COST REDUCTION – VALUE CHAIN ANALYSIS

Profit Client is facing reduction in earnings/profits (bottom line) due to possible increase
OVERVIEW
in cost of operations. You need to understand reasons and give recommendations

Revenue Cost

Storage &
R&D Raw Material Processing
Transportation

Transportation to Customer
Machinery Storage Distribution Marketing
Warehouse Service

Number of
Employees Quantity per trip Sales Channels CRM Repair
warehouses

Cost per
Technology Number of trips Sales Force Returns
warehouse

Capacity
Value per trip Efficiency Spare Parts
Utilization

Packaging Cost per trip

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DECLINING REVENUES
Profit Client is facing reduction or stagnation in earnings/profits (bottom line) due to
OVERVIEW possible decrease in revenues (top line). You need to understand reasons and give
recommendations
Revenue Cost

Price Number of Units

Price Elasticity Number of Number of units/Ticket size

Frequency
customers per customer

Competitors Supply Internal Internal

Demand

Substitutes
Internal External Internal External External External

Competition Value Chain PESTEL

PESTEL

Change in consumer
preferences
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CUSTOMER JOURNEY
Customer Journey is a framework which can be used in any kind of situation. At any point in analysis if you are stuck, this can be used to ensure that all
possible options are covered. This is the most common framework used in unconventional cases, and can be used as a part of other conventional cases as well.
It refers to the journey of customers right from the start – when they develop a need for something, and how various factors can influence their journey. For
example, if customers require something, they should know about it (awareness), they should be able to reach a point where they can buy it (accessibility), the
product should be in stock (availability), and they should be able to afford it (affordability).

Customer Journey
(from left to right)

Product Purchase Post Purchase

Need Awareness Accessibility Affordability Availability Ambience
Selection Action Services

External
Promotions Internal External Stock-outs Product Payments
Factors

Internal Factors Value Chain Competition Substitutes Final Packaging

Utility Compliments Billing

PESTEL

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DELHI METRO NETWORK
The Delhi Metro network is facing profitability issues in CP – the profit is not as
high as other stations. Figure out why and suggest recommendations.
Sure. Since when has the station facing this issue?
Since the beginning.
Okay. Now, profits are a function of the revenues and costs. So are the costs
higher as compared to other stations or is the station not generating revenue
as high as other metro stations?
The revenue is not as high as other stations. You can ignore costs in this case.
Okay. I would break down the revenue streams into 3 broad categories –
tickets, advertisements and outlets. Is there any other source of revenue for
the station as well?
No, you can proceed with these three.
Is there an issue with one of these revenue streams as compared to other
metro stations, or shall I look at all of them to find where the problem is?
The revenue from outlets is less as compared to other metro stations.
Okay. The revenue from the outlets depends on the total number of outlets,
and the rent per outlet. Is the number of outlets same as other metro
stations?
Yes, assume it to be roughly the same.
What about the rent? How is it charged?
The rent is fixed for each outlet.
Since rent is the same clearly price is not an issue for the shopkeepers.
They would be looking into other aspects when they rent an outlet. They would
also be considering the expected revenue when they operate in a metro
station, the other costs that they might incur, the margins that they have – if
they differ across stations, and also conditions of the rent agreement. Am I
missing something?
Yes, that is correct. Expected revenue, incurred costs and margins are the
same. You can explore the reasons of why rent agreement be an issue.
Sure. The various terms of a rent agreement include the rent, the duration, and
the lock-in period. Since the rent is the same, is the duration or lock-in period
different? Probably longer than others which would be a higher risk for the
shopkeeper?
Yes, that is correct. The lock-in period for outlets in other metro stations is 2
months while in CP it is 6 months, due to which they do not prefer to rent
them. Can you suggest recommendations?
Yes. First, we should look into why the lock-in period is 6 months in CP while 2
months in other stations, and if it is possible it should be reduced. If not, then
the rent can be reduced. We can also opt for differential pricing, where the
rent is a function of the area and location of the outlet inside the station – for
example areas which attract high footfall can have a higher rent.
That’s all. Thanks.
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