2. Framework Development Flashcards
What is the METHOD to answering a framework development question?
- Framework Creation: extract main elements and break them down into components
- Framework Delivery: POINT to framework!!! to the interviewer to engage them, prioritise areas to explore spontaneously
What is the GENERIC STRUCTURE to answering a framework question?
- Be polite, reiterate key Q
- Describe approach you took to create the framework
- List key elements, walk through each element in turn
- If you want, can provide your overall objective in exploring that element
- In doing this, you want to break down the elements into components
- Provide description/explanation of individual components if necessary
- List drivers, questions you want to understand within each component
- Prioritise order of analysis based on impact / ease / your hypothesis of where the problem is likely to be
- Is it necessary to look at all the different areas to find the root cause of the issue?
Thank you for your patience. To reiterate, the key objective for our client is to ABC. The approach I’ve taken to put this framework together is DEF. Based on this, I’ve extracted X key elements our client could look at: No.1. . . No.2. . . No.3. . .
Now, let me walk you through what components I suggest we analyse in more detail within each element. For element no.1, I would like to break this down further into X, Y & Z. For X, what I mean is . . . For Y, the drivers I want to look at include. . . For Z, the questions I want to better understand include. . . For element no.2. . . For element no.3. . .
Looking at all these different aspects is important to ensure a comprehensive analysis for our client. However, given there are quite a few areas to look at, I think prioritising them would help bring structure to solving the case. I suggest looking at ABC first because of DEF (relatively easy to. . . will get closest to the answer. . . is a preliminary criteria. . .where I hypothesize the issue to be be based on. . . ). We could then build on this analysis by doing XYZ.
Despite this, I would like to emphasize that in this case, it is actually necessary to look at all the different areas to make a concussion on the root cause of the issue.
Does this approach make sense to you? If you have any further insights based on the questions I’ve outlined, that would be greatly appreciated too.
1. Profitability Framework
e.g. What are the different areas you would look at to help Client ABC to grow its profitability back to historical levels?
Clarifying Q’s
- Existing work done: has there been any existing analysis done by our client fo this?
- In-scope vs. Out of scope: the main objective appears to be profitability - does that mean I should look at both revenue and costs?
- Quantity: Is there a particular target our client is aiming to achieve and by when?
- Competitors, location, distribution channel, customer demographic etc.
Thank you for your patience. To reiterate, the key objective for our client is to grow its profitability back to historical levels. To solve for this problem, we can structure our approach into 3 key stages - No.1 identifying the root cause of the profitability issue, No.2 brainstorming strategies to target and overcome this issue, No.3 quantifying the impact and risks of the different strategies to determine what is the best choice for our client. I recommend taking this approach because understanding the root cause of the problem as a first step will ensure that our solution is the most effective.
Let’s start with stage no.1 - identifying the root cause.
The approach I’ve taken to put this framework together is by asking myself “what are the main factors that drive profitability specifically in light of Client ABC’s business model”. Quite simply, a decline in profits could be either due to a decline in revenues or an increase in costs or both. A decline in revenues could be due to a decline in the no. of customers or a decline in the ave. spend per customer. An increase in costs could be due to an increase in fixed costs or variable costs. These form 4 key elements our client can look at.
Now, let me walk you through what components I suggest we analyse in more detail within each element.
For element no.1 - a decline in the number of customers could due to contraction of the overall market or internal issues with Client ABC’s itself. Under the market size category, I would like to understand - Has the no. of customers in the market decreased over the past 3 years? Has competition intensified? In particular, do competitors offer similar features to Client ABC? If so, what could be the reason behind the decline in consumer demand? Have substitute products become more attractive / convenient? Have there been new technology developments such that consumers are moving on to newer markets?
Under the client’s internal issues category, I would like to understand - has the no. of customers decreased over the past 3 years? If so, is the decrease the same across all segments or is there a particular segment driving this decrease? For example, between different locations, customer types (e.g. new/recurring for subscription businesses), product lines, distribution channels. What could the reasons behind this decrease? For example - has Client ABC changed any feature of their business that was previously important to customers? Could aggressive expansion have led to cannibalisation of customers between the stores?
