In an issue tree for profitability framework, where do you factor in questions about market etc.?

Framework issue tree market questions MECE profitability profitability analysis
Edited on Jun 03, 2022
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Anonymous asked on Aug 13, 2018

E.g. addressing a decline in profitability.

The standard issue tree would include revenue and cost, but where would you include an overview of the market/competition/etc.? I usually make a side note but that doesn't make it very MECE - is there a different type of issue tree to use?

I feel like this is such a simple question but can't figure out how to structure this properly.

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Sidi
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updated an answer on Jun 03, 2022
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi Kay,

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

_______________________

Dr. Sidi Koné 

(Former Senior Engagement Manager and Interviewer at McKinsey | Former Senior Consultant and Interviewer at BCG)

(edited)

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Anonymous on Mar 30, 2020

Hi Sidi, would you communicate the two steps seperately or after the Revenue analys of the numerical drivers, you will look at potential factors that are causing the problem?

Anonymous on Nov 14, 2021

Hi Sidi, I have the same question. My understanding is that you first build a driver tree for the 1st step to identify the numerical drivers. At this point, there are no qualitative elements in your framework. Let's say we did some math and understood that the problem is customer base shrinkage. After identifying the problem, you ask the interviewer to give you some additional time to further build upon the initial framework by incorporating qualitative elements related to customer base shrinkage. If I understood your approach correctly, wouldn't the interviewer think that the initial framework is not complete? In other words, we don't show the interviewer a complete framework at the beginning. This is more efficient as you said, but it does not show an end-to-end solution to the problem at the beginning of the case.

(edited)

Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
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