Cookie and Privacy Settings

This website uses cookies to enable essential functions like the user login and sessions. We also use cookies and third-party tools to improve your surfing experience on preplounge.com. You can choose to activate only essential cookies or all cookies. You can always change your preference in the cookie and privacy settings. This link can also be found in the footer of the site. If you need more information, please visit our privacy policy.

Data processing in the USA: By clicking on "I accept", you also consent, in accordance with article 49 paragraph 1 sentence 1 lit. GDPR, to your data being processed in the USA (by Google LLC, Facebook Inc., LinkedIn Inc., Stripe, Paypal).

Manage settings individually I accept
2

Profitability analysis: What has happened

Hi,

When facing the question: "our profitability declined by 10%, what has happened, and how to overcome them"

Shouldn't I start with the R-C relation (while adding the mix for qualitative analysis;considering different components in the mix per industry) ? I dont want to come across as someone who memorizes this, but I cant overlook it as well.

The analysis later on, on how to improve, should take a different structure to be tailored upon the situation.

Looking to hear your thoughts on how I can structure it initially.

Hi,

When facing the question: "our profitability declined by 10%, what has happened, and how to overcome them"

Shouldn't I start with the R-C relation (while adding the mix for qualitative analysis;considering different components in the mix per industry) ? I dont want to come across as someone who memorizes this, but I cant overlook it as well.

The analysis later on, on how to improve, should take a different structure to be tailored upon the situation.

Looking to hear your thoughts on how I can structure it initially.

2 answers

  • Upvotes
  • Date ascending
  • Date descending
Best Answer
Book a coaching with James

1 Meetings

11 Q&A Upvotes

USD 159 / Coaching

Hi,

In my opinion, it is absolutely fine starting with the standard Revenue and Costs structure to understand why profitability has declined. Effetively driving down each of these will lead to identifying the key issues that are impacting the case and you can then address more specifically how to fix them.

However, you are right to try and avoid being too generic and memorising standard structures. Remember though, that this should not mean that you shouldn't use simple structures if they make sense. The most important thing if you do use them is to ensure that you have understood the key issues / levers that matter to the case in question and bring them out in the second and third levels of your structure. That is how you avoid appearing to have memorised structures. For example, in a profitability tree, avoiding a generic Fixed vs Variable cost breakdown and instead identifying the key cost buckets that really matter for the client in question - these will be different if considering manufacturing vs pharma vs oil and gas.

Let me know if you have any more questions.

Best,

James

Hi,

In my opinion, it is absolutely fine starting with the standard Revenue and Costs structure to understand why profitability has declined. Effetively driving down each of these will lead to identifying the key issues that are impacting the case and you can then address more specifically how to fix them.

However, you are right to try and avoid being too generic and memorising standard structures. Remember though, that this should not mean that you shouldn't use simple structures if they make sense. The most important thing if you do use them is to ensure that you have understood the key issues / levers that matter to the case in question and bring them out in the second and third levels of your structure. That is how you avoid appearing to have memorised structures. For example, in a profitability tree, avoiding a generic Fixed vs Variable cost breakdown and instead identifying the key cost buckets that really matter for the client in question - these will be different if considering manufacturing vs pharma vs oil and gas.

Let me know if you have any more questions.

Best,

James

Book a coaching with Vlad

97% Recommendation Rate

404 Meetings

11,346 Q&A Upvotes

USD 239 / Coaching

Hi,

I would recommend the following approach:

1) Ask clarifying questions:

- Clarify the business model (i.e. how the business works and what are the revenue streams / core products or business lines). 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.

- Clarify the objective both in money terms and timeline (e.g. Our objective is to increase profits by 5M in 5 years). When you have a to select from several options in a case - clarify the selection criteria

- Clarify other possible limitations if you feel that it's necessary

2) You make a classic profitability structure adapting it to the case. Sometimes cases are not that easy as just declining profits. For example, if the profits are lower than planned, it is either because we have problems with profits or we have problems with planning. Try to be MECE here.

3) While you do your structure and split revenues into price and quantity - addproactively 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. You split the costs into fixed and variable.

3) Costs I would split into Fixed and Variable

4) I would start the case by checking whether its increasing revenues, declining costs, or both - so that you could eliminate the part that is irrelevant

5) If it is the quantity problem I would further analyze whether it's the external market problem or internal one

Best!

Hi,

I would recommend the following approach:

1) Ask clarifying questions:

- Clarify the business model (i.e. how the business works and what are the revenue streams / core products or business lines). 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.

