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How do you develop a framework for open-ended questions?

Elizabeth

In reading posts on this forum, I understand it is better to develop your own framework. For profitability questions, the framework is rather straightforward. How do you develop a MECE framework for an open-ended question, such as should your client enter a market, launch a product, or acquire another company (especially for those questions when profit is not a key objective)? Please provide an example of a case and an ideal MECE framework. Thank you in advance.

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Sidi replied on 07/05/2018
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 45+ candidates secure MBB offers

Hi Elizabeth,

there is a fundamental misconception among many folks trying to build their case solving muscle: assuming that there is an essential difference between what you call "Profitability Cases" and, for example, "Market entry", "Company acquisition", "Product launch", etc. But the truth is: at the core, there is absolutely no difference between these questions! The core of the issue is absolutely identical:

Can the client create value or not?

Hence, juggling around with different frameworks, trying to map and match them to these questions is just demonstrating this fundamental non-understanding of the candidate. I will say it again and again: cases should be approached and solved from first principles!

  • One of these first principles is that you start EVERY case from the core question that you need to answer! This core question is the starting point of a rigorous logic tree, and each element that you want to analyze needs to clearly relate back to the core question! This principle forms the basis of any structure.
  • Another first principle is, e.g, to define the criterion or criteria that need to be met in order to anwer this core question in one way or another.

The big advantage is that this is making "frameworks" unneccessary for the structuring of cases! You need to learn and internalize the logic, then you have a bullet-proof toolbox under your belt, far more rigorous then a "framework-learning" approach.

Just one example below which I described in an earlier post. This is about capacity expansion and vertical integration. Please think it through - I hope you will realize that the same logic, centered around value creation, can be applied to ALL situations that you descibed above (new market, new product, m&a, etc.). It also works indepent of whether Profit is the primary objective or not. As long as the objective(s) is/are clear, the criterion to answer the core questions can be adapted accordingly.

EXAMPLE:

Question:

Our client is a large producer of PET. PET is a type of plastic that is used mainly for producing bottles, such as the ones you find in grocery stores. The main component of PET is PTA. Our client has a PET plant in the US and serves clients both in the US and Europe. They have made the decision to build a PET plant in Europe to be closer to the clients. They have asked you to evaluate whether they should also backward integrate and purchase a PTA plant and locate both plants next to each other.

Approach:

This is a strategic investment decision. A very clear approach would be:

1. Core Question: "Should the client invest into purchasing a PTA plant next to the new PET plant in Europe?"

2. Identify criterion to make this decision: The additional value we can create over the client's investment horizon has to be significantly higher than the investment cost. Moreover, the risks need to be manageable.

3. Compile base information: Purchasing Price of PTA plant / yearly operating cost of PTA plant if purchased / capacity of PTA plant vs. PTA need / investment horizon of client

4. Deep dive into the value bucket by means of a profitability tree: what are the levers of value here? Compare Scenario A (PTA plant in Europe) to Scenario B (no PTA plant in Europe). Probably the value lever lies on the cost side: how much savings potential due to decreased/eliminated transport costs? How much savings due to eliminated import tariffs? etc.

5. Calculate annual value (delta between Scenario A and B). If a PTA plant in Europe indeed increases annual profits by a certain amount, you then divide the purchasing price of the PTA plant by this additional yearly profit. This gives you the break even point (point in time after which the investment becomes profitable). If this point comes earlier than the investment horizon, then this is a beneficial investment and the client should proceed with the purchase (purely based on financials).

6. Don't forget to compile potential risks and mention them in your summary

Cheers, Sidi

P.S.: A rare exeption are pure operations cases, where I usually recommend a different approach. Just as operations projects in real life at MBB firms need to be approached and conducted differently from strategic projects.

(edited)

Vlad replied on 07/05/2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi,

It really depends on the case. If it is an issue tree case type, like profitability, you may have 2-3 buckets in the first level, while with open-ended cases it will be 3-4 buckets. Same with the levels and being MECE:

  • For cases like profitability, I might have a structure with 3 levels (especially if I have multiple revenue streams) structured as an issue tree and this structure will be very MECE
  • For other cases like Market-related cases (market entry, new product, PE deal) I will have just 2 levels (buckets + bullet points under the buckets). These structures are open-ended and not very MECE

Here is some inspiration for you. Below you can find a list of the most common case types and some high-level recommendations on structuring:

  1. Market sizing - structuring from the supply or demand side. Structuring using a formula or using an issue tree
  2. Profitability - basic profitability framework. Remember about different revenue streams and product mix
  3. Market context cases (Market Entry, New product, Acquisition, etc). Always start with the big picture "Market". Finish with something specific question related to the case (e.g. How to enter?"). For the buckets in the middle - choose the most important ones for this particular case (Competitors / Company / Customers / Product)
  4. Operational math problem (e.g. Should we increase the speed of an elevator or just buy a second one? How should we reduce the queues? Etc.) - Structuring as a process / value chain, with inflows, operations, and outflows
  5. Cost cutting - I provided the recommendations on structuring it here: https://www.preplounge.com/en/consulting-forum/operations-cases-mck-1105#a2134
  6. Valuation - Purely financial structure with cash flows, growth rate, WACC / hurdle rate, etc.
  7. Synergies - revenue synergies (price, qty, mix) and cost synergies (value chain).
  8. Social / economics cases (e.g. How to improve the quality of life in the city? How to increase the revenues of the museum?) - huge variability. Practice 3-5 social cases before the interview.

So I recommend you to use a flexible approach depending on the type of the case. It definitely comes with practice. Here is an algorithm on how to develop this skill:

  1. Make sure you understand all the different types of cases that you may face
  2. Identify the most appropriate structure for each type
  3. Solve 30-50 cases and try to understand where do they fit in your categorizations
  4. Based on your experience think of the potential variations in structures within each of the case types

Best of luck!

Anonymous A replied on 07/05/2018

Hi,

1- Check the practice case examples on PrepLounge and also use the search bar too for growth rate structures etc.

2. If the case is open-ended or ambiguous- its going to change for every case type eg if profit is NOT the goa.l For these cases, you cant memorise things. You need to UNDERSTAND the client and objective and think about how to break the case down into smaller areas.