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profitability case structure product /customer /distribution channel mix

Alice asked on Jul 04, 2017 - 6 answers
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Hi everyone,

I've practiced a few profitability cases recently and I've noticed that how they all end up with different product mix/customer mix/distribution channel mix etc. As a result, I was wondering whether I should incorporate the mix into the framework. The standard profitability framework seems too simple and I would want to break down the cost further by customer/product/channel etc. Any advice & thoughts are appreciated!

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Hemant
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replied on Mar 05, 2018
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A profitability case is, in the end, an operations case. If you are too quick to jump to the R=P*V equation, you show signs of a data junky who doesn't try to get a better feel of the "environment" this case lives in.

I STRONGLY prefer that candidates do NOT jump into the R=P*V game too quick. Ask a few overarching questions, find out who you are selling to and how that's changed, find out who you are competing against and are they fragmented/big, find out if your industry has seen a regulatory shift if relevant (e.g. shipping), find out more about HOW you sell (online, retail, reseller, etc), etc.

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Hemant, thanks a lot for your answer. It is definitely answering my question very well — Stephane on Mar 05, 2018

Sara
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replied on Jul 04, 2017
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Dear Alice,

the most important points in laying out your structure are: be MECE, be quick, be sensible. The breakdown that you are suggesting is a deeper layer that might not even be evident at the beginning of the case. Therefore I would suggest, as a rule valid on average, to bring it up only ahead in the case.

When the time to dig more into each element of your profitability tree comes, it is then a good idea to suggest that there are a number of dimensions you might use and then to pic the one that makes more sense in the specific situation.

However, each rule as exceptions and it might happen that the segmentation is easily understandable from the beginning. In this case, you can mention it with no disruption in the MECEness or speed of your structure. For example, if the case states from the beginning that there are two products originating income, you can already segment the revenues in 2 sub-branches correspondent to the products. Later on in the case, it might be necessary to create sub-brunches, splitting for example each product into different customer-categories. In this case, drawing a matrix might be a good idea to impress your interviewer.

Vlad
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replied on Mar 05, 2018
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Hi,

I recommend using two tools here:

  1. I recommend asking the clarifying question at the beginning of the case: How does the business work and what are the revenue streams? 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. And downstream basically generates 50% of revenues selling snacks on the gas stations. This is the most common pitfall in profitability cases (the 2nd pitfall is the Mix)
  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.

    While presenting the structure, provide some examples of what can be under the Mix bucket - geography, customer, product, etc.

    Good luck!

Vlad, thanks a lot for your hint. It is definitely answering my question very well. — Stephane on Mar 05, 2018

Francesco
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replied on May 31, 2018
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Hi Stephane,

I would personally go for neither the volume or the price classification. The ideal thing would be to first ask for the mix, then perform an analysis of the problematic segment only. The steps to follow thus would be the following:

  1. Segment by profitability/revenue channels. Ask the interviewer how the client segments its profitability channels (products, customers, distribution channels, etc.).
  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 or costs using fix or variable costs

Best,

Francesco

Danny replied on Jul 04, 2017

if it is a interviewee-led case, it may better not be incorporated. if it is interviewer-led, multi-layer framwork may show your deep thinking of the problem. And be cautious, profitability may not always end in that way. Best!

Hi Danny. It's a myth - it doesn't really matter who leads a case — Vlad on Jul 05, 2017

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