"Our share price is falling, help." It sounds like a finance question, but this management consulting case study shows it is really a profitability case in disguise, set in an industry that is getting smaller every year.
Case Scenario
A client who sells military aircraft is concerned that its stock is losing value. How might you assist the client in raising its share price while looking into the reason for the decline?
Suggested Approach
Start by understanding that the value of a share depends on predicted earnings in the future. This awareness leads directly to a profitability framework (revenue and cost).
You should discuss both the income and the expense side as probable causes of declining earnings (and share price). Reduced military funding has led to a decline in the military aircraft sector. In this climate, a discussion about expenses takes centre stage, since opportunities to increase income are limited.
There are several ways to reduce costs, including eliminating facilities, automating more of the process, employing components that are more interchangeable among plane types, improving inventory management, and training workers to be more productive.
Here it is important to think widely. Keep in mind that expenses depend on a variety of factors, including the workers' work habits, the available technology, and their competence.
Conclusion
In this specific instance, the client was advised to try to combine with a smaller business in order to gain some economies of scale. Once told that the market was contracting, it was simple to see that not all five players in the market would survive. Six months after the client bought a smaller competitor, the share price began to increase.
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