

 

https://www.preplounge.com/en/consulting-forum/direct-and-indirect-instead-of-fixed-and-variable-6272

 

https://www.preplounge.com/en/consulting-forum/when-should-i-break-down-costs-as-fixed-and-variable-as-opposed-to-over-the-value-chain-5990

 

Major Costs - Areas to Cut

 

FC

  • Rent
  • Labour (salaried employees)
  • Transport (if we own the trucks, etc.)
  • Capex
  • Utilities (for the office, warehouse, etc.)
  • Cbsolescence (wrong word...this is amortization/depreciation)
  • Stolen objects (but shocked you heard this in a case)

VC

  • Labour (hourly employees)
  • Transport (if we pay a company per load)
  • Fuel/truckers (if we own our own trucks etc. for transport)
  • Utilities (if you need more energy to make more widgets)
  • Raw Materials (why wasn't this included? Big one to miss)
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Moritz
Expert
Content Creator
replied on Nov 02, 2023
ex-McKinsey EM & Interviewer | 7/8 offer rate for 4+ sessions | 90min sessions with FREE exercises & videos

Hi there,

If you're asking whether your framework should include a ‘solution bucket' or something of that nature, don't do it. There's two reasons for that:

  • REDUNDANCY: It's implicit that we don't just analyze the problem and leave it there without proposing a solution. Think of the framework as your analytical blueprint for identifying the problem/solution space. You can voice over the fact that you're obviously going to try and propose a first draft recommendation.
  • INFORMATION: Without having the specific problem identified, what are you going to say about how you're going to solve it? You simply have nothing to work with at this point other than a vague description of the problem space from the prompt.

Hope this helps a bit. Best of luck!

Moritz

~~~~~~~~~~~~~~~~~~~~~~~~~~~~
>> Need a senior McKinsey coach? See my profile in a nutshell
>> Need real McKinsey cases? See two real examples with Zero Carbon Mine (hard) & Car Convenience (Intermediate + brand new)

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Cristian
Expert
Content Creator
replied on Nov 02, 2023
#1 rated MBB & McKinsey Coach

Hi!

Great question.

First of all, don't try to systematise the types of structures because that leads to you learning them by heart which then leads to you failing to pick up the nuances in the interview and then eventually failing. 

Second of all, always connect with the question. If the question is asking only about the root causes, then only focus on the why. If they ask also about solutions, then cover that as well. If you are confused about what the question is asking, then clarify with the interviewer. 

Third of all, internal external works well but it's at best an average structure and that's how the interviewer will label your performance. My recommendation would be to push for more creative frameworks that are specifically designed for that client situation or at least to disguise the internal/external framework with more creative labelling.

Good luck!
Cristian

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Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
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