Profitability case: how to break down revenue & cost if there's multiple business lines?

Profitability Case
New answer on Jan 22, 2022
3 Answers
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Anonymous A asked on Jan 20, 2022

Dear all: I'd like to seek your advice on how to break down revenue and cost if the company has “multiple different business lines”. Given the short time frame, should I focus more on coming up with more “ideas” (i.e. different possible revenue sources and major costs items) or should I try to come up with “numerical drivers” (i.e. listing down the math formula of different revenue source)? Should I always break down the revenue and cost of different business lines (in some cases, different divisions might share the same cost pool)?

For instance, if the company has triple business line (night club, cafe, and restaurant), I wouldn't have time to break down each business lines' revenue into it math formula (ex: cafe revenue = #customer * average cups of coffee purchase * average price). How specific should the revenue and cost items in each business line be, and what is the best way to structure the revenue and cost items in such scenario? “”Thank you so much. 

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Sidi
Expert
replied on Jan 22, 2022
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers

Hi! 

You misunderstand structuring! Your task is NOT to create a comprehensive tree with all branches already worked out until level 3 or 4! This is NOT what a structure is there for!

The purpose of a structure is to clearly explain the LOGIC and the analytical path that will invariably lead you to the answer of the question. So what you need to explain is:

“I will break down profits into it's numerical drivers and sub-drivers. Starting with splitting profit into the three business lines, I will first need to find out whether all business lines are affected by the profits issue, or whether there is one or two problem segments. Then, the further drilldown will ONLY concentrate on these ”problem segments", which I would then disaggregate into revenues and costs, to again see, WHERE the problem comes from. 

By repeating this for 3 or 4 levels down, I will have isolated the precise numerical driver of the problem. 

And once I know this driver, I can start with a qualitative assessment to understand the underlying REASONS for the negative development of this driver. 

And once I understand these reasons, I can outline a set of ideas how to address these very reasons."

This is an example for a sharp and precise explanation of your logic. And by no means you need a fully developed profit tree with 20 sub branches for this! Your task is to share your LOGIC! Not to read a boring list of branches to the interviewer. This is one of the things that are super badly explained in the typical books on case solving…

Cheers, Sidi

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Pedro
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replied on Jan 20, 2022
Bain | EY-Parthenon | Roland Berger | FIT | Market Sizing | Former Head Recruiter

You don't have to do everything in the structuring part. 

You approach can simply be that you will try to understand which of the three business lines has “the problem” or “the opportunity”, and then further break down on its value/revenue/cost drivers to understand what going on. Then you drive the case and when you drive the case you do the type of breakdown you are considering… for the specific business line that is the focus area.

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Ian
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Content Creator
replied on Jan 20, 2022
MBB | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Revenue cost is not the only way to break things down, please don't forget this! A profitability framework should not always be Revenue and Cost (in fact, it should almost never be as it's wholly ungeneric and untailored to the problem).

Rather, think about other buckets like Customer, Competition, Geography, Product, Internal, External, etc.

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Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 350+ candidates secure MBB offers
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