How can I analyze profitability cases in an outstanding way?

Cases profitability analysis
New answer on Oct 27, 2021
5 Answers
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Anonymous A asked on Oct 25, 2021

How can I analyze profitability cases in an outstanding way? I usually start with asking questions about whether it is a company-specific or a market-wide issue. But I struggle to then properly cut through to the deeper analysis levels. If it is a market problem, should I then do an analysis of the market? Should this then already be part of my initial structure? When practicing cases ad doing this, I oftentimes get lost and confused after some time and get stuck. So how can I aboid this and approach profitability cases in a bullet proof way?

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Sidi
Expert
updated an answer on Oct 25, 2021
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers

Hi! 

 

Alright... This will take some again. ^^ Given the underying premises of your question, and the many inaccuracies that have been spread by “case preparation books” over the last decade, I need 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.

 

Firstly, the term "profitability case" is nonsense!

 

Now, please read the above sentence again... This is super important to understand, because practically the entire "case preparation literature" is teaching this crap. What we are actually looking at here is a class of strategic problems that can be called "Diagnostic situations" - and it can comprise any observed phenomenon (a decrease in profit is just one out of hundreds of possible variations). All of these problems can (and should) be attacked by the same core logic.

 

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/brainstorm 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

(edited)

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Pedro
CoachingPlus Expert
replied on Oct 25, 2021
# 1 Rated Bain Coach | EY-Parthenon | Roland Berger | FIT | Former Head Recruiter | Principal

Hi there,

You seem to be looking for a specific “technique” that would allow you to solve the case well every time. That does not exist. If it did, consulting firms would not use case interview.

So the first thing you need to realize is that you need to CUSTOMIZE your approach to the specific problem, and then you need to decide the best course of action during the case with the specific information you have at any given point in time. So even if you have a great structure, how you proceed along the structure DEPENDS on the specific case (and information you collect along the way). 

How to do this can be learnt, but cannot be memorized, as there are too many possibilities

In terms of overall approach, this is what you have to do:

  1. What is happening: Identify precisely where the problem is (i.e. what specific driver(s) is/are causing that change in profitability). You solve this through a quantitative approach.
  2. Why is it happening: Identify the root cause of the problem. What caused that specific change in the underlying driver (this is usually qualitative).
  3. How to improve: Identify potential courses of action and decide which one is the best. Please note that it doesn't matter whether the root cause is internal or external, there is always something you can do about it. 

Finally, you should NEVER ask whether the problem is company driven or market driven. It is your job as a candidate to perform the necessary analysis to find out the answer, not the interviewers job to answer that question. If your peers are answering, they are not representing what a real interviewer would do in a real case (I would never answer that question).

So when you present your “structure”, what you should be laying out is actually the set of potential analysis that you would perform to understand whether the problem is “internal” or “external”.

So you have to ask yourself the question: what set of analysis do I need to perform to understand whether the problem is internal or external, and where it lays exactly? You need to lay out a comprehensive set of hypothesis (and underlying analysis) to answer that question.

This is hard to explain in writing, and is part of the core of good coaching sessions.

So I hope this was helpful, and feel free to reach out if you want a more personalized session to help you improving your approach to case interviews.

Pedro

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Ian
Expert
Content Creator
updated an answer on Oct 26, 2021
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi there,

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/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)

(edited)

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Antonello
Expert
Content Creator
replied on Oct 26, 2021
McKinsey | MBA professor for consulting interviews

Hi!

I agree with Sidi and his approach to profitability cases. This methodology will give a direction to your problem-solving and give you an edge over the competition. 

It is crucial that you can deeply analyze a company's revenue streams and therefore I recommend practicing structuring drills and market sizing mainly.

Hope this helps.

Best,

Anto 

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Clara
Expert
Content Creator
replied on Oct 27, 2021
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

I have a case that focuses very much on profitability, feel free to PM

Cheers, 

Clara

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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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