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How to structure and PRESENT profitability framework at McKinsey specifically?

Anonymous A asked on Feb 20, 2019

Hey all,

wondering how to best structure and present the classical profitability framework at McKinsey. I often hear that in contrast to BCG and Bain, the framework must be broader, more specific and customized to the client situation. I struggle a bit in incorporating all these requirements without being too lenghty.

  • Before presenting the framework ask clarifying questions about business model, customer segments served, markets, distribution channels
  • Setup framework consisting of the classical profitability tree

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My presentation approach to the interviewer so far:

1) Investigate what is the main element causing the decline

a. Revenue Side:

  • Check out the historical development, mention you want to differentiate between product lines, customer segments, geopgraphies (if possible) and compare market/competitor development

b. Cost Side:

  • Check out historical development, mention to differentiate and compare cost basis with competition/industry average

2) Identify the root causes of the development

If problem lies on the revenue side:

  • Screen PRICE and QUANTITY
  • PRICE: Price could have decreased due to firm decision to lower price (i.e. to gain market share), competition could have changed their pricing or customers have changed their willigness to pay (i.e. due to economic developments)
  • QUANTITY: Quantity decline could be caused by internal or external issues:
  • Internal: Name a 3-4 examples that could have changed like 1. we changed our products or have quality issues, 2. capacity problems, 3. stopped/changed our marketing...
  • External: Name 3-4 examples that could be a reason: 1. New competitors emerge, 2. Existing competitors changed their products/use new distribution models, 3. Customers changed their product preferences...

If problem lies on the cost side:

  • Screen fixed and variable costs, analyze the value chain
  • Fixed costs: Name 2-3 fix costs client will have
  • Variable costs: Name 2-3 variable costs client will have (if any)
  • Benchmark to see which costs are above competition and understand what they are doing better

3) Give an outlook what will happen afterwards - develop solutions to the problem, qualitatively assess chances and risks of the available options

-------------------------------------------------------

Would this presentation be okay for McKinsey or too long?

Thanks in advance!!

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Vlad replied on Feb 20, 2019
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Hi,

I would recommend the following approach:

1) Ask clarifying questions:

- Clarify the business model (i.e. how the business works and what are the revenue streams / core products or business lines). Why do you need to know the revenue streams? Because it's one of the most critical pieces in understanding the business model. An example is Oil&Gas with up-, mid- and down- streams that are completely different businesses.

- Clarify the objective both in numeric terms and timeline (e.g. Our objective is to increase profits by 5M in 5 years). When you have a to select from several options in a case - clarify the selection criteria

- Clarify other possible limitations if you feel that it's necessary

2) You make a classic profitability structure adapting it to the case. Sometimes cases are not that easy as just declining profits. For example, if the profits are lower than planned, it is either because we have problems with profits or we have problems with planning. Try to be MECE here.

3) While you do your structure you split the revenues first by the revenue streams (if you have multiple streams) and then into either:

  • Price and quantity for the production companies. I also recommend to add proactively the 3rd boxn - the "Mix". Thus you show your business sense and demonstrate that you know the most common case traps. Pls note that the "mix" can be anything - geography, customer, product, etc.
  • The number of customers and the average check for retail stores, restaurants, etc. You can further split the customers into traffic and conversion (if relevant, e.g. for a fashion store) and the avg check into the products and prices

3) Costs I would split into Fixed and Variable. VCs you can split further into costs per unit and units sold

4) I would start the case by checking whether its increasing revenues, declining costs, or both - so that you could eliminate the part that is irrelevant. Then you dig deeper into the parts of your structure

5) You may split into internal / external causes on the price / qty level

Best!

Indeed, really interesting question. @Vlad - what do you mean by┬ácustomizing the profitability framework? What would be sufficient? — Matthias on Feb 21, 2019

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