Questions around profitability issue tree

Case Interview profitability analysis
Recent activity on Sep 10, 2018
2 Answers
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Anonymous asked on Apr 03, 2017

Hi all + experts,

I have two nagging questions around the Profitability issue tree -

1) When splitting Revenue into Quantity Sold and Price, at which branch do I ask about segmentation (product line / customers / channels etc) since it affects one or both?

2) In general, if a case says overall industry revenue is growing at constant margins, can I cross out the Profitability branch since revenue and cost moving at the same pace? In other words, I should only worry if margins are negative or declining?

Thanks,

Eugene

(edited)

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Vlad
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replied on Apr 03, 2017
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

1) You proactively ask in the beginning, even before drawing the structure (something like "What kind of products / revenue sources do we have) and then split the structure into price, qty, product mix. Distribution and customers I usually check within qty part

2) Not sure if I understand the question. Your company does not necessarily replicate industry trend, so you have to look at it separately

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Eugene on Apr 04, 2017

Hi Vlad, thanks for the insight. For (1), i should ask for revenue sources AND their sizes right?; (2) Sorry I didn't mention that industry AND client are growing revenue at same rate at constant margins - your answer still stands right? We only analyse client's profitability when its margins are declining / negative relative to industry?

(edited)

Ivan on Oct 31, 2017

To me it rather seems like client has a concern with profitability at the first place and he assumes that this new bid in case of winning might improve profitability situation, is this correct? If so I would segment this problem into following steps: 1) I would like to look into current profitability in order to understand what is the root cause and expectation from the management 2) I would than identify the bid opportunity in sense of profitability in order to understand whether it will help to improve the situation 3) And If I still would have enough time I would also look into other ways to improve profitability for a client Does it make sense?

Ben
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replied on Sep 10, 2018
Ex-McKinsey EM | Experienced interview coach (1,000+ sessions) | Discount on 1st session | LBS MBA

Regarding the first question, I would suggest that it depends if this is Interviewer or Candidate led case:

Interviewer-led: if you got any hint as to the potential segmentation of revenues (e.g., by distribution channel), when presenting your structure, you should first segment the revenues and then discuss the PxQ formula in each of the segments (as drivers might be different). If you have no ideas regarding an appropriate segmentation, after presenting the Revenues = PxQ, just mention that you would like to segment the information by geography, distribution channel, customer type or any other segments which are relevant to the company,

Candidate-led: you can just ask for the segmentation, unless provided up-front of course. Say something along the lines of: “on the revenue side, I’d like to breakdown the revenues by price and quantity sold for each of the relevant revenue segments. Do we have any information about how the company segments its revenues?”

Hope it helps!

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Vlad gave the best answer

Vlad

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McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School
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