profitability case structure product /customer /distribution channel mix

Framework profitability What is the best way to include the mix (product channels geography etc.)in the profitability case
New answer on Sep 24, 2020
7 Answers
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Alice asked on Jul 04, 2017
Thank you prep lounge I got McKinsey offer

Hi everyone,

I've practiced a few profitability cases recently and I've noticed that how they all end up with different product mix/customer mix/distribution channel mix etc. As a result, I was wondering whether I should incorporate the mix into the framework. The standard profitability framework seems too simple and I would want to break down the cost further by customer/product/channel etc. Any advice & thoughts are appreciated!

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Sara
Expert
replied on Jul 04, 2017
5+ years consulting experience | McKinsey | Strategy& | INSEAD | Bocconi | Here to guide you from your very first steps

Dear Alice,

the most important points in laying out your structure are: be MECE, be quick, be sensible. The breakdown that you are suggesting is a deeper layer that might not even be evident at the beginning of the case. Therefore I would suggest, as a rule valid on average, to bring it up only ahead in the case.

When the time to dig more into each element of your profitability tree comes, it is then a good idea to suggest that there are a number of dimensions you might use and then to pic the one that makes more sense in the specific situation.

However, each rule as exceptions and it might happen that the segmentation is easily understandable from the beginning. In this case, you can mention it with no disruption in the MECEness or speed of your structure. For example, if the case states from the beginning that there are two products originating income, you can already segment the revenues in 2 sub-branches correspondent to the products. Later on in the case, it might be necessary to create sub-brunches, splitting for example each product into different customer-categories. In this case, drawing a matrix might be a good idea to impress your interviewer.

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Anonymous replied on Sep 24, 2020

Dear Alice,

There are different ways to structure the profitability case. As you already know, profitability is equal to revenues - costs.

There are 3 typical ways on how you can structure the revenues and segment them:

1. by customers,

2. by products

3. by geographical markets

Regarding the costs you may structure them either in the fixed and variable cost, or may also structure them by different kinds of cost - like personell cost, material cost, etc. The other way to look about it is to structure the cost along value chain.

So, depending on the case you might use different approaches and segment your revenues and cost side.

Recently I've uploaded a profitability case “Deep Water rescue” (available in English & German) here on Preplounge:
https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/advanced/deep-water-rescue-206

I used similar cases when I was interviewing candidates on my own in Central Europe (Germany & DACH Region), Eastern Europe (Ukraine & Russia) as well as Middle East (Dubai, KSA, Lebanon, and Qatar). So, this case is very advanced and could be typically used in the 2nd or 3rd interview rounds by the leading consulting firms.

Try, whether you can crack it.

Best,
André

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Danny replied on Jul 04, 2017

if it is a interviewee-led case, it may better not be incorporated. if it is interviewer-led, multi-layer framwork may show your deep thinking of the problem. And be cautious, profitability may not always end in that way. Best!

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Vlad on Jul 05, 2017

Hi Danny. It's a myth - it doesn't really matter who leads a case

Anonymous replied on Mar 05, 2018

A profitability case is, in the end, an operations case. If you are too quick to jump to the R=P*V equation, you show signs of a data junky who doesn't try to get a better feel of the "environment" this case lives in.

I STRONGLY prefer that candidates do NOT jump into the R=P*V game too quick. Ask a few overarching questions, find out who you are selling to and how that's changed, find out who you are competing against and are they fragmented/big, find out if your industry has seen a regulatory shift if relevant (e.g. shipping), find out more about HOW you sell (online, retail, reseller, etc), etc.

Hemant

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Stephane on Mar 05, 2018

Hemant, thanks a lot for your answer. It is definitely answering my question very well

Vlad
Expert
Content Creator
replied on Mar 05, 2018
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi,

I recommend using two tools here:

  1. I recommend asking the clarifying question at the beginning of the case: How does the business work and what are the revenue streams? 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. And downstream basically generates 50% of revenues selling snacks on the gas stations. This is the most common pitfall in profitability cases (the 2nd pitfall is the Mix)
  2. While you do your structure and split revenues into price and quantity - add proactively the 3rd box with the "Mix". Thus you show your business sense and demonstrate that you know the most common case traps.

    While presenting the structure, provide some examples of what can be under the Mix bucket - geography, customer, product, etc.

    Good luck!

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Stephane on Mar 05, 2018

Vlad, thanks a lot for your hint. It is definitely answering my question very well.

Francesco
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replied on May 31, 2018
#1 Expert for Coaching Sessions (3.700+) | 1.300+ Reviews with 100% Recommendation Rate | Ex BCG | 8+ Years of Coaching

Hi Stephane,

I would personally go for neither the volume or the price classification. The ideal thing would be to first ask for the mix, then perform an analysis of the problematic segment only. The steps to follow thus would be the following:

  1. Segment by profitability/revenue channels. Ask the interviewer how the client segments its profitability channels (products, customers, distribution channels, etc.).
  2. Identify which channel is the priority. Ask for the change in profitability for each channel. Then start from the one that had the biggest decline in profits.
  3. Identify whether it is a revenue or cost issue. Ask how revenues and costs changed for the channel that you have identified. Start from the area which has the major negative change in absolute amount
  4. Analyse the components of revenues and/or costs. According to what you found in step 3, you should further segment revenues in price and volume or costs using fix or variable costs

Best,

Francesco

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Sara gave the best answer

Sara

5+ years consulting experience | McKinsey | Strategy& | INSEAD | Bocconi | Here to guide you from your very first steps
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