How to find the specific root cause of a profitability case

Question

Dear all, I'm a bit stuck in the profitability case, especially the process of defining root cause. Would appreciate any suggestions.

Let's assume that the profit is going down, due to volume drop (cost, price remain the same). Here's my questions:

1.Is it okay to split the root cause by "internal (company / product) and external (client / competition)? Or there's other better way to structure?

2.I just realized this approach doesn't seem very clean since there is some overlapping.

For instance, if the root cause was due to end user's purchase preference - prefer buying cheaper products (competitors are providing promotion), is this root cause catagorized in "client (purchase criteria)" , "competition", or "company (company's business model weakness)"? My interviewer told me that other competitors are not facing a volume drop, so it seems that this is a more "internal" issue. My confusion is that, if I say I want to focus on the "internal issue (company / product), I will miss the "client" and "competition" factor since they are categorized in the "external issue".

3.How could I "drill down" the root cause of profitability issue? Is it more like asking tons of questions (client / company / competition / product) to gather thoughts and find a conclusion, or is it branching out internal (company / product) or external (competition / client) first and then try to eliminate unrelevant factors and arrive the final conclusion?

4.Given that our client's product volume has reduced, how do I use a "hypothesis driven" approach to find the root cause?

Thanks in advance!

Answer 1

Hi,

Your original approach of using one-fits-it-all approach is fundamentallty incorrect.

First of all, there are 3 ways to split your revenues:

Price / Units sold / mix
# of customers / av check
Market * market share

You should select one depending on the context, objective of the case and the industry.

Then, depending on the industry / objective and the context you drill down further.

For example, in fashion retail, you can split customers into traffic and conversion. In food retail, it will not make any sense since all the customers will be doing purchases. You would rather directly split into: Macro factors (store format, brand), local factors (location, store visibility, etc) and so on.

In banking, you would look into interest income, transactional income, and commissions. And so on.

Thus you should be flexible and define the right approach from a library of approaches in your head, rather than coming to the interview with a single solution for all profitability cases

Best

Answer 2

I think you could really use a session with a case coach. I get the impression you're a "peak information overload". Meaning you've absorbed a lot of different frameworks, concepts, etc. and you're trying to turn this information into a formula/procedure.

This is a dangerous approach!

Also, please note: is it automatically an internal issue if competitors are not facing a volume drop? Maybe they've lowered prices because of an external shock, and as a result their volumes have remained steady.

________________________________________________________________

This short answer to your quesiton is: It depends. What do you think makes sense based on the context you know?

For Q#2: Does it matter if you "miss" client and competition if they're not a root problem? And, what questions do you need to ask to figure out if they are or aren't?

3) It's not about asking tons of questions. It's about thinking about which ones will most likely (and logically) get you to your answer. Be targeted.

4) All this means is thinking about the problem.

For example, 1) Could this be caused by a drop in customer demand? To find out, do we have info on any market shifts (recession, regulation) or customer preference changes? If the size of the pie isn;t shrinking then

2) Could this be due to competition? To find out, do we know if they've been gaining market share at our expense? If this isn't because of competition or customer changes, then

3) Is it because of us? To find out, have we done (or not done) something recently that was bad? What products do we sell and which ones have seen declines?

Answer 3

Dear A,

Agree with Ian here, it looks like you are overloaded with information, so I would recommend you to take one session with a coach to put everything on its shelf in your mind.

If you need any help or advice, feel free to reach out.

Best,
André