For element no.2 - a decline in the ave spend per customer, I want to break this down further into internal drivers and external drivers. Internal drivers are ones within our client’s control that could have decreased the ave spend. Under the internal drivers category, I would like to understand - has Client ABC’s ave spend per customer decreased over the past 3 years? If so, is the decrease the same across all segments or is there a particular segment driving this decrease? What could the reasons behind this decrease? For example - has Client ABC decreased their prices or the quality of their product? Changed its promotions and discounts strategy? Any changes in staff training / incentives leading to staff not upselling customers as much as they used to?
External drivers are factors our client has no control over but could decrease the average spend. Under the external drivers category, I would like to understand - How do competitors compare to our client when it comes to pricing and promotions? Have they launched an aggressive market campaign? What are the main drivers behind industry spending and how they been trending negatively? (e.g. disposable income, consumer confidence, consumer taste, lifestyle trends)
For element no.3 - an increase in fixed costs, I want to break this down further into real estate, equipment, and employee salaries. For element no.4 - an increase in variable costs, I want to break this down further into advertising and utilities.
For each of these costs, I want to understand - how have they changed over the past 3 years? How have their proportions to each other and to revenue changed over the past 3 years? Is there an increase in the share of 1 type of cost?
In particular: For real estate - does Client ABC own or lease their stores? Have they increased the size of their stores? Have they been expanding into luxury locations?
For equipment - does Client ABC own or lease their equipment? Has maintenance costs increased?
For machinery - Has technology recently been upgraded? Have they been recently replaced? Could we optimize the value chain to reduce machinery costs?
For employee salaries - Have new employees been hired? Have salaries of existing employees increased? Could we automate or digitize manual administrative tasks?
For advertising - Has the cost of acquisition of new customers increased? Has there been a change in advertising strategy in terms of channel, target customer, time, location?
For raw material - Who are our suppliers? Have they increased their prices? Has our client upgraded to a higher quality?
For delivery costs - is this function outsourced? Is the client particularly exposed to the price of gas and its fluctuations? Does our client have a hedging strategy to combat volatility in commodity prices?
For all of these costs, is there a reasonable justification for increases?
Prioritising which area to look at first is usually a good idea. However, I would like to emphasize that in this case, it is actually necessary to look at all the different areas to make a concussion on the root cause of the profitability issue. Thus, I suggest we approach our analysis by moving column by column through the layers of the issue tree - so first looking at generic high-level numbers, then tailoring our approach and deep-diving into particular areas based on hypotheses we can form from the numbers. If I had to make a hypothesis based on the limited information provided so far, my reasonable guess is that the issue is in revenue due to increased competition as this is the most common issue.
Does this approach make sense to you?
What are the different revenue models?
Revenue segmented by product line
- $price x #quantity
- e.g. manufacturing, retail companies
Revenue segmented by quality/price per unit
- # units sold x $price per unit x %occupancy rate / capacity utilisation rate
- e.g. hotels, planes (economy vs. premium)
Revenue driven by frequency/customer loyalty
- (#unique customers x #visits per customer per yr) x $ave spend (driven by external / internal factors)
- e.g. resteraunts, ski resorts
Revenue driven by subscriptions
- (#renewing members + #newly acquired members) x $ave spend
- e.g. gyms, Netflix
2. Market Entry Framework
e.g. What are the different areas you would look at to help Client ABC decide whether it should enter market DEF?
Clarifying Q’s
- Does our client plan to sell a similar product in this market?
- Competitors, location, distribution channel, customer demographic etc.
Thank you for your patience. To reiterate, the key objective for our client is to determine whether they should enter the market or not. Solving for this case can be broken down into 3 parts: No.1 how attractive is the market? No.2 what is our client’s ability to win in that market? No.3 what are the different entry options
Now, let me walk you through what components I suggest we analyse in more detail within each element.
For element no.1 - market attractiveness, I would like to break this down further into financials, competition, barriers to entry.
