Structuring profitability cases

profitability
New answer on Jan 31, 2021
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Ravi asked on Jan 05, 2020

Can I structure profitability cases with 1. Reasons for profit decline 2. Ways to improve profitability 3. Incremental profitability analysis 4. Other risks and consideration as my main buckets? I am confused if it still count as MECE?

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Sidi
Expert
replied on Jan 06, 2020
McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers

Hi Ravi!

Your thinking points to the right direction! :) Let me illustrate how I would approach a low-profits scenario. You should start to clarify the profit expectations and how much the company is actually underperforming. If, for example, reaching the 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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Luca
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replied on Jan 05, 2020
BCG |NASA |20+ interviews with 100% success rate| 120+ students coached |GMAT expert 780/800 score

Hello Ravi,

I think that your structure works but it's not always the best choice you can do. For example you can have a case where you don't have any profit decline but still your client wants to improve his profitability.

I would suggest to start from a more general framework where you write Profit = Revenues - Cost. In this way you analyze revenues and costs singularly and you can understand if and where there are rooms to improve the profitability.

Best,
Luca

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Oleksandr (Alex)
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replied on Jan 05, 2020
Very experienced ex-McKinsey consultant with cross-country expertise

Hey Ravi,

I believe that having non-standard approach to adress this problem is definitely good to have. But in order to have it more advanced, here is how I would recommend you to structure the problem (just a simple set of questions):

* What has happened with our profitability? Why?

* Are we the only one in the industry who has this problem or the problem is industry-wide? This is a crucial factor, as, for example, if you are in a cercular economy (commodity products) your revenue improvement potential is quite weak, unless you go through value chain (indirect growth).

* Then you can consider how to improve the profitability (by going through revenue and costs, keeping in mind what has been said above).

* Also don't forget assess feasibility of your improvement, resources needed, etc.

Good luck,

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Antonello
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replied on Jan 05, 2020
McKinsey | MBA professor for consulting interviews

Hi Ravi,
it is a good high-level structure (I would include points 3&4 in the 2nd, remaining with only 2 main bullets). You are not requested to be MECE at this stage since these bullets are macro problems that answer to the questions: 1.what's happening? 2.how can we solve it?
When you are going to deep dive these main points you will have to be MECE (e.g. ways to improve P: increase R; decrease C).

Hope it helps,
Antonello

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Ian
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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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Vlad
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replied on Jan 06, 2020
McKinsey / Accenture Alum / Got all BIG3 offers / Harvard Business School

Hi Ravi,

It really depends on what you have as a second level of your structure. If you want to use only 1 level - that's absolutely not enough. Moreover, what does "Incremental profitability analysis" even mean?

Best

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Clara
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Content Creator
replied on Jan 06, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

Hello!

I would say it overall works, but many problems are tought in a way in which "classical" frameworks/approaches don´t work -precisely to see how can think creatively outside of them-.

I would start from the basics "PROFIT = REVENUES - COSTS" and drill down from there with questions on both components, 1st revenues and then costs.

Like this, you narrow down the problem more and more, discarding easily whatever is not the issue.

Hope it helps!

Cheers,

Clara

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Sidi gave the best answer

Sidi

McKinsey Senior EM & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 300+ candidates secure MBB offers
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