Profitability case

Declining Profitability Case issue tree prioritization
New answer on Jun 10, 2020
6 Answers
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Eric Ng asked on Jun 08, 2020

Hi guys,

I have a question relating to solving a profitability case.

The case scenario: Imagine if profit was down, after having broken profit into revenue and cost, revenue was down while cost remained unchanged.

In that case, the hypothesis will be revised stating "maybe revenue was the driver of the profit decline, not cost" and (I feel that) it makes sense to dive into revenue's components. Let's say quantity drop (as a result of a certain competitive behaviour) was the cause. At this point, a switch to a new framework is warranted to solve the drop in quantity. HOWEVER, that means that reducing cost remains an open issue to be explored.

My question: I have noticed in many cases in business schools' casebooks as in the case of one of Victor Cheng's cases. they recognized it was a quantity issue, but instead of switching into a new issue tree at that point, they proceeded to explore the cost side first. The rationale being: (1) They don't want to come back to the profitability framework later one, and (2) Reducing cost is easier than increasing quantity.

=> Which of the two approaches makes more sense (i.e. Approach 1: switch frameworks before exploring cost, or Approach 2: explore cost before switching frameworks despite knowing it's a quantity issue)?

Thank you. I would very much appreciate your thoughts on this.

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

Hello!

Honestly, none of them.

It´s simpler than that:

  • At the beggining of the case, ask if there have been changes in:
    • Cost
    • Revenue
    • Both
  • 100% this will give you a clue/hint, since there are the only two things that can affect a profitability equation. If there have been changes in the past, one of them or both must be drivers
  • Hence, once you know which one changed, drill down:
    • If revenues:
      • Price
      • Quantity
    • If costs:
      • Fixed variable
  • Later, continue with this phylosophy of:
    1. Finding out what challenged
    2. Drilliing down inmediately to keep advancing and breaking it down.

Hope it helps!

Cheers,

Clara

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Ian
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updated an answer on Jun 09, 2020
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi there,

It's all about context! You need to ask the critical high level questions first to then identify when to take the case. Base these questions off of what you already know (either provided in the prompt or based on your knowledge of the industry/market trends).

In general, you need to find out what is the biggest thing making the biggest move.

General Case/Framework Advice

How do I use frameworks in a case?

If there's anything to remember in this process, is that cases don't exist just because. They have come about because of a real need to simulate the world you will be in when you are hopefully hired. As such, remember that they are a simplified version of what we do, and they test you in those areas.

As such, remember that a framework is a guide, not a mandate. In the real-world, we do not go into a client and say "right, we have a framework that says we need to look at x, y, and z and that's exactly what we're going to do". Rather, we come in with a view, a hypothesis, a plan of attack. The moment this view is created, it's wrong! Same with your framework. The point is that it gives us and you a starting point. We can say "right, part 1 of framework is around this. Let's dig around and see if it helps us get to the answer". If it does, great, we go further (but specific elements of it will certainly be wrong). If it doesn't, we move on.

So, in summary, learn your frameworks, use the ones you like, add/remove to them if the specific case calls for it, and always be prepared to be wrong. Focus rather on having a view, refering back to the initial view to see what is still there and where you need to dive into next to solve the problem.

(edited)

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Vlad
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replied on Jun 08, 2020
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

First of all - never say "My hypothesis is that the revenues have declined". You are not using the hypotheses correctly. More on that here: https://www.preplounge.com/en/consulting-forum/how-explicitly-do-you-need-to-state-your-hypothesis-in-mck-cases-1526

Secondly,

  • When starting a case, you should ask the interviewer: "Do we know if our revenues have declined, costs have increased or both of these factors?"
  • Then you drill down to the one that has changed
  • If both of them change - you go one by one

In addition, the general rule is - once you found an insight - always drill deeper immediately. Absolutely never postpone solving an insight to go through the whole structure. The time for the case is limited and you will have no chance to get back

Best

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Anonymous replied on Jun 08, 2020

Hi there,

It all depends on how you position your choice (both approaches could work)

That being said, what I would do is the following:

  • Acknowledge that quantity might be the biggest issue but still decide to quickly understand the cost base just so I analyze the big picture before making a recommendation (the fixed/variable cost breakdown might offer insights)
  • In case it is not a cost-driven case, the interviewer would politely say "good point, however, let's focus on the volume"
  • In case cost is important, then you would have made the right choice.

It's a low-cost low-risk approach :)

Remember, an important element of the case (and the interviewer's evaluation) is to see how you react to tips and guidance. So it's okay if you make a mistake by being " too MECE", the interviewer will guide you to where the important elements are.

I hope this helps

Khaled

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Anonymous updated the answer on Aug 18, 2020

Dear Eric,

In the typical restructuring cases you first need to focus on the cost-side and identify levels on how to reduce the costs, afterwards you can switch the framework and analyse the quantity problem on the review side. So therefore I would rather recommend you to go for the second option.

Hope it helps you,

Good luck,

André

(edited)

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Anonymous replied on Jun 10, 2020

Hello, I agree with what has been said.

A very important point emerges here, on a case study with a decline in profitability, you should not guess the driver of the decline, but you should take advantage of the clarification part to ask all the questions that allow you build a correct framework.

In the event that the interviewer's answers do not lead you not to explore costs or income, it is absolutely necessary to put the 2 dimensions in your framework.

Best

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Clara gave the best answer

Clara

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