McKinsey on the McKinsey cost curve

A decade of strategy consulting work at McKinsey has not made me a big believer in standard frameworks. Most business problem require a tailor-made approach without the buzz words and generic statements you find in most airport business best sellers.

There is another problem with frameworks: a framework to solve a business problem is usually not the framework to communicate a business solution. Problem solving and presentation are two different things.

McKinsey's "enduring ideas" series periodically discusses one of the classic frameworks from the world of management consulting. This month it discussed the cost curve.

• On the vertical axis you show the cost per unit
• On the horizontal axis you line up the competitors in order of their production cost
• (Unusual) you change the width of the column to reflect the production capacity of a player
• Drawing a vertical line where capacity = demand shows you what the market price of the (commodity) product will be, and who is making money/who is not.

This framework is maybe an exception. A slightly modified column chart can serve both as a problem solving tool and a communication instrument. If there is incomplete information, 3 people can spend 2 months to develop it (running all the analysis), but once it is there, it shows what's going on in a (commodity) industry on one very insightful piece of paper (piece of PowerPoint slide).