Initial structure a profitability case

profitability analysis Structure
New answer on Dec 31, 2020
8 Answers
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Anonymous A asked on Apr 08, 2020

Dear community,

I struggle with the initial structuring of the profitability case as I am not sure whether in my initial structure I should already include Economy & Market trends (Case In Point) or only stick to the internal perspective (Victor Cheng) and focus on competitive comparison later on when I go into detail in the different branches of the problem.

I am worried, that starting by asking about the economic & market trends in the beginning might be too early & unspecific, however only focusing the initial structure on the internal perspective with Profit = Revenues - Cost also sounds too little in detail.

Many thanks in advance! :)

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Sidi
Expert
replied on Apr 08, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers

Hi,

In my view, the most important thing here is to understand the purpose of a structure:

Structuring a case does NOT mean to tell the interviewer what you're going to look at! This is not a structure - it's just a bucket list... and a pretty random one most of the time!

Structuring a case means to explain to the interviewer the LOGIC according to which you will answer the question at hand. "Areas to look at" are just a byproduct of this logic.

Therefore it is not very helpful to start with defining qualitative "buckets" to look at (e.g., "I'm going to start with looking at the market, then I want to understand the customers etc."). This is, at the end of the day, quite random, with no clear logic from which your areas are derived (other than "experience" or "gut feeling", both of which are not what MBB interviewers are supposed to assess!). If you think about it, this approach is the opposite of how you should work as a strategy consultant. Defining buckets and then hoping to find something interesting in there is pure explorative working - another word for this is "guessing".

One fundamental things that needs to be learned in order to rigorously disaggregate the value drivers of a business and, hence, business-related questions, is how to set up rigorous driver trees. The driver tree allows you to identify the numerical drivers and sub-drivers of your focus metric (e.g., 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:

1. 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 has (mathematically) caused the problem (e.g., customer base has shrinked, which you would discover by drilling three or 4 levels down in your profit tree).

2. The second step is the understanding of the WHY (why has this cause emerged?). 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.

Another aspect that is very important (and usually violated in Case Coaching books) is the principle of first isolating the numerical problem driver, before asking qualitative question. Never start your analysis with asking qualitative questions ("First I would like to get a general understanding of the market development" and such phrases)! This is practically the very definition of "boiling the ocean", i.e., working in an extremely inefficient way. First, you should seek to narrow down the area that you need to qualitatively understand - and this can be done very quickly by doing a numerical analysis as described above. Once you know where the problem comes from, THEN you can start to understand the qualitative reasons that underlie the negative development of this driver, and this analysis will be far more focused and concrete than if you would have tried to do it at the start.

Cheers, Sidi

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Emily
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replied on Apr 08, 2020
BCG Project Leader | 3+ years interview experience for BCG SEA recruiting | Kellogg MBA, NTU, Peking University

Hi,

I suggest you first find out where the problem lies, is it revenue, cost or both. No point going in asking economic & market trend without knowing whether these are relevant questions or not. E.g. If it is a company specific cost issue, you might be just wasting precious time of the case interview, and you'd run the risk of appearing to the interviewer as if you don't have a clear approach but just fishing for info.

For revenue and cost, you can elaborate into the next layer of details, and try to customise according to the context of the case.

Best,

Emily

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Vlad
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replied on Apr 09, 2020
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

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 money 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) Don't forget to split revenues into revenue streams / products

4) There are 3 ways to split your revenues further for individual products / revenue streams:

  1. Price / quantity / mix (for production companies)
  2. Number of customers / avg check (for retail, restaurants, etc)
  3. Market / Market share (when you are launching a new business and assessing feasibility)

While you do your structure and split revenues into price and quantity - and proactively the 3rd box with 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. You split the costs into fixed and variable.

5) Costs I would split into Fixed and Variable

6) 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

7) If it is the quantity / customers problem I would further analyze whether it's the external market problem or internal one

Best!

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Clara
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replied on Apr 08, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

It´s a good question, and profitability cases are very very common -and also standarized!-

My suggestion would be to do both.

In the "economic" branch of the issue tree, include:

  • Profitability analysis, that breaks down into:
    • Revenues
      • Price x Quantity
    • Costs
      • Fixed vs. variable
      • other breaksdowns
  • External factors: also to be taken into consideration since they influence the first branch above presented. You can ask:
    • Are there any overarll market trends?
    • Do we know if our competitors are experiencing the same?
    • etc.

Hope it helps!

Cheers,

Clara

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Ian
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replied on Dec 31, 2020
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Honestly, it depends! You need to think about the industry/business context, the company context, and the situationally/problem context. Only then can you create an appropriately tailored cost breakdown.

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)
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Anonymous replied on Aug 18, 2020

Dear A,

Yes, at the begining I would recommend you to ask ony clarifying questions - about objective of the case, about business model of the company or about unfamiliar terms.

For structuring I would recommend you the main formula of what profitability is about.

Profitability = revenues - costs.

There are 3 typical ways on how you can structure the revenues and segment them:

1. by customers,

2. by products

3. by geographical markets

Regarding the costs you may structure them either in the fixed and variable cost, or may also structure them by different kinds of cost - like personell cost, material cost, etc. The other way to look about it is to structure the cost along value chain.

So, depending on the case you might use different approaches and segment your revenues and cost side.

Recently I've uploaded a profitability case “Deep Water rescue” (available in English & German) here on Preplounge:
https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/advanced/deep-water-rescue-206

I used similar cases when I was interviewing candidates on my own in Central Europe (Germany & DACH Region), Eastern Europe (Ukraine & Russia) as well as Middle East (Dubai, KSA, Lebanon, and Qatar). So, this case is very advanced and could be typically used in the 2nd or 3rd interview rounds by the leading consulting firms.

Try, whether you can crack it.

Best,
​André

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Antonello
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Content Creator
replied on Apr 30, 2020
McKinsey | MBA professor for consulting interviews

Hi, Cosentino's book is a great starting point to approach your preparation, but you should try to remain flexible in the structuring, by customizing your framework depending on the question, the client's problem and the industry

Best,
Antonello

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Thomas
CoachingPlus Expert
Content Creator
replied on Apr 12, 2020
150+ interviews | 5+ years experience | Kearney & Accenture | Sold consulting startup| London Business School

This is a great question that I think many people struggle with. My advice is to try to understand the situation as much as possible before creating the structure. The way to do this is to create a model or list of questions that you want to have an answer to before you can recommend a solid structure. This list should include economic and market trends. If the interviewer prompts you to go to the structure immediately, add aspects as economic and market trends to your structure.

In my opinion, it is critical to ask those questions to establish a good starting point. You need to have a good understanding of the business before you can give any recommendations or drill down further. You will find that not all cases have this extra level of detail. In that case, the interviewer will likely give you a hint to continue.

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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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