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What is a good way to structure an industry-wide profitability problem?

Anonymous A asked on Oct 05, 2018

Hi, just wanted some ideas to proceed once I find out the profitability problem is an industry-wide one.

Also, what are some general recommendations to make to the company in this case, if it is a revenue and/or cost problem?

Would appreciate some advice and ideas, thanks!

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Benjamin replied on Oct 05, 2018
ex-Manager - Natural and challenging teacher - Taylor case solving, no framework
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Hi,

If the whole industry has a profitability probelm, I would firs try to understand where does the problem come from and then offer suggestions (depending on the root causes) :

- Does it come from sales ?: drop of volume (substitution, no more demand, new competition from other geographies), drop of price (price war started by a specifc player)

- Does it come from cost ? : increase of raw material costs, high exposure to one supplier with limited bargaining power, ...

- As a company do we have options to stay profitable within this industry ? Change operating model, change scale, create alliance with other players of the industry... If not consider switching to an industry where to current asset are valuable.

Hope this helps

Best
Benjamin

Alessandro
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replied on Oct 05, 2018
Bain & Company | University of Cambridge | CV/Resume writing | 770 GMAT
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Not exactly a structure, but in an industry wide profitability issue, there are a number of typical potential "answers" which you should explore and use your structure to narrow down / verify.

- Focusing on a segment: Overall industry may be declining, but a specific segment of it may be growing - for example, the overall "soft drinks" market might be shrinking, but health drinks in specifically is a growing market.

- Move into new, high growth industries/markets: if margins are under pressure in your home market (e.g. due to regulation, competition), you may look to expand into different industries/markets - either starting operations in a different geography, or "pivoting" into a related industry (with higher growth/margins).

- Put pressure on costs: If margins are tight industry wide, firms often end up having to compete on costs to survive - so answer is often a cost based one

- close up shop: this is always an option to remember, especially in a case where you might be looking only at a subsidiary of a larger parent firm. If you find there's no realistic way to fix profitability issues (assuming profits are negative), the best course of action may be to liquidate.

This is not necessarily an exhaustive list, and none are things you should recommend off the bat - rather, they are areas to explore further to determine if they are feasible.

Hope this helps!

Alessandro

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