Good way for in-depth analysis of profitability cases?

approaching a case profitability analysis Structure
New answer on Oct 09, 2020
3 Answers
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Anonymous A asked on Oct 01, 2020

Dear experts!

I am struggling to find a good way of analyzing profitability cases deeply. So I normally start with the usual question to see if it is a company-specific problem, or a market-wide problem. But then, I am not sure how I can continue properly. If it is a market problem - do I then run a market analysis? If I do this, I tend to get lost and after a couple of minutes, the interviewer needs to help me out. So how can I approach such analyses in a better and more secure way?

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Sidi
Expert
replied on Oct 01, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers

Hi Anonymous!

Alright... This will take a bit. I feel I have to explain a couple of absolutetely crucial points here.

In fact, your described initial approach corresponds to what is outlined in the usual case preparation books, youtube videos, etc. (mostly created by authors who have been still very junior when they left Consulting or did not even work in Consulting!). But as a matter of fact, this approach is not how a real consultant should tackle such questions! At least not in MBB.

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. 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 whether it's and industry problem or not 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:

  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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Anonymous B on Oct 02, 2020

Hi Sidi, thank you for this detailed answer! One question - prior to identifying the different income streams, should the candidate first establish whether to focus on costs or revenues? Or when is the right point to clarify this?

Sidi on Oct 02, 2020

No! Segmentation ALWAYS needs to come first! You first disaggregate your tree into the different segemnts, so that you can verify whether profit of segement 1 through segment n has changed. Then you drill deeper into the "problem segments", so you can then understand revenue and cost within this respective segment. NEVER segment deeper down in the tree (e.g., first drill down to volume, and then try to segment - this will lead to a complete mess, as you will then have to map volumes of each segment to the respective prices, and also the respective costs, which will result in a very complex matrix. Never do this please! ;))

Anonymous on Oct 03, 2020

That makes sense, thank you so much!

Anonymous on Oct 03, 2020

While doing these steps, should you tell the interviewer what you are doing? Like: "I would like to identify the different income streams to drill deeper into the problem segments?"

(edited)

Anonymous on Oct 03, 2020

Do you have any visual example to take a look at for the "driver tree to find and isolate the core of the problem"? Thank you for your help!

Mehdi
Expert
replied on Oct 09, 2020
BCG | Received offers from all MBB & Tier 1Firms | Supporting you secure your top tier consulting offer

Hi there,

On the top of what was already said, I would like to add the following:

  • No two cases are cracked in the same way, each one can have a special structure/approach
  • There is no One Framework Fits All, very frequently you will have to create your own approach for the case by combining 1-3 frameworks
  • The direction you take after determining if it is a company or industry problem depends on the case you are cracking. For some of them, you will have to complete your assessment of the industry, for others you will not be asked to do that as you have to solely focus on the client's next steps.

Those are some comments I wanted to add to what was already said, but it will be difficult to give a complete assessment of the situation without knowing the details of the case.

I will be happy to continue to the discussion to better understand the details of this situation.

All the best,

Mehdi

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Ian
Expert
Content Creator
replied on Oct 03, 2020
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Honestly, it depends! You need to think about the industry/business context, the company context, and the situationally/problem context. Only then can you create an appropriately tailored cost breakdown.

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)
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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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