Capacity case framework

Hi!

It all boils down to the concrete question! If the question is: "Should we expand our capacity?", then this does not differ from any other strategic go- or no-go question (market entry, product maunch, etc. it is - at the core - all identical!). 

Rigorously thinking through business means that each element that you want to scrutinize needs to clearly relate back to the question that you want to address! This principle should form the basis of any structure. (And, by the way, since you have to repeat this process for every question, it makes absolutely no sense to "learn" and memorize frameworks.)

At the core, all strategic questions necessitate a more or less identical assessment:

Can the client create value or not?

Hence, juggling around with different frameworks, trying to map and match them to these questions is just demonstrating this fundamental non-understanding of the candidate. I will say it again and again: cases should be approached and solved from first principles!

• One of these first principles is that you start EVERY case from the core question that you need to answer! This core question is the starting point of a rigorous logic tree, and each element that you want to analyze needs to clearly relate back to the core question! This principle forms the basis of any structure.
• Another first principle is, e.g, to define the criterion or criteria that need to be met in order to anwer this core question in one way or another.

The big advantage is that this is making "frameworks" unneccessary for the structuring of cases! You need to learn and internalize the logic, then you have a bullet-proof toolbox under your belt, far more rigorous then a "framework-learning" approach.

Just one example below which I described in an earlier post. This is about capacity expansion and vertical integration. Please think it through - I hope you will realize that the same logic, centered around value creation, can be applied to a myriad of different situations that people often describe as "different case types" (new market, new product, m&a, etc.). It also works indepent of whether Profit is the primary objective or not. As long as the objective(s) is/are clear, the criterion to answer the core questions can be adapted accordingly. It can also easily applied to your outlined example!

EXAMPLE:

Question:

Our client is a large producer of PET. PET is a type of plastic that is used mainly for producing bottles, such as the ones you find in grocery stores. The main component of PET is PTA. Our client has a PET plant in the US and serves clients both in the US and Europe. They have made the decision to build a PET plant in Europe to be closer to the clients. They have asked you to evaluate whether they should also backward integrate and purchase a PTA plant and locate both plants next to each other.

Approach:

This is a strategic investment decision. A very clear approach would be:

1. Core Question: "Should the client invest into purchasing a PTA plant next to the new PET plant in Europe?"

2. Identify criterion to make this decision: The additional value we can create over the client's investment horizon has to be significantly higher than the investment cost. Moreover, the risks need to be manageable.

3. Compile base information: Purchasing Price of PTA plant / yearly operating cost of PTA plant if purchased / capacity of PTA plant vs. PTA need / investment horizon of client

4. Deep dive into the value bucket by means of a profitability tree: what are the levers of value here? Compare Scenario A (PTA plant in Europe) to Scenario B (no PTA plant in Europe). Probably the value lever lies on the cost side: how much savings potential due to decreased/eliminated transport costs? How much savings due to eliminated import tariffs? etc.

5. Calculate annual value (delta between Scenario A and B). If a PTA plant in Europe indeed increases annual profits by a certain amount, you then divide the purchasing price of the PTA plant by this additional yearly profit. This gives you the break even point (point in time after which the investment becomes profitable). If this point comes earlier than the investment horizon, then this is a beneficial investment and the client should proceed with the purchase (purely based on financials).

6. Don't forget to compile potential risks and mention them in your summary

Cheers, Sidi

_______________________

Dr. Sidi Koné 

(Former Senior Engagement Manager and Interviewer at McKinsey | Former Senior Consultant and Interviewer at BCG)