Profitability decline; understanding the root cause

business situation profitability
New answer on Apr 01, 2021
3 Answers
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Anonymous A asked on Mar 31, 2021

Hi, i have a questions regarding profitability cases.

Let's say we have a client who is selling white wine and the quantity of wine bottles has declined over the past three years. To understand the root cause of the problem, i would then look at the qualitative factors that might cause the decline (3Cs / Business Situation Framework).

When looking at the customers, would you then only look at the customer segments (size, growth, preferences) of white wine or would you "zoom out" one step to look at the different customer segments (size, growth, preferences) of wine in general (e.g., red, white, rosé) or even other alcoholic beverages?

What would make more sense and how do i decide which level to choose?

Thanks in advance!

(edited)

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Franco
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replied on Mar 31, 2021
Ex BCG Principal | INSEAD | 10 yrs in consulting | Interviewed >200 Career Switchers, MBAs, Undergrads in Europe and USA

In general terms for a case like this, I would start off with the classic revenue-cost framework, because it's the most comprehensive and allows you to immediately direct the focus on costs or top line and deep dive from there.

But like most of the cases, also here you can apply different frameworks (3C) and reach the same conclusions. So following your example, you should definitely start broad and look beyond the white wine market to spot any changes in the market shares of the different products (I would also consider non-alcoholic beverages as a potential substitute for white wine). So in terms of customers

  • The first step would be to understand whether the white wine market as a whole increased, decreased, or stayed stable (and this can be affected by a switch in preference of the market towards other types of beverages)
  • If there is no major switch in the market I would deep dive into the segments within the white wine segment.

Hope it helps

Franco

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Raj
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replied on Mar 31, 2021
Strategy&| ex-interviewer | 78+ coached |95% success @ MBB, S&, RB, LEK, OW, Big4 [SUCCESS STORIES BELOW]| engineer

This is an interesting point, and you are on the right track to think about benchmarking other wine types.

This would actually be covered in using a framework like Porter's 5 as Substitutability. I would suggest thinking through the problem at that level (call it L0). Then L1 would be the 3C's at the level of white wine only

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Ian
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replied on Apr 01, 2021
BCG | 100% personal interview success rate (8/8) and 95% candidate success rate | Personalized interview prep

Hi there,

You may be getting my most comprehensive answer written to date. I hope this helps :)

GENERAL PROFITABILITY APPROACH

You need to understand the industry + company context from the prompt itself to figure this out...cases and case types cannot be memorized...you have to adjust every single time!

Example: LOOKING FIRST at Economy/Industry

In my Hot Wheels case, you're a Korean OEM with falling profits. You operate in the US and Japan. The FIRST thing you have to look at here is the general market AND how competitors are doing. Otherwise, you will never learn that US OEMs are doing well in the US while Korean OEMs are NOT doing well in the US. Then, you'll never solve the crux of the case which is that transport times+costs are prohibitively like (Just in Time delivery is the #1 product characteristic).

If you don't look at economy/industry first here, you will not solve the case in a time effective manner.

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/hot-wheels-186

Example NOT looking at Economy/Industry

Take my "Chinese Airline During Covid" case example. We know that the airline is in trouble due to covid. We can make the deduction that this is caused by a reduction in demand. As such, we don't really need to look into rest of market/industry

So, we want to "repair" existing revenue streams as much as possible. So, first let's see what we can do. Then, whatever "gap" is remaining, we want to fill it with alternative revenue streams. Finally, whatever we can't make up for, we have to fix through cost cutting (ideally cutting unused capacity). See the logic here?

And it'll change every time based on the case itself...think critically!

https://www.preplounge.com/en/management-consulting-cases/candidate-led-usual-style/intermediate/chinese-chess-airline-business-during-covid-19-191

GENERAL PROFIT DRIVERS

Volume Down: Competition reduced prices or improved their product (outcompeting you), competition just launched effective marketing, regulation has slowed you down, economic decline, environmental disaster, tarrifs, suppliers disrupting your production, your product no longer applies to the customer (i.e. decline has been happening for a while)...and so on and so forth...

Price Down: We're in a price war, costs have gone down so we're realising this, regulation has created a price cap, we ran a discount program

Variable Costs Up: Raw materials costing more, inefficient contracts, ageing workforce, deteriorating workforce, regulations, quality control

Fixed Costs Up: Recent large investments

================================================

REVENUE ISSUES/IMPROVEMENTS

Remember, you need to apply your revenue improvement ideas to the specific case at hand. You cannot be generic.

That said, some major ways companies boost sales include:

  • SAAS (software as a service)
  • (Relatedly) Subscription revenue
    • Get people onot subscription plans (i.e. Netflix)
  • Behavior-changing "memberships" - i.e. Amazon Prime
    • When people enter Prime membership, they actually actively spend more than they did before
  • Bundling
    • I.e. sell a few things together
  • Radiation
    • Sell products similar to the current one
  • Low-price entry
    • Get someone in with a super cheap/good deal, then, now that you have them as a customer, sell additional, higher-margin products (insurance companies do this, for example)

==================================================

COST ISSUES

In general, for determining cost issues, you need to break down the problem into a tree/root-cause analysis and ask the highest level (but specific) questions first! In this way, you essentially move down the tree.

How do you identify where to look? Well, you need to look into whichever of the following 5 make the most sense based on where you are:

  1. What's the biggest? (i.e. largest piece of the pie...most likely to change the end result)
  2. What's changing the most? (I.e. could be driving the most and most likely to be fixable)
  3. What's the easiest to answer/eliminate? (i.e. quick win. Yes/No type of question that eliminates a lot of other things)
  4. What's the most different? (differences between companies, business units, products, geographies etc....difference = oopportunity)
  5. What's the most likely? (self-explanatory)

https://www.preplounge.com/en/consulting-forum/structure-breakdown-for-costs-7963

https://www.preplounge.com/en/consulting-forum/inventory-costs-how-to-segment-6861

https://www.preplounge.com/en/consulting-forum/direct-and-indirect-instead-of-fixed-and-variable-6272

https://www.preplounge.com/en/consulting-forum/when-should-i-break-down-costs-as-fixed-and-variable-as-opposed-to-over-the-value-chain-5990

Major Costs - Areas to Cut

FC

  • Rent
  • Labour (salaried employees)
  • Transport (if we own the trucks, etc.)
  • Capex
  • Utilities (for the office, warehouse, etc.)
  • Cbsolescence (wrong word...this is amortization/depreciation)
  • Stolen objects (but shocked you heard this in a case)

VC

  • Labour (hourly employees)
  • Transport (if we pay a company per load)
  • Fuel/truckers (if we own our own trucks etc. for transport)
  • Utilities (if you need more energy to make more widgets)
  • Raw Materials (why wasn't this included? Big one to miss)
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Anonymous A on Apr 01, 2021
thank you! but wouldn't looking at the overall economy / external factors before pinpointing the symptom be "boiling the ocean"?
Franco gave the best answer

Franco

Ex BCG Principal | INSEAD | 10 yrs in consulting | Interviewed >200 Career Switchers, MBAs, Undergrads in Europe and USA
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