Structure in a declining market? Always recommend to exit?

Exit Declining Market profitability
Recent activity on Aug 31, 2018
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Anonymous A asked on Aug 30, 2018

Case Study Interview Exit Declining MarketHey there,

In a case I stumbled upon this table and the question was to figure out why the profits have declined for 2 years. I assumed that client unit sales is the same as revenues.

My structure was it do drill down on the segment which shrinks faster than the market (hypothesis: the major, internal cause for the decline in profits) and exclude the other two segments where the company is doing "all right" i.e. decline in revenues is slower than the market decline.
Hence, my "what" was that revenues in the value-added segment are decreasing faster than the market and I then wanted to figure out the "why" this is happening there by using a qualitative structure (looking at the product compared to the competition etc.). Once I would figure out this why I could come up with recommendations.

However, the solution states that we should exit this market. I was wondering if my approach is still feasible given that there might be exit costs etc.

Furthermore, I have two questions regarding the solution:

1. I don't get why the solutions say market share has been declining. If I calculate it, I get a difference of 0.05%. How can I quickly see if the market share in such a table is declining?

2. Also the solutions say that units ("volume") decrease. However, if I calculate it for each of the clients segments (e.g. Value added units in 2000 = 50M/8K etc.) I get that units actually have increased. Is this a mistake in the solution?

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Francesco
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replied on Aug 31, 2018
#1 Expert for Coaching Sessions (3.600+) | 1.300+ Reviews with 100% Recommendation Rate | Ex BCG | 8+ Years of Coaching

Hi Anonymous,

in terms of the structure I would personally start asking the interviewer which are the costs as well. In this way you could calculate the profits for all the segments as a first step, and identified the problematic one. Concentrating on the segment with the highest declining revenues compared to the market would not be ideal for two reasons:

  • you may have a segment with the highest decline in percentage terms, but not in absolute terms
  • the segment with the highest decline in revenues may not be the one with the highest decline in profits

As for the other questions you had:

  1. The safest thing to do in this cases is doing all the steps: sum up revenues in the market in the two years and the one for the client in the two years listed, and compare the two
  2. The only volume decreasing is for "Value-added"; unless the solution is referring to this, yes, it is probably a typo

Best,
Francesco

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Francesco

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