Profitability, too narrow a framework?

Question

Hello,

Very often the 1st question of a McKinsey-style case about profitability is something like: Profits are declining, how would you approach the client's problem?

I find that the common Profitabilty analysis (any kind, but let's take Cheng's framework as an example) is too narrow.

Especially because of how it's worded (how would you approach the problem), I feel I would like to include:

- Macroeconomic trends;

- Industry trends & profitability;

- Company's capabilities, value prop and Profitability analysis;

- Competition, segments&concentration;

- Customers, segments, price sensitivity and preferences;

- Product, nature of, mix, pricing strategues and promotion.

Is it too general? I just think a lot could be missed in a profitability analysis if we do not look at all these aspects.

Thoughts?

Answer 1

It's a helpful list of "things to consider" but I would not be impressed if that was your structure to a McKinsey profitability case. For starters, there are always ques in the case intro that suggests where there might be issues (e.g., increasing competition, declining market demand). A strong candidate would ask 1-2 good subtle clarification questions to refine their hypothesis (e.g., how are competitors performing - is it an industry or company problem?; how does this business make money; etc.) so that their structure is highly relevant and doesn't 'boil the ocean'. There is a big difference between comprehensiveness and relevance with a MECE structure!

Secondly, I would use some of your 'considerations' to dig deeper into where the issues might be in the profit tree. Yes, we all know that it's revenue minus cost; revenue can be broken down into price and volume, etc. but your chance to shine is the next few layers from there based on your hypothesis. You will be amazed by how many candidates don't really indicate any appreciation for the type of business they are working with and will talk about, say fixed and variable costs genererically. This is also where you are expected to show some business acumen and common sense, even if it's an industry you have no idea about.

Answer 2

Hi Anonymous,

In the end, it all depends on the actual case and the further context that is given to you. But let's assume this is an average case. I actually think that this framework is too complex to use right from the start. If you would always use this framework, it might come across as if you are trying to apply the same framework to any problem you are faced with.

Instead, I would start simpler, trying to find out whether there are any major changes in the market, in your own revenue, or in your costs. Once you know where things are going wrong, you can dive deeper and use some of the other dimensions you mentioned in your approach.

That is a much more 80/20 approach than using the same scatter gun for every problem...

Cheers,

Pascal

Answer 3

Hello Anonymous,

In order to successfully solve a problem you have to structure while being MECE and PRIORITIZE- meaning applying common sense and using clarifying questions/asking for relevant data. Anyone with business education can come up with these aspects, but fewer people can actually find key drivers of the problem in an efficient way. So, before making your issue tree complex think about that.

Answer 4

Hello Anonymous!

BEFORE looking into any of those categories you've mentioned, you firstly need to understand where the problem is located.

So, you need to understand WHICH profitability driver and sub-driver has changed over the past year or years and then you can look for the specific reasons, the WHY, or the root-cause of the problem.

So, for example, if you see that something has changed in the revenues and you find out that our client sells less volume than before, then you need to understand whether this comes for the supply side (our capacity & capabilities) or the demand side (market size & growth, competition, trends etc). In your example you focus directly to the last part of the analysis without explaining how you got there. This is not top-down thinking.

I repeat, you cannot fix a problem before firstly understanding where the problem comes from!

Hope this helps,
T

Answer 5

Hi there,

You raise a great question, and it really applies to all cases.

Yes, you want to understand the general frameworks that exist out there No, you do not want to copy each framework exactly.

Fundamentally, you need to make each and every framework your own. Reflect on the real question being asked, the industry in which you're working, and any clues/hints embedded in the prompt that can help direct you.

From here, you need to come up with your own framework that truly addresses how you would tackle this problem if you were really at the client site and had 3 weeks to solve it.

So yes, your framework is too general...you need to really think about what matter contextually and apply it!

Answer 6

Hello!

Regarding this cases, the