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Hard/complex profitability structure - Help

case structure hard improving profitability issue tree issue trees margins profitability profitability analysis Structure
Edited on Jan 13, 2024
5 Answers
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Anonymous A asked on Jan 10, 2024

During my practice, I came across what seemed like a simple profitability case but that threw me off when I attempted to solve.

It's about a Candy manufacturer in an EU country that has been seeing a margin decline. We are asked to figure out why this is happening?

Data we have:
-Products: Many types of candy - Many products that has sugar
-Geography: Distributes all across EU
-Distribution: All normal retail channels - Major supermarkets + smaller retail
-Current margins: 10% (Competitors higher than this)
-No info about historical data


I am finding difficulty in analyzing this because of the many moving parts. Many products, many geographies/markets, many channels, etc.

I tried to approach this with an issue tree method or:
P = R - C

R = Volumes sold * Price
Then I checked the volume sold and the price each across all my different segments vs competition and historical

(but I figured I was missing the market demand, the consumer trends and possibly a supply constraint)

C = I took the value chain approach and I think it covered a lot.

Does anyone have a good idea of how to structure such profitability problems that have so many moving parts and a lot of ambiguity?
 

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Ian
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updated an answer on Jan 11, 2024
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Please do NOT do REVENUE - COST.

That is not a framework and is super generic.

I appreciate you saying  “seemed like a simple profitability case” as this is a misnomer! 

Every profitability case is different and requires a tailored answer.

Take a look at how I framework these profitability cases in this article: Candidate-Led Cases: What to Expect With Example Cases

ONE FRAMEWORK OPTION

Bucket 1: Products (the candy)

Bucket 2: Geography (their locations)

Bucket 3: Customers/Distribution

Profitability is tricky. You CANNOT do Revenue - Cost as no consultant would ever actually propose this to a client.

Rather, your framework should be your approach to driving profits. Revenue+Cost sits across ALL buckets

^This is hard to truly learn/explain via just a Q&A so feel free to reach out for coaching for a true mindset shift!

(edited)

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Hagen
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updated an answer on Jan 11, 2024
#1 Bain coach | >95% success rate | interviewer for 8+ years | mentor and coach for 7+ years

Hi there,

I would be happy to share my thoughts on your question:

  • In dealing with complex profitability cases like the one you described, it's crucial to maintain a clear structure in your analysis. Your initial case study structure is a good start, yet too generic and not specific to the specific situation. I developed the “Case Structuring Program” to help exactly such candidates like you who still struggle with properly structuring any case study.

If you would like a more detailed discussion on how to best prepare for your upcoming interviews, please don't hesitate to contact me directly.

Best,

Hagen

(edited)

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Florian
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replied on Jan 10, 2024
Highest-rated McKinsey coach (ratings, offers, sessions) | 500+ offers | Author of The 1% & Consulting Career Secrets

Hi there,

For cases like this I would break the analysis into the following logic:

1. What is the issue and how big is it? You want to quantitatively understand what the issue is and from what part of the business it is coming from → looking into Revenue and Cost and breaking them down into lower-level granular buckets is appropriate here. Finding this out will allow you to understand where the issue is coming from (could be multiple issues at once), how big it is (magnitudes), and to come up with hypotheses about the cause.

2. Once you understand the issue, it is time to focus on the biggest part of it (remember 80/20), then investigate what drives the issue, or the “why is it happening”. This is where you dive into internal and external factors related to the analysis you have conducted earlier (e.g., if it's a cost issue, look into things such as labor cost for internal factors or increased supplier cost for external factors - just examples, there are way more). This will help you pinpoint the root cause.

3. Once the root cause is identified, you can work on effective remedies.

A few comments:

  1. You must tailor the revenue and cost buckets to the case/client context at hand.
  2. Your framework and probing need to be sequential and focused. It makes no sense to think about internal and external reasons in depth before you have isolated where the issue is coming from and quantified the impact. Otherwise, you are boiling the ocean.

This is how a first-principles approach would look in practice and how an MBB team would approach the topic as well.

All the best,

Florian

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Cristian
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replied on Jan 10, 2024
#1 rated MBB & McKinsey Coach

Hi there!

Happy to provide a perspective. 

First of all, you're going in the right direction. A few pointers to keep in mind:

  1. The profitability issue could be because of multiple factors. So it could have to do with price and volume, or their products, or costs, etc. So you need to stay open to this possibility
  2. With your current structure of looking at you focusing only on what happens within their organisation. You need an external lens as well. Specifically, their situation might have changed also as a result of changes in the market and/or competitor response. 

The reason why you're struggling here is that you're trying to apply a typical framework to an atypical situation. I coach my candidates to approach these cases from first principles because this enables them to address any situation with a fresh perspective.

Best,
Cristian

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Nikita
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updated an answer on Jan 13, 2024
MBB & Tier2 preparation | 85+ offers | 7 years coaching | 2000+ sessions | PDF reviews attached

Hey,

First of all, I would try to understand which segment causes the profitability decline: you can segment by geography, product or a distribution channel. You can also request the data on the client's portfolio structure before approaching your analysis.

After that, figure out what part is causing the profitability decline: revenue side or a cost side. It makes sense to look both at the company's profitability in general and at the profitability of a single SKU.

After that, if it's revenue, you can jump into the customer's journey and analyse the number of clients vs the average spent at each stage. After that, drill down into that particular stage. The problem can indeed be supply or demand related.

If it's a cost-related problem, deep-dive into the company's cost structure and figure out the cost item causing the problem. After that, drill-down into that particular problem.

It's a general approach which I would tailor on the go depending on the interviewer's inputs.

Hope this helps,
Nick

(edited)

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