Organization changes in profitability decline

Question

Hi all. In a profitability decline case where the root cause is due to an internal organization change (e.g. sales force in the firm not trained to sell specialized products recently developed by a company; sales force not compensated enough), I would like to know what is the best way to ask probing questions in order to arrive at the problem. In an ideal situation, I'd ask "are any organization changes in the firm" and the interviewer would spell out any changes that occurred and we can conclude from there; however, I'd doubt things would easily play out like this.

Answer 1

Hi Adrian,

I would suggest the following structure:

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

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
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.
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
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.
Identify the component that is underperforming. You can do so comparing the client performance with its past performance, or benchmarking competitors on that area.
Identify the reason for the problem. Usual areas to consider are:

Internal (customer, competitor, supplier issues)
External (client issues)

In this case you should identify in the first step that the reason for the problem is a lack of revenues for a specific product due to client issues. At this stage, you should receive information that you have to solve an efficiency problem of the client.

Step 2: Understand what is creating the inefficiency. There are usually 4 reasons for an efficiency problem (i) labour; (ii) technology; (iii) a structural increase in demand; (iv) specific client/supplier issue

Step 3: Find the proper solution for that inefficiency. Solutions would be related to the kind of problem you found: (i) increase the efficiency of labour (eg more incentives or training); (ii) increase the efficiency of technology (new investment); (iii) cover the structural increase in demand (eg: increase supply); (iv) fix the specific client/supplier issue

In your case of course you would end in the first option.

Best,

Francesco

Answer 2

Hi,

What I understand is that maybe missing some steps in that tree. For instance, I would like to understand the following

Industry wide problem or just client's problem?
If client's problem, what's the historic trend ?
What's the sales mix looks like ?
What's the distribution channel and how efficient it is (benchmark with industry and historical data)?

This line of questioning gives me the idea A) what's wrong and B) I am not missing anything but have narrowed it down.

Now circling back to your question, "are any organization changes in the firm ?" , this seems to me a broad open ended question or fishing for data because you are unsure what's wrong. So I think your tree and line of questions needs tweaking.

Hope this helps!

Cheers!

Answer 3

Before you get to a solution, the first thing to do is identify the issues is with sales effectiveness. Assuming a MECE (mutually exclusive and collectively exhaustive - Google it) line of questioning you should be able to quickly identify that you have a revenue problem and that it's specifically with volume.

If volume is below reasonable expectations, I'd perhaps probe to see whether this is because of actions by the competition (presumably not) or the internal situation. Has anything changed internally (you should be given something here)? Are there the right products, right segmentation, etc.? If you're getting signs that all the more strategic/ structural stuff is right (your interviewer might wave you off that line of questioning) it will come down to operations - i.e. how good your sales team is at selling