Declining Profitability Case

Hi Anonymous,

I would not use either of the two, as you would definitely need more elements in the structure. In particular, assuming you have clarified the goal, I would recommend you three buckets: (i) Identify the problem. (ii) Propose a solution. (iii) Consider risks.

This is how I would suggest you to proceed:

Step 1: Identify the problem. You can proceed through the following steps:

1. Segment by profitability/revenue channels. Ask the interviewer how the client segments its profitability channels. In your case, that may be related to the different products in supermarkets, or type of restaurants
2. Identify which channel is the priority. Ask for the change in profitability for each channel. Then start from the one that had the biggest decline in profits.
3. Identify whether it is a revenue or cost issue. Ask how revenues and costs changed for the channel that you have identified. Start from the area which has the major negative change in absolute amount
4. Analyse the components of revenues and/or costs. According to what you found in step 3, you should further segment revenues in price and volume and costs using fix or variable costs, or dividing them through the value chain.
5. Identify the component that is underperforming. You can do so comparing the client performance with its past performance, or benchmarking competitors on that area.
6. Identify the reason for the problem. Usual areas to consider are:

• Customers (for revenues) /Supplier (for costs) issues
  • eg revenues (customer issue): changes of preferences of the customers for eco-friendly products
  • eg costs (supplier issue): increased prices for suppliers
• Competitors issues
  • eg revenues: decreased prices for competing product
  • eg costs: lobbying strikes/ regulations against us
• Client issues
  • eg revenues: stopped to do marketing campaigns
  • eg costs: wrong process development/budgeting

Step 2: Propose a solution. In general, there are two main things you can do to increase revenues and two to cut costs:

• Revenues increase strategies
  • Work on current products
  • Work on new products
• Costs decrease strategies
  • Decrease the cost of each unit
  • Decrease the number of units of cost

Step 3: Consider risks. Present all the elements that could be risky and should be analysed further before a complete recommendation, according to what you found. Eg: it may be necessary to launch a pilot marketing campaign before the main one, or consider whether reducing benefits for sales people may lead to resignations, etc.

This approach joint with the proper communication of the structure can definitely help you to stand out, as many candidates will focus on analysing the problem only, or even on generic revenues and cost analysis.

Best,

Francesco

For an open ended declining profitability question like the one posed, a combination of your two approaches would be best, assuming the interviewer doesn’t let you probe deeper to understand root causes. So, start out with a purely MECE structure of revenue and cost but then break down the potential revenue and cost issues.

For revenue, you want to explore the Price Quantity equation:

• Pricing: Has base pricing changed? Have any promotions been run recently / discounts been given? Has there been a shift in the mix of orders to lower cost items that has effectively resulted in lower overall average price per order?
• Quantity: Has there been competitive pressure (e.g., new competitor offerings, new competitor stores, new competitor pricing, increased competitor marketing)? Have certain restaurant channels (e.g., malls vs stand alones) seen a change in traffic? Have you changed your menu (e.g., removed certain menu items)? Have your changed your order system (e.g., relied more on self-serve)?

For cost, you want to split the cost into the typical Fixed and Variable cost:

• Fixed cost: Fixed cost for fast food restaurants are every cost incurred even if the restaurant is closed. Have rents increased? Has your interest rate gone up? Have insurance rates gone up? Have tax rates increased?
• Variable cost: Fast food restaurants have mainly 3 types of variable costs. Have your COGS increased (e.g., food and beverage costs)? Have your labor costs increased? Have your maintenance costs increased (doubtful)?

By combining the two approaches, you demonstrate to the interviewer that you are a structured thinker and that you understand the “2nd level” issues. Don’t worry about trying to “stand out”. Just make sure that you are answering the question. And, be sure to talk through the problem out loud and in a structured way.