The Profitability Framework, Rethought

The profitability framework is the old standby for profitability decline cases. However, using it definitely doesn’t impress the interviewer and although it’s mutually exclusive, it’s probably not collectively exhaustive.

I’ve done some analysis of my previous cases and come up with a new profitability framework that has more elements than the traditional, staid version:

Profitability Framework

Decreasing Revenues

When you get to revenues I’d ask about price and volume just to get a better idea of what’s exactly changed. Then, you can dive deep into internal and external factors depending on where you think the problem most likely lies. Next, I’m going to explain what I sort of questions I’d ask in each of the factors I’ve listed just to give you more detail.

Internal Revenue Factors:

1. Changes in Pricing:

Has pricing changed, and if so why?

Is this an industry wide or client specific trend?

How price sensitive are customers? (to see if you can raise prices)

2. Changes in Supply:

How many units are we making compared to previous years?

If we’re making less units, is it because we’ve lost capacity or because demand has dropped?

What’s our capacity utilization? (to see if we can sell assets or manufacture for a competitor if we have unused capacity)

3. Product Quality

What do customers think of our products?

Has product quality changed recently, and if so why?

How do our products compare with the competition?

4. Innovation

Does the client have any new products in the R&D pipeline?

Is the client willing to operate outside of its traditional geographies and / or traditional product lines?

External Factors

1. Competition

What’s the industry structure like?

What do we compete on? Do customers care about this?

Have there been any new entrants and have that affected our sales?

Are there any substitutes to our products?

2. Customer Trends

Have customers moved away from our product, and do we know why?

3. Distribution Channels

What are the main distribution channels for this product?

Which channels do we operate in and over which channels do we have the most supplier power?

4. Sales and Marketing

How is the product sold and marketed?

How large is our sales force, and how do we incentivize sales?

Increasing Costs

I’m also going to outline what the components of the various fixed cost categories are as well since not everybody is probably familiar with the terminology.

Fixed Costs:

1. Plant, Property, and Equipment (PPE) – Land, Utilities, Equipment

2. Selling, General, and Administration (SG&A) – Commissions, Sales/Admin Salaries, Marketing Expenses, Promotional Expenses.

3. Labor – Salaries, Benefits, Training, Insurance

Conclusion

Hopefully, this new framework helps spark your creativity. I’ve found that a solid initial framework really allows me to get to the heart of the issue quickly. I’d even take the framework from the above and further customize it to your needs further. Good luck!

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