Profitability case structure

profitability
New answer on Jan 31, 2021
4 Answers
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Anonymous A asked on Jul 12, 2018

Hi,

I wanted to get feedback on this structure for Low profits and how to reverse:

Step 1: Ask Clarifying Question (Is this affecting client only or trend in industry, How long has this trend been, Any profit target, any other objective)

Structure:

Comp:For company Financials, I want to look at revenue and cost and under revenue, understand how we price products and how has price change over time. Also I want to know if our volume has increased or decreased over time. For cost I want to look into if our FC or VC has changed over time compared to the competition. I will also want to know about our product mix and how they compare to the comprtition.

Competition: I will want to look how the competition price their product and how that compare to us. I will also want to look into the cost structure and benchmark those agiant ours. Lastly, I will want to know about their customer segments and product mix and benmarhc those againt our as well. Base on our findings, we will look at

Ways to Turnaround Profits: Revenue Strategies (Increase price, Introduce new product or change product mix). Cost Strategies (FC, VC or both) and the cost benefit analysis of each.

Am I missing anything or need to make any change?

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Anonymous replied on Jul 13, 2018

Hi there,

Overall, your structure contains the key elements that you will need to solve most cases. I do have a couple of specific comments, though, that will help you improve it.

1) break down your profit tree further (especially on the revenue side)

In some cases, the real "heart" of the answer will be a level deeper than the structure you show. For example, it is not just that "quantity has decreased" but it's that "the number of customers we have has decreased, but the sales per customer have remained the same". This can have a significant effect on your answer.

  • Revenue
    • Price
    • Quantity
      • Number of customers
      • Sales per customer
        • Average purchase size
        • Number of purchases

2) Only ask questions on competition if that part of the initial structure has revealed an insight.

Always ask yourself "why am I asking this question?" Asking about competition is just helping you understand the source of the problem more - e.g. "is it just our product mix that has shifted towards cheaper products or is this an industry wide problem?". Therefore, you should only ask about a competitor's price or product mix if that element of the structure was identified as an issue or point of interest when you were going through the profit tree. Asking questions on competitor's price if you already know that the issue is not one of price will make you seem like you are not hypothesis driven and will reflect poorly on your performance.

My advice here would be to not even put competition as the second part of the structure, but rather to say "after I have identified the specific source of the profitability problem, I want to look into what our competitors are doing and figure out if this is a specific company X problem or whether it is affecting the whole industry"

3) Customise turnaround strategies

Your strategies can be broken down into broadly two buckets: 1) strategies that can help turnaround the specific issue (e.g. lower number of customers) and 2) other strategies that can help turn around other components of the profitability tree.

Solutions under 1) are generally preferred because they fix the actual source of the issue, but this is not always possible (e.g. if it is a macro trend), then you may want to look at other levers to try improve profitability. For example, a lot of banks which have their revenues threatened and challenged by Fintechs and increased regulation/competition are now turning to cost-cutting and leaner organisational structures to maintain healthy profits.

4) Overall, you should be more clear that every subsequent phase of your structure depends on the previous phase.

As I explained above, you should only look into competitor benchmarks in the areas you have identified as important. Your turnaround solutions should be focused on turning around the specific source of the issue rather than generic turnaround solutions.

Hope this helps!

Alessandro

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Sidi
Expert
replied on Jul 13, 2018
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers

Hi Anonymous,

such profitability scenarios are the core of a myriad different possible business situations you might encounter. So it is absolutely essential to address such questions in a rigorous and coherent way. So let me illustrate how I would approach such low-profits scenarios:

You should start by clarifying the profit expectations and how much the company is actually underperforming. If, for example, reaching a certain industry benchmark is the objective, then I would do the following:

  1. Firstly you need to identify the numerical driver of the below-benchmark profits of the company (the WHAT? question). --> Identify the different revenue streams of the company; then for each revenue stream, draw a driver tree to find and isolate the core of the problem (compared to industry average: less customers? less revenue per customer? lower margin products sold? lower pricing? higher operational costs? etc.)
  2. Once the numerical problem driver is isolated, you need to understand the WHY? question. For this, the analysis depends on what the actual problem is. If it is a cost problem, you may want to go through the entire value chain to diagnose where the difference/disadvantage lies. If it is a revenue or sales mix problem, you may want to scrutinize underlying trends and developments, competing offers, substitutes etc.
  3. Based on your quantitative (WHAT?) and qualitative (WHY?) analysis, you can develop strategic measures to address the qualitative reasons.
  4. Do not forget to outline potential risks of your strategic recommendation

Cheers, Sidi

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Vlad
Expert
Content Creator
updated an answer on Jul 12, 2018
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

I would recommend the following approach:

1) Ask clarifying questions:

- Clarify the business model (i.e. how the business works and what are the revenue streams / core products or business lines). Why do you need to know the revenue streams? Because it's one of the most critical pieces in understanding the business model. An example is Oil&Gas with up-, mid- and down- streams that are completely different businesses.

- Clarify the objective both in money terms and timeline (e.g. Our objective is to increase profits by 5M in 5 years). When you have a to select from several options in a case - clarify the selection criteria

- Clarify other possible limitations if you feel that it's necessary

2) You make a classic profitability structure adapting it to the case. Sometimes cases are not that easy as just declining profits. For example, if the profits are lower than planned, it is either because we have problems with profits or we have problems with planning. Try to be MECE here.

3) While you do your structure you split the revenues first by the revenue streams (if you have multiple streams) and then into either:

  • Price and quantity for the production companies. I also recommend to add proactively the 3rd boxn - the "Mix". Thus you show your business sense and demonstrate that you know the most common case traps. Pls note that the "mix" can be anything - geography, customer, product, etc.
  • The number of customers and the average check for retail stores, restaurants, ets. You can further split the customers into traffic and conversion (if relevant, e.g. for a fashion store) and the avg check into the products and prices

3) Costs I would split into Fixed and Variable. VCs you can split futher into costs per unit and units sold

4) I would start the case by checking whether its increasing revenues, declining costs, or both - so that you could eliminate the part that is irrelevant. Then you dig deeper into the parts of your structure

Best!

(edited)

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Ian
Expert
Content Creator
replied on Jan 31, 2021
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

I'm going to take a step back and answer the question you're really asking: 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.

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