Profitability case - revenue and cost analysis

profitability analysis
New answer on Dec 31, 2020
4 Answers
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Anonymous A asked on Feb 29, 2020

In probability case, I usually separate the cost and revenue analysis, and would just do one side of analysis if the case is clearly a cost or a revenue problem.

In a case I did today, the cost of the client's company has gone down, so I focused just on the "revenue side" to analyze. However, in this case, the drop of revenue was actually caused by cost-cutting activity, since the cost-cutting has impacted the quality of the product.

My question is:

(1) Should I always analyze "both" cost and revenue information, in case that I will miss important information? In today's case, I totally did not ask about cost information, which caused me to miss much crucial information.

(2) If the case is clearly a revenue problem (cost did not change, or cost reduced), where should I ask about the cost information? Should I ask during the "finding root cause part", or ask in the cost part after I have fully analyzed the revenue part?

Thank you!!!

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Luca
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replied on Feb 29, 2020
BCG |NASA | SDA Bocconi & Cattolica partner | GMAT expert 780/800 score | 200+ students coached

Hello,

Finding a potential cause in costs or revenues can not exclude a problem also on the other side of the framework. The best approach is to drill down the part that seems to be the root cause and then to quickly analyse also the other part. A good habit is at least to ask if there was any particular trend in the last years in terms of costs/revenues.

In the case mentioned by you, anyway, you could arrive to the same solution from the revenues side following this path: Revenues decreasing --> Volume decreasing --> Internal problem with our products. Why didn't you get to that point?

Best,
Luca

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Ian
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replied on Dec 31, 2020
#1 BCG coach | MBB | Tier 2 | Digital, Tech, Platinion | 100% personal success rate (8/8) | 95% candidate success rate

Honestly, it depends! You need to think about the industry/business context, the company context, and the situationally/problem context. Only then can you create an appropriately tailored cost breakdown.

In general, for determining cost issues, you need to break down the problem into a tree/root-cause analysis and ask the highest level (but specific) questions first! In this way, you essentially move down the tree.

How do you identify where to look? Well, you need to look into whichever of the following 5 make the most sense based on where you are:

  1. What's the biggest? (i.e. largest piece of the pie...most likely to change the end result)
  2. What's changing the most? (I.e. could be driving the most and most likely to be fixable)
  3. What's the easiest to answer/eliminate? (i.e. quick win. Yes/No type of question that eliminates a lot of other things)
  4. What's the most different? (differences between companies, business units, products, geographies etc....difference = oopportunity)
  5. What's the most likely? (self-explanatory)
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Anonymous replied on Jun 30, 2020

Hi,


An important thing to do when solving a case (and later a real project) is about prioritisation - focus more of your effort on where the key problem lies. You don't always have to go through every single details or all branches of your initial structure to solve a problem.


In this example, I would agree with Luca, the questions is - why did you not find out about the negative implication of cost cutting, when you are solving the revenue problem? Even without specifically going to examine the cost branch, by examining the revenue decline, if you ask the right question and drill down deeper enough, that should come out. Just because you have 2 branches (rev vs cost) in a profitability framework, doesn't mean they would be totally independent, and doesn't mean you cannot ask anything about cost levers when you try to solve the revenue puzzle. Don't be too rigid in applying framework.

Best,

Emily

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Clara
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replied on Feb 29, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

Not only for this case, but in general, the fact that there is an issue in one branch of the tree does not imply that it´s the only one.

Hence, best thing is to start where you see some hints that the issue must be -in this case, revenues- and later discard any potential issues in the cost side.

Hope it helps!

Cheers,

Clara

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Luca gave the best answer

Luca

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