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How to ask for profitability segmentation

Carl asked on Aug 10, 2019 - 3 answers

Hi,

When doing a profitability case, I usually like to find out whether the profitability have changed across segments (Customer segments, product mix) and then go deeper in to the specific "problem segment".

How would you do this, and how would you incorporate the segment part in a framework? Is it okay to just ask "what are the segments of profitability for this client?", to me that sounds a bit generic..

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Vlad
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replied on Aug 11, 2019
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Hi,

I suggest to do 2 things while solving these types of cases:

1) At the beginning of the case, you should ask the clarifying question: "Could you pls tell me more about the business model and what are the revenue streams?". I suggest to ask this question with any case, even if it is not a profitability type.

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.

2) 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.

Good luck!

Anonymous replied on Aug 11, 2019

Hi Carl,

This is a good approach for the most part, but it's limited (more on that later). In regards to incorporating this into the framework, you need to make it specific to the prompt. Clarifying questions come in really handy here, because you can gauge from what angle to tackle this part(based on industry, objective, etc.).

What I mean is, if you've been told about a clothing company that sells pants, shoes, and shirts, well, it's pretty clear you should break down this problem by product mix, and articulate what products. If you're not told the mix, but it's clear this is a product mix question, then hypothesize/customize in your framework! i.e. "I'd like to look at this by product mix, i.e. pants, shirts, shoes, to see..."

However, your approach is limited for a few reasons:

1) When looking at product mix, you should look at customer segments within the product mix. So "Is X product unprofitable? Is this because of high costs, or are we over/under priced. Importantly, are we targeting the right demographic with our pricing, advertising, placement, etc"

2) There are more segments than just customer and product - if you think this way you will miss the point on different cases

For example:

a) If you have a company that sells commodities (can be an oil company, or maybe a better reference is a nickle mine), well, all of a sudden neither customer nor product mix work do they? In this case, you need to look at commodity prices/trends, and focus on the costs along the value chain. For example. if we're oil and gas, you're probably not looking at customer segments. It might be product mix, but only if you've got a vertically integrated company that sells products upstream, midstream, and downstream (i.e. crude, LNG, petrochemicals, etc). If not, it could be purely a cost-out problem

b) If we're a multi-national company, or a franchise, well, maybe our issues are geographical. If you're a US-wide burger chain, you'd probably want to segment by East Coast, Midwest, South, etc.

There are other examples, but i think you get the point. In summary: Tailor your framework to the prompt: industry, situation, objective, etc.

Felix replied on Aug 10, 2019

Hello Carl,

I am fairly new to cases in general, but I have done mostly profitability cases so far. For me there are 2 cases how to handle this,

Case 1: If the case specifies 2 segments, such as urban and suburban stores, you should ask for the difference in revenue/cost/customer behavior in the 2 segments.

Case 2: If the case does not specify any segments, I would explain which item i would like to segment (for example nb units sold decreased) and then ask for the data. (do you have any information what the different segments are for units sold)? There can be so many different segmentations: by region, channel, product, customer, etc. that i think it has very little benefit for the interviewer to let you try every signle segmentation possible.

I hope that helps.

Best, Felix

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