Under the financials category, I would like to understand - What is the overall market size and profitability? How have these 2 metrics changed over the past 3 years? How is expected to change in the next 3 years? What are the different product categories and customer segments and how have these changed over the past 3 years?
Under the competition category, I would like to understand - How concentrated is the market? Who are the major players? What are their market shares and how loyal are their customers? What are their strategies and outlook? In particular, are there any competitors with a similar profile to our client?
Under barriers to entry, I would like to understand - Is there new regulation that applies and what compliance cost is associated with it (e.g. licences/approvals that need to be obtained)? What sort of infrastructure, equipment, technology, or talent is required? Intense price wars?
For element no.2 - Client ABC’s ability to win, I would like to break this down further into existing value chain capabilities, and existing brand image.
Under the value chain category, I would like to understand - Can Client ABC leverage their existing skills and equipment to design & manufacture the new products? Can they leverage their economies of scale or existing supplier relationships to obtain a cheaper raw material price? Can they leverage their distribution channels to access more customers?
Under the brand image category, I would like to understand - Can Client ABC market to their existing customer list or will it just deteriorate their brand and disappoint loyal customers?
Overall, for this element, I just want to understand what competitive edge our client has against competitors to assess the desirability of entry into this market.
For element no.3 - market entry options, Client ABC can enter the market by organic growth, an acquisition, or by partnership / JV.
Entry by organic growth means doing it by yourself and starting from scratch. Benefits include more control and a potentially higher ROI.
Entry by acquisition means purchasing a company in the desired segment. Benefits include speed of entry due the company already being established and potential cost synergies from integration.
Entry by JV means partnering with another company. Benefits include increased expertise and shared costs and therefore risks.
To determine which option is the most suitable, I would look rank them based on the ROI, alignment with our client’s motivations, and our client’s ability to raise capital.
Looking at all these different aspects is important to ensure a comprehensive analysis for our client. However, I would prioritise assessing market attractiveness as this is a preliminary criteria for assessing whether our client should enter the market or not.
Does this approach make sense to you? If you have any further insights based on the questions I’ve outlined, that would be greatly appreciated too.
3. Acquisition Framework
e.g. what are the different areas you would look at to decide whether PE Client should invest in Target ABC or not?
Thank you for your patience. To reiterate, the key objective for our client is to determine whether they should invest in target company or not. To guide the decision, we can look at 3 key elements: No.1 How attractive is the market? No.2 What is the Target ABC’s ability to win in the market? No.3 What is the post-acquisition strategy?
Now, let me walk you through what components I suggest we analyse in more detail within each element.
For element no.1 - market attractiveness, I would like to break this down further into financials, competition, industry drivers.
Under the financials category, I would like to understand - What is the overall market size and profitability? How have these 2 metrics changed over the past 3 years? How is expected to change in the next 3 years? What are the different product categories and customer segments and how have these changed over the past 3 years?
Under the competition category, I would like to understand - How concentrated is the market? Who are the major players? What are their market shares and how loyal are their customers? What are their strategies and outlook? In particular, are there any competitors with a similar profile to our client?
Under the industry drivers category, I would like to look at - What are the relevant regulations? How disruptive is technology? How important is economies of scale? Are there intense price wars?
For element no.2 - Target company’s ability to win, I would like to break this down further into financials, business model, future plans, management team.
Under the financials category, I would like to look at - How much sales and profits does Target ABC currently generate per year? How much cash does the company have to finance its growth?
Under the business model category, I would like to look at - What are the differentiating factors of Target ABC’s business model? Do we believe these factors will enable Target ABC to increase market share in the long term? At how much would customers value these differentiating factors? Does Target ABC’s business model address a gap in the market? Are there competitors with similar profiles or is Target ABC uniquely positioned in the market?
Under the future plans category, I would like to look at - Is Target ABC planning to enter new markets? Do these plans make sense? What is the ROI for these plans?
Under the management team category, I would like to look at - How experienced is the leadership team? Do we believe they have the ability to execute Target ABC’s future plans successfully?
