Is this structure MECE (internal vs external factors)

Anonymous A asked on Mar 11, 2018 - 3 answers


I recently started preparing for case interviews and have a question ragarding cases where my objective is to increase profits.

I know that the standard framework would be Profits = revenue - costs, but I start by separating internal and external factors. Then I look at the profits as part of the internal factors and look at things like regulation or competition as a point of external factors.

Do you think this is a good approach or not. I had some doubts recently because I am asking myself: Is units sold (part of the internal factors) really an internal factor as part of the profits because it is heavily influenced by external factors like competition?

How would you include things like competition or regulations in a profitability framework?

Thanks for your help

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Anonymous replied on Mar 12, 2018

Hey anonymous,

If you are looking into a problem statement that requires understanding what’s going on with profitability in the past/what are the causes of profitability loss in the past.. then your external vs internal factors are not only MECE (that part is always true by definition) but also the best way to approach the problem - because this is the way we consultants do it in real life, so there’s no chance the interviewer will reach negative to it (what happen sometimes is that the case is focused exclusively in the internal piece, and the candidate should be able to quickly detect it by the first one or two answers from the interviewer; however, in real life no good analysis is done without knowing and understanding what’s going on in the market).

Btw, I’m still puzzled with the number of candidates that still tell me they got feedback in the past that they shouldn’t look into the market at all.. Hope you can avoid such basic mistake by critically thinking about the following example: a company is decrease 2% in profits in a booming market vs. another one also decreasing 2% in a market decreasing 20%



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replied on Mar 11, 2018
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Hi Anonymous,

in general it’s ok to analyse internal and external elements to understand what is creating the problem for the client. Before moving to such analysis, however, you should understand where the problem is.

In order to first analyse where is the problem, assuming you have already clarified the objective, I would structure the beginning of a profitability case as follows:

  1. Segment by profitability/revenue channels. Ask the interviewer how the client segments its profitability channels (products, customers, distribution channels, etc.).
  2. Identify which channel is the priority. Ask for the change in profitability for each channel. Then start from the one that had the biggest decline in profits.
  3. Identify whether it is a revenue or cost issue. Ask how revenues and costs changed for the channel that you have identified. Start from the area which has the major negative change in absolute amount
  4. Analyse the components of revenues and/or costs. According to what you found in step 3, you should further segment revenues in price and volume or costs using fix or variable costs
  5. Identify the component that is underperforming. You can do so comparing the client performance with its past performance, or benchmarking competitors on that area.
  6. Identify the reason for the problem. Usual areas to consider are:
  • External
    • Customers issues
      • eg revenues: changes of preferences of the customers for different products
      • eg costs: requires expensive addons which do not lead to increase in revenues
    • Suppliers issues
      • eg revenues: can’t deliver in time, leading to less sales
      • eg costs: increased prices for suppliers
    • Competitors issues
      • eg revenues: decreased prices for competing product
      • eg costs: lobbying strikes/ regulations against us
  • Internal
    • Client issues
      • eg revenues: stopped to do marketing campaigns
      • eg costs: wrong process development/budgeting

Moving the division of internal and external to Step 6, you can understand first where the problem is, and use the internal-external division simply as a way to understand the reason for the problem. As for your question, thus, the number of units sold is not structured in this framework neither as “internal” nor “external”, but as one of the potential components that is underperforming (Step 4 and 5). On the other hand, the reason why we have the problem on the number of units could be either internal or external (Step 6).


replied on Mar 11, 2018
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I would recommend to start with a classic profitability structure and then in quantity look at the internal / external. 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) While you do your structure and split revenues into price and quantity - add 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.

3) Costs I would split into Fixed and Variable

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

5) If it is the quantity problem I would further analyze whether it's the external market problem or an internal one


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