Structuring the approach in investigating operations and value chain

Question

Hello Everyone,

I tend to struggle in structuring my approach when investigating the internal components, as part of the profitability decline analysis. Lets entertain this: I reviewed the market opps, and the segments profitability and found nothing so far. Hence, I'd move on to see "how we are doing things."

What buckets/sub buckets should I focus on in my analysis ? I'm thinking of capacity/utilization (Quant.), and analyzing processes, competency and systems (qual.)

Looking to hear your inputs.

Thanks in advance.

Answer 1

I would probably use the classic profitability tree to figure out the drivers causing the decline.
e.g.

Revenue assessment:

- P or V declined?

Cost asseessment:

- FC or VC increased?

Once I figure out what drivers, dive deeper into whats causing them. E.g. Volume = utilisation problem or perhaps ineffective marketing etc. Then ask for data and so on.

Answer 2

Hi,

I would recommend the following approach to profitability cases:

1) Ask clarifying questions:

- Clarify the business model (i.e. how the business works and what are the revenue streams / core products or business lines). Why do you need to know the revenue streams? Because it's one of the most critical pieces in understanding the business model. An example is Oil&Gas with up-, mid- and down- streams that are completely different businesses.

- Clarify the objective both in money terms and timeline (e.g. Our objective is to increase profits by 5M in 5 years). When you have a to select from several options in a case - clarify the selection criteria

- Clarify other possible limitations if you feel that it's necessary

2) You make a classic profitability structure adapting it to the case. Sometimes cases are not that easy as just declining profits. For example, if the profits are lower than planned, it is either because we have problems with profits or we have problems with planning. Try to be MECE here.

3) While you do your structure and split revenues into price and quantity - add proactively the 3rd box with the "Mix". Thus you show your business sense and demonstrate that you know the most common case traps. Pls note that the "mix" can be anything - geography, customer, product, etc. You split the costs into fixed and variable.

3) Costs I would split into Fixed and Variable

4) I would start the case by checking whether its increasing revenues, declining costs, or both - so that you could eliminate the part that is irrelevant

5) If it is the quantity problem I would further analyze whether it's the external market problem or an internal one

6) If it is the internal problem you have to understand what we are doing differently now, that our volumes are declining. Which structure to use? Depends on the industry. You may look at the classic marketing structure - Product / distribution / marketing / pricing to identify what is driving the decline in sales. Be aware that this particular structure will work in retail, while in the other industries it may be different (e.g. sales process instead of distribution, etc.)

Best!