Learn two essential methods all consultants use | Consulting on The Gateway

Learn two essential methods all consultants use

When consultants are trying to solve a problem, they turn to a core set of methods used by everyone across the industry. Two key examples of these are demand analysis and cost analysis.

Demand analysis

Demand analysis means evaluating the consumer demand for a particular product or service. Consultants might do this where they've been asked by a private equity client to assess the sustainability of the revenue of a company they're considering buying, or where a manufacturing client is considering selling their products in a new market.

In order to assess market demand for a product, consultants will take three key steps: defining and sizing the market, projecting market growth, and analysing the market segment by segment.

Define and size the market

Markets can be defined by a number of characteristics, such as:

  • Product range What products does it include?
  • Geography Where are the products sold?
  • Time When during the day or during the year are the products bought?
  • Customer type Who buys the products?

It can sometimes be difficult to decide which market a product belongs to, and a given product or service can belong to several markets.

The most common mistakes in demand analysis are defining a product's market too narrowly (and so underestimating the potential of the product), or too broadly (and subsequently targeting the wrong users).

A helpful tool in defining a product's market is not to only think about the consumers of a product, but also about what other products can be substituted for it. For example, if demand for peanuts is inversely correlated to the demand for crisps we can deduce they're in the same market – the market for packaged snacks.

Once a consultant has decided what market a particular product belongs to, they'll size the market. There are two approaches to sizing the market: bottom-up and top-down. Here is how each would be used by consultants when asked by a client to consider the potential demand for a product they've decided falls into the general UK packaged snack market.

  • Top-down approach Divide total value of sales by market share – for example, number of packaged snacks sold in the UK x average price of packaged snacks in the UK x proportion of the UK packaged snack market the client expects to win.
  • Bottom-up approach Multiply number of potential purchasers by unit volume and price – for example, estimated number of people who'll consume the new packaged snack x estimated number they'll consume on average daily x 365 days x price of the new packaged snack.

It's generally best to calculate the market size using both approaches, and then calibrate the results to arrive at a final number.

Project market growth

After completing the sizing exercise, consultants consider how the size of the market for a product is likely to change over time. They'll consider a number of drivers of change, including:

  • Population change If the UK's net population is set to increase every year, UK markets have potential to grow.
  • Scope for adoption of a product by current non-users Is there any reason to think non-snack eaters might start eating snacks?
  • Changes to use frequency As the UK becomes dominated by single person households, will we eat more packaged snacks?
  • Cross-selling opportunities Could more snacks be sold through, for example, producing limited editions?
  • Likely fluctuations in price How will inflation and consequential changes to the price of the client's snack affect sales?

Segmentation

Once a market has been defined, consultants will then divide it into segments with different characteristics. This is done in order to refine their findings and so that they can develop a specific action plan for each segment.

There are many ways in which a market can be segmented, but the most popular approaches rely on thinking through who is using the product, when are they using it, and why. For example, segments of the market for a packaged snack could include the market for the snack in supermarkets and the market for the snack in cafes, which will differ in some key ways.

Each market segment is then evaluated on the basis of its attractiveness by looking at factors such as:

  • Total size of the market segment including projected growth rates and potential profit margins
  • Size of product's current share of that market segment and barriers to increasing it
  • Competitors in that market segment
  • Key purchase criteria for consumers in that market segment
  • Unmet needs in that market segment

Once characteristics of each market segment have been defined, consultants then rank them by attractiveness, developing specific conclusions and key actions steps for each.

One of the most common, and most controversial, management consulting assignments is cost-cutting. Many businesses make bad business decisions in relation to costs – for example, overproducing products that are expensive to make.

Management consultants are often brought in to analyse a company's costs. Typically they'll make sure costs are allocated to the correct part of the business, compare a business's costs with those of its competitors, and identify saving opportunities.

Cost analysis

Here are the steps that consultants follow when performing cost analysis. We'll illustrate the steps by using the example of a TV production company.One of the most common, and most controversial, management consulting assignments is cost-cutting. Many businesses make bad business decisions in relation to costs – for example, overproducing products that are expensive to make.

Management consultants are often brought in to analyse a company's costs. Typically they'll make sure costs are allocated to the correct part of the business, compare a business's costs with those of its competitors, and identify saving opportunities.

Here are the steps that consultants follow when performing cost analysis. We'll illustrate the steps by using the example of a TV production company.

  • Understand how a business makes money A TV production company makes money by producing shows for external networks.
  • Define a business's divisions A TV production company may have drama, entertainment, soap, factual and comedy divisions.
  • Identify costs For a TV production company, costs could include direct costs (for example, salaries, sets, props and equipment) and indirect costs (for example, HR, finance, legal and property).
  • Gather cost data To do so, consultants will liaise with an organisation's finance function. However, they'll need to be careful as information from a client can be presented in a different format to the one needed, or it may lack important pieces of data. They'll also look at competitor cost data at this stage.
  • Identify drivers of each type of cost For example, the costs of a TV production company can be linked to the number of one-off shows, number of freelancers hired per show, and show length.
  • Allocate costs to segments Once costs and their drivers have been analysed, they'll be allocated to a business division. The true profitability of each one can then be assessed and scope for cost-cutting identified.

Recommended reading

It's essential that consultants understand how their clients' businesses work, and the actions of businesses in general.

Read our article Commercial awareness: what you need to know for an explanation from Christopher Stoakes, author of Know the city and Commercial Awareness, and consultant to global law firm Hogan Lovells (this advice is relevant to all industries).

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