For element no.3 - post-acquisition strategy, I would like to break this down further into acquisition cost, investment targets, risks.
Under the acquisition cost category, I would like to look at - What is Target ABC’s current valuation? Does this seem fair compared to competitor valuations? Is Target ABC undervalued?
Under the investment targets category, I would like to look at - How long would the investment horizon be? At what price could Target ABC be sold for? What is the targeted ROI? Can this be achieved based on Target ABC’s current valuation and future expansion plans?
Under the risks category, I would like to look at - Has our PE client invested in companies in this industry before? How familiar are they with the market? Would Target ABC fit well with the client’s portfolios or would it be negatively received by shareholders?
Looking at all these different aspects is important to ensure a comprehensive analysis for our client. However, I would prioritise assessing market attractiveness as this is a preliminary criteria for whether our client should invest in Target ABC or not.
Does this approach make sense to you? If you have any further insights based on the questions I’ve outlined, that would be greatly appreciated too.
4. Merger / Integration Framework
e.g. what are the different areas you would look at to decide whether BuyerCo should acquire TargetCo or not?
Strategic Rationale
- Increase horizontal market share (acquiring competitors)
- Increase vertical market share (suppliers/distributors)
- Market entry (new products/customers)
- Cost synergies? Expansion of distribution channel? Opportunity to cross-sell / on-sell? Make core product more attractive? Boost branding?
- Company is undervalued and buyer can add value by getting control and running the company better
Thank you for your patience. To reiterate, the key objective for our client BuyerCo is to determine whether they should acquire TargetCo or not. To guide the decision, we can look at 4 key elements: No.1 How attractive is the market? No. 2 What are BuyerCo’s individual capabilities? No.3 What are TargetCo’s individual capabilities? No.4 What are the synergies and risks of the merged entity?
Now, let me walk you through what components I suggest we analyse in more detail within each element.
For element no.1 market attractiveness, my overall objective is to understand what the broader dynamics are.
The questions I would like to investigate include - Are both companies (buyer / target) in the same markets (by geographies, customers, etc.)? What is the overall market size, profitability and growth rate? How have these metrics changed over the past 3 years? How is expected to change in the next 3 years? How intense is the competition? Who are the major players, what is their market share and strategy? Has there been an increase in new entrants? How heavily regulated is the market? What are the key industry drivers (technology, economies of scale, price wars)?
For element no.2 - the target, my overarching objective is to understand how attractive TargetCo is both strategically and financially. The main components of this element include TargetCo’s financials, capabilities, management.
Under the financials category, I would like to look at - What is the current valuation for TargetCo? What is the projected revenues and profits of TargetCo? Is it undervalued?
Under the capabilities category, I would like to look at - What is TargetCo’s key assets? brand? Does TargetCo have technology, talent, brand image or other capabilities that BuyerCo could benefit from? Does TargetCo’s have access to a desired customer demographic that BuyerCo wants to target? Does TargetCo have existing relationships with supplier/distributors that would benefit BuyerCo? What are the differentiating factors / competitive edge of TargetCo?
Under the management category, I would like to look at -What is the quality of the current management? Do we believe we can add value by getting control and running TargetCo better?
For element no.3 - the buyer, my overall objective is to understand what’s motivating the purchase.
The key questions I would like to investigate include - What is the acquisition rationale? (Undervaluation, control, synergies, or market share or market entry) What is our client’s ability to finance the acquisition? Does our client have any experience in integrating companies?
For element no.4 - synergies and risks, I would like to break this down further into revenue synergies, cost synergies, post-acquisition risks.
Under the revenue synergies category, I would like to look at - Is TargetCo’s product / service complimentary? Does TargetCo’s services make BuyerCo’s core product more attractive? Are there opportunities for product cross-selling / on-selling between the 2 entities? Are there opportunities to use TargetCo’s distribution channels to sell BuyerCo’s products? Are there opportunities to use TargetCo’s technology / talent / expertise to improve BuyerCo’s business? What is the financial impact of each of these strategies?