- Clarify the objective both in money terms and timeline (e.g. Our objective is to increase profits by 5M in 5 years). When you have a to select from several options in a case - clarify the selection criteria

- Clarify other possible limitations if you feel that it's necessary

2) You make a classic profitability structure adapting it to the case. Sometimes cases are not that easy as just declining profits. For example, if the profits are lower than planned, it is either because we have problems with profits or we have problems with planning. Try to be MECE here.

3) While you do your structure and split revenues into price and quantity - addproactively 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. You split the costs into fixed and variable.

3) Costs I would split into Fixed and Variable

4) I would start the case by checking whether its increasing revenues, declining costs, or both - so that you could eliminate the part that is irrelevant

5) If it is the quantity problem I would further analyze whether it's the external market problem or internal one

Best!

Related case(s)

The Madhouse Animation Crisis

Solved 5.7k times
The Madhouse Animation Crisis Your client is Madhouse Studios, one of the largest anime producers in Japan. The anime-industry is flourishing. Originally revenue was generated mainly in Japan but the trend is that revenues outside of Japan are growing at a steady rate of 15% a year as more and more non-Japanese people enjoy anime. Despite this rapidly growing new segment, Madhouse lost $6m in profits at the end of 2017 even though profits were growing steadily the years before. Madhouse has given you the objective to find the root cause of the loss in profitability and to advise them on how to proceed from here.
4.2 5 114
| Rating: (4.2 / 5.0)

Your client is Madhouse Studios, one of the largest anime producers in Japan. The anime-industry is flourishing. Originally revenue was generated mainly in Japan but the trend is that revenues outside of Japan are growing at a steady rate of 15% a year as more and more non-Japanese people enjoy anim ... Open whole case

Water flows

Solved 5.3k times
Water flows We are a German owned water provider company based in the south west of the United States. As the biggest water provider in the region we serve the majority of the south west region. We measure our performance using the Economic Value Add (EVA) valuation technique. We are currently at a negative EVA level; what do you think we should do to achieve a positive EVA?  
3.4 5 73
| Rating: (3.4 / 5.0)

We are a German owned water provider company based in the south west of the United States. As the biggest water provider in the region we serve the majority of the south west region. We measure our performance using the Economic Value Add (EVA) valuation technique. We are currently at a negative EV ... Open whole case

Hot Wheels

Solved 4.8k times
Hot Wheels Problem definition: Our client is Korean Car Parts (KCP), a multi-national original equipment manufacturer (OEM) of car parts based in Korea. They've recently seen a decline in profits and have brought us in to understand how to address this falling profitability.
4.6 5 284
| Rating: (4.6 / 5.0)

Problem definition: Our client is Korean Car Parts (KCP), a multi-national original equipment manufacturer (OEM) of car parts based in Korea. They've recently seen a decline in profits and have brought us in to understand how to address this falling profitability. Open whole case

Chinese Chess - Airline Business During COVID-19

Solved 3.3k times
Chinese Chess - Airline Business During COVID-19 Sky China, a government-backed Chinese airline, has recently seen profits plummet due to COVID-19. Profits are down 80% in the months of February and March, but are showing early signs of a rebound in April.  They've brought you in to first investigate what can be done immediatedly to prevent hemorrhaging cash and surive in the short-term. They are also looking to see how the current situation can be viewed as an opportunity, and what can be done to prepare for the future. 
4.3 5 101
| Rating: (4.3 / 5.0)

Sky China, a government-backed Chinese airline, has recently seen profits plummet due to COVID-19. Profits are down 80% in the months of February and March, but are showing early signs of a rebound in April. They've brought you in to first investigate what can be done immediatedly to prevent hemor ... Open whole case

Fast Food Pricing

Solved 1.3k times
Fast Food Pricing Our client is a global fast food restaurant that offers a wide range of breakfast and rest of day products including burgers, salads, fries, and beverages, and offers combo bundles. Over the last ~5 years in the US, our client has seen relatively flat guest count, but a decline in profitability. They have launched several large national advertising campaigns focused on highlighting their "value" products which have not turned around profits the way they had hoped. The head of the US business has asked us to help him understand why gross margin is decreasing, and specifically to take a look at his menu's pricing. Is there an issue with the menu pricing structure? If so, what would you recommend to restructure the pricing? What is the overall implications to volume and gross margin with a revised pricing structure?
4.3 5 52
| Rating: (4.3 / 5.0)

Our client is a global fast food restaurant that offers a wide range of breakfast and rest of day products including burgers, salads, fries, and beverages, and offers combo bundles. Over the last ~5 years in the US, our client has seen relatively flat guest count, but a decline in profitability. The ... Open whole case