Hi guys, I am bit struggling with approaching "change in profitability" questions. I see these differently as change in absolute profit, since the drivers could be a bit different. I am trying to come up with some thinking framework to capture how to investigate these cases (similar to declining Profits = declining Revs or inclining Costs or both).
Anyway, if speaking directly about decliling PROFITABILITY (not absolute profit), I was thinking that I could approach it as follows:
Declining PROFITABILITY can be cause by
- declining PROFIT/product
- declining REVENUE/product (=PRICE)
- inclining COST/product
- change in PRODUCT MIX (towards less profitable products)
So the question is, is this MECE approach or am I missing something important?
Thanks a lot, folks!
Hi Ian, thank you for extensive answer. However I still feel that if we strictly differentiate between decline in PROFITs (Revs - Costs) and decline in PROFITABILITY (Profits/Revenues) then for example we can rule out "volume down" factor from the equation. If I sell you 1000 products with profitability 20% or just one product with profitability 20%, my overall profitability EOY is still the same = 20%. However it significantly impacts my PROFIT in absolute values.
I would say that if you the case states that company has issues with profitability I can first find out how does it relate to absolute value on PROFITS. There are 2 options - PROFITS decreased, PROFITS increased or PROFITS remained the same. All of those could be related with PROFITABILITY decrease. Based on the answer, I would move with either R-C framework (for PROFITs declined case) or the one I stated above (PROFITs remained the same or even increased). Does it make sense or is my logic flawed?
(editiert)