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How to write a MECE issue tree for profitability? - covering all relevant components

Anonymous A asked on Jan 04, 2019

Hi. I'm practising profitability cases, and getting stuck on how to write an issue tree that combines 1. the typical financial analysis (Profits = Revenue*Costs), and 2. the more qualitative analysis (external + market trends, customer preference, competitor dynamics, channel dynamics etc.) that may be driving a profitability issue.

How do you write a profitability issue tree that covers all such areas in a MECE way?

I'm having real problems with this. Any advice much appreciated.

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Sidi replied on Jan 05, 2019
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 80+ candidates secure MBB offers
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Hi Anonymous,

this is indeed one of the fundamental things that you need to learn in order to rigorously disaggregate the value drivers of a business. The driver tree allows you to identify the numerical drivers and sub-drivers of profits. The qualitative elements (such as consumer demand, market structure, company operations, etc.) then have to be mapped to the sub-branches of the tree!

Hence, your analysis has two steps. Imagine you want to run a diagnostic on why profits have fallen. First you need to identify the numerical driver of the problem (e.g., customer base is shrinking). This gives you an understanding of the WHAT. The second step is the understanding of the WHY! To do this, you have to examine the qualitative elements that link to the "number of customers"-sub-branch in your driver tree (e.g., competitive situation, market entries, new substitutes, relative price point, customer preferences, product/service properties vs. competition, etc.)

You can think of these qualitative elements as the typical business situation framework elements (see V. Cheng et al.) - but here, they are not hanging in the air, but they are embedded in a rigorous thinking frame which emerges from the disaggregation of value drivers and linking it to qualitative reasons.

Cheers, Sidi

Anonymous B replied on Jan 04, 2019

Hello Anonymous A,

This could vary depending on the candidate. As long as you are able to convincingly justify your motivations for categorizing a particular way, it could work.

It might be helpful to draw your tree first. Then write what qualitative factors you believe are relevant, and where you believe the qualitative factors will impact that tree. For example, you could put "customer preference" under the revenue because it may impact sales more than cost structure.

Anonymous

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