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Mece profitability framework?

Carl asked on May 15, 2019 - 5 answers

Hi,

I am having some problems with the profitability framework. I will present how I would structure a profitability problem today and what I believe is the problem with that structure, it would be great to hear your thoughts on this.

(Will make this generic, would of course tailor it to the specific case).

In general, in a profitability case I would first draw two branches for two overarching areas: Profits and Execution. Under profits I would then draw one branch for each revenue segment, to see if any of the segments are more profitable. Then I would drill further down in to costs, revenues and mix for the segments.

Under mix I am thinking e.g. Customer segments, product lines etc. The problem I am having is whether or not I should put mix here? Since the mix could also go both under cost and under revenues. Let´s say I start looking at the mix, I find out that one customer segment is more profitable than the others, what should I do with revenues and cost?

In which order do you think that I should look at this and is it Mece, as the mix could go under cost and revenues as well..?

Thank you!

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Sidi replied on May 15, 2019
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 60+ candidates secure MBB offers

Hi! "Mix" is not an area in a logic tree! It is just a description of a potential issue that you might find. So it does not make any sense to try and include it in your deeper analyses - especially since you already cover it in your very first disaggregation! You first disaggregate profits into the different segments. Hence, by comparing current profits with historic profits (and the underlying drivers like especially quantity sold) for each segment, you can already see whether the mix has changed and if the problem is particularly driven by one specific segment (e.g., Profits of segment A have remained constant, while Segment B has lost 50% of its profits --> then you need to double click on segment B and see what has changed (check revenues (+quantity & price developments) and costs of the segment). And so on...

Cheers, Sidi

Ian
Expert
replied on May 16, 2019
BCG Consultant | MBA Stern | 100% interview success rate (8/8 incl BCG, A.T. Kearney, Strategy&) |Personalized interview prep

Hi Carl,

Sidi said it well!

I think you're getting confused by a "3rd dimension" or slice of Profits/Revenues. You'll probably run into this when solving a case that involves customer segments as well.

Just remember, split Profit into Revenue and Cost. THEN, when solving the case, Revenue and Cost can be looked at from a different angle. I.e., they might go "We have 3 main costs" or "Revenue comes from 4 streams" or "For Product A, our Revenue is x, and Product B our revenue is y". This is when you use a table to organise the math. But, no need to account for this in the framework.

Rather, in the framework, think about WHAT you would look at in this deep-dive.

So, under Revenue, you might say "I'm interested in looking at the Revenue streams for the 3 products. This comes as quantity sold times price, and I'd like to look at the trends for these. So, which products have the most volume, or highest price/margin, or are growing the most? We'd want to enhance this. Then, which products have the least volume, lowest price/margin, or are growing slowly/shrinking? We'd want to consider either cutting these products, or finding wants to reverse the negative trait"

Then, the case would provide those numbers for you and you can dive into "mix" and analysis. Make sense?

Daniel replied on May 15, 2019

Hi Carl,

every math equations, like the profit equation, is in its nature MECE. You can have your proposed segments in both branches as you look in each branch at those from a different angle. In the cost bucket, you analyse costs of each segment, whereas in the revenue bucket, you look at the revenues in each segment. So there is no problem with not being MECE. Only because you use a name twice doesn't mean that the content is repeated. It important to make that clear to your interviewer.

Good luck with your preparation!

Regards,

Daniel

Carl replied on May 16, 2019

I was reading another thread on the topic of profitability cases (https://www.preplounge.com/en/consulting-forum/structuring-profitability-cases-837). Here, the thought seems to be that it is unstructured to ask for segmentation as clarifying questions. Why is that? Isn't it good to understand the business line and then divide profits into the revenue streams in your issue tree or is it something that I am missing here?

Vlad replied on May 15, 2019
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi,

Why don't you just ask about the products in clarifying questions?

Then you split into revenues and costs. Revenues you split further into price / qty / mix or customers / av check. Costs you split further into fixed and variables

Best!

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