Profitability Tree vs Value Chain Analysis for cases involving profitability decline?

Question

Hi, for profitability cases we can go with a profitability tree or a value chain analysis.

May I know how can we learn to decide whether to structure out a profitability tree or value chain analysis?

Example case prompt (Duke 2019 - Queen Bae):
Your client is Royal Honey, a manufacturer of premium organic honey that purchases its raw honey from a single farm in the Midwest. Despite record-high demand for high-quality organic honey nationwide, Royal Honey has experienced a gradual decline in profitability in recent years. Its CEO has come to you to determine why the company’s financial state has rapidly deteriorated over the past four years and to develop a turnaround strategy for the company.

Thanks!

Answer 1

Hi there,

Please don't forget the 3rd option of Total Contribution Margin!

In terms of which to go with, this highly depends on both the case (the clues given, the objective, and the industry) as well as your preference preference (how you more naturally think).

With the prompt you gave, I would go with classic profitability tree given it's pretty clear this isn't something value-chain will identify…I'd also go classic profitability over total contribution margin, given it's pretty clear we only have 1 product (honey)…though I would clarify this. This means product mix and margin for a given product won't help us as much either.

The market has high demand for honey, but we have a profitability decline…therefore we're going to be able to pretty quickly figure out whether it's a product/revenue issue or a cost issue.

Answer 2

If the case focuses purely on cost , then stick to end to end value chain. If its profit or revenue & cost or both, then start with the profitability tree and drill into the revenue and cost branch systematically. When you come to cost branch you might end up sketching the value chain anyway, depending on the case.

Answer 3

Hi there, and thanks for asking, Indeed, setting up the framework for a profitability case can be a bit confusing, ho... (read entire answer)

Hi there, and thanks for asking, Indeed, setting up the framework for a profitability case can be a bit confusing, however, I would advise you not to think of “THE” framework wh... (read entire answer)