Under the cost synergies category, I would like to look at - What are the potential cost savings from consolidating duplicate roles, IT databases, premises, stronger buyer power from economies of scale?
Under the post-acquisition risks category, I would like to look at - What is the financial impact of dis-synergies or cannibalization? Would BuyerCo’s customer react negatively? Would TargetCo’s culture fit with BuyerCo’s? How can success be measured? Does our client risk losing focus on its core business?
Looking at all these different aspects is important to ensure a comprehensive analysis for our client. However, I would prioritise assessing market attractiveness as this is a preliminary criteria for whether our client should invest in Target ABC or not.
Does this approach make sense to you? If you have any further insights based on the questions I’ve outlined, that would be greatly appreciated too.
5. Market Share Framework
e.g. What are the different areas you would look at to identify the reasons behind Client ABC’s market share decline?
Thank you for your patience. To reiterate, the key objective for our client is to identify the root cause behind the market share decline and fix it. Quite simply, if Client ABC has been losing market share, its revenues have necessarily been growing slower than competitor revenues. Thus, I’ve recommended structure our analysis around comparing what Client ABC does against what competitors have been doing.
To solve for the question, I’ve put together this framework, and the approach I’ve taken to do this is by asking myself “what are the determinants of success in this particular industry”. Based on this, I’ve extracted X key elements our client could look at for itself AND its competitors: No.1. . . No.2. . . No.3. . .(e.g. stores strategy, product strategy, communications strategy, online strategy, value chain strategy, country strategy, customer loyalty strategy, channels strategy, delivery strategy etc.)
Now, let me walk you through what components I suggest we analyse in more detail within each element. For element no.1, I would like to break this down further into X, Y & Z. For X, what I mean is . . . For Y, the drivers I want to look at include. . . For Z, the questions I want to better understand include. . . For element no.2. . . For element no.3. . .
Looking at all these different aspects is important to ensure a comprehensive analysis for our client. However, given there are quite a few areas to look at, I think prioritising them would help bring structure to solving the case. I suggest looking at ABC first because of DEF (relatively easy to. . . will get closest to the answer. . . is a preliminary criteria. . .where I hypothesize the issue to be be based on. . . ). We could then build on this analysis by doing XYZ.
Despite this, I would like to emphasize that in this case, it is actually necessary to look at all the different areas to make a concussion on the root cause of the issue.
Does this approach make sense to you? If you have any further insights based on the questions I’ve outlined, that would be greatly appreciated too.
6. Pricing Framework
e.g. What are the different areas you would look at to help Client ABC decide how much it should charge for Product DEF?
Clarifying Q’s
- Who are Product DEF’s target market?
- Is there a particular country Product DEF is being piloted first?
- What is our client’s underlying objective - profits or market penetration?
Thank you for your patience. To reiterate, the key objective for our client is to determine a suitable price for Product DEF. To guide our decision, we can look at 3 key elements: No.1 benchmarking vs. competitors products & prices, No.2. analysing the customer’s WTP, No.3. analysing Product DEF’s cost structure, No.4 other considerations.
Now, let me walk you through what components I suggest we analyse in more detail within each element.
For element no.1 - benchmarking against competitors, I would like to break this down into 2 stages: (a) using competitors’ products prices as an anchor? (b) making adjustments based on how our client’s product is different.
Under category (a), I would like to look at - What sizes do competitors sell their products at? How does pricing vary with size and quality? What is the purchasing model? For example - do competitors offer subscription services for customers to be automatically supplied every month? How convenient is it for the customer to purchase the product? What distribution channels do competitors use? What discounts and promotion strategies are used? What are the broader market dynamics - are there intense price wars?
Under category (b), I would like to understand - Does Product DEF’s quality justifies a higher price than competitors? Does Client ABC’s brand image justifies a higher price? Does Client ABC have a loyal base of customers in country XYZ that guarantees a minimum level of demand for its new product?
