Identifying the 'why' in Profitability cases?

Question

Hi all

I have a question regarding profitability frameworks - how to understand the drivers (the 'why') in a profitability case.

It strikes me that the standard profitability framework (Profit = Revenue [Price*Volume] - Costs) is great for identifying the 'what'.

By this I mean the the framework will allow me to diagnose (for example) that volumes have fallen, which has reduced revenue, which has reduced profits.

However, in my practice cases I can't seem to use the framework to dive into why volume is falling (at least, not in a way that feels MECE).

For example, if volume has fallen because of a competitor entry, I don't think I would identify this point in a structured manner from the P = R - C equation.

So, my question is: how can I draw a profitability issue tree that allows me to consider the 'why' of a change in profitability?

To continue my example, maybe I could create another level on the issue tree and breakdown volume into competitive dynamics, customer preferences, external factors etc. but I'm not sure I could be collectively exhaustive in this approach?

Any thoughts much appreciated

Answer 1

Understanding the "WHY" will be quite easy once you have already isolated the "WHAT". The questions will come more or less naturally! It all depends on what the actual numerical driver of the problem is! If it is average quantity per sale for example, then you just need to ask the how- and why-questions to find out what determines this quantity and which influencing factor has shifted.