For element no.2 - customers WTP, I would like to look at - what do we hypothesize the target customer for Product DEF to be? What are the differentiating factors of Product DEF? What is the value of the next best alternative? What customer needs does Product DEF address? How much would customers be WTP to address those needs? How sensitive are customers to pricing? How does this WTP vary between income and age? How does this WTP vary between Client ABC’s existing customer list and foreign customers?
For element no.3 - Product DEF’s cost structure, I would like to look at - What was the R&D cost for Product DEF? What are the variable manufacturing costs? What is the expected advertising cost? What is the targeted profit margin? What is the target payback period?
For element no.4 - other considerations, I would like to look at - what is our client’s overall objective - higher profits or market penetration? If they are trying to gain market share - how much can they underprice competitors and for how long can they afford to do this? Is our client already a cost-leader such that this is a viable strategy? Are there opportunities for our client to cross-sell / up-sell such that a lower price can still be justified (e.g. Amazon Kindle’s ancillary revenue)? Can we sell different versions of the same product to reach a wider market? Can partition pricing apply to our product?
Looking at all these different aspects is important to decide on a strategic price for the product. However, getting to a price that is in the right ballpark can probably be achieved by prioritising the benchmarking analysis with competitor products. We could then build on this first analysis and fine-tune the exact price we want to charge by looking at customer’s WTP and the product’s cost structure.
Does this approach sound fair to you?
7. Revenue Framework
e.g. What are the different areas you would look at to help Client ABC grow sales back to historical levels?
Thank you for your patience. To reiterate, the key objective for our client is to grow its sales back to historical levels. To solve for this problem, we can structure our approach into 3 key stages - No.1 identifying the root cause of the decline in sales, No.2 brainstorming strategies to target and overcome this issue, No.3 quantifying the impact and risks of the different strategies to determine what is the best choice for our client. I recommend taking this approach because understanding the root cause as a first step will ensure that our solution is the most effective.
Let’s start with stage no.1 - identifying the root cause.
The approach I’ve taken to put this framework together is by asking myself “what are the main factors that drive sales specifically in light of Client ABC’s business model”. A decline in sales could be either due to a decrease in the ave spend per visit or a decrease in the number of visits per year or both. These form the 2 main elements I want to further investigate for our client.
Now, let me walk you through what components I suggest we analyse in more detail within each element.
For element no.1 - a decline in the ave spend per customer, I want to break this down further into internal drivers and external drivers.
Internal drivers are ones within our client’s control that could have decreased the ave spend. Under the internal drivers category, I would like to understand - has Client ABC’s ave spend per customer decreased over the past 3 years? If so, is the decrease the same across all segments or is there a particular segment driving this decrease? What could the reasons behind this decrease? For example - has Client ABC decreased their prices or the quality of their product? Changed its promotions and discounts strategy? Any changes in staff training / incentives leading to staff not upselling customers as much as they used to?
External drivers are factors our client has no control over but could decrease the average spend. Under the external drivers category, I would like to understand - How do competitors compare to our client when it comes to pricing and promotions? Have they launched an aggressive market campaign? What are the main drivers behind industry spending and how they been trending negatively? (e.g. disposable income, consumer confidence, consumer taste, lifestyle trends)
For element no.2 - the ave number of visits per year, I would like to further break this down into the no. of unique customers, and the frequency of visit per customer.
Under the frequency of visits category, my overall objective is to understand factors that drive customer loyalty. Factors I would like to look at include - How seamless and smooth is the overall customer experience? What are the critical components of a great experience? Does the client use any loyalty cards or recurring specials deals to drive repeat visits?
Under the no. of unique customers category, I would like to understand - what is the target market? How have customer demographics changed? Have the number of competitors increased? etc.
Given there are quite a few areas to look at, I think prioritising them would help bring structure to solving the case. I suggest looking at the ave spend per visit first because relevant data should be relatively easy to obtain by looking at the restraints receipts. Despite this, I would like to emphasize that in this case, it is actually necessary to look at all the different areas to make a concussion on the root cause of the issue.
Does this approach make sense to you?
