Structured Problem Solving & Hypothesis Generation
Goals of this module
Lay out a systematic approach to solving business problems –“Structured Problem Solving ”
Establish a common “modus operandus” for Consulting teams
Practice the suggested process on a real-life example
Strategy is about thriving in a changing world… “ The picture’s pretty bleak, gentlemen . . . The world’s climates are changing, the mammals are taking over, and we all have a brain about the size of a walnut.”
… which is all about “decision making”
“ Strategy is about making decisions”
The best strategy “makers” are able to blend analytic techniques with an understanding of the future uncertainties and simple good luck
Based on often imperfect information they make decisions and then drive implementation
There are two basic approaches to problem solving; but both can work The “ there's a pony in here somewhere” approach The structured analytic approach Potential for rich powerful solutions Scurry around analyzing tons of data to see if you can find something useful Get the data Potential for good (and mixed) solutions Define problem and hypotheses
Defining the issue is the first step in the journey to final recommendations Develop Conclusions and Make Recommendations to Implement Find Insights Analyse Data Gather Data Form Hypotheses So what? —aha, new thought What you should do… and how Define the Issues What are the questions keeping you awake at night? Factual information gathered to prove or disprove hypotheses Analyse what the data tells us Statements that provide direction and structure for the analysis
Hypothesis formation ensures that our analysis is focused on our client’s problem Form Hypotheses Define the Issues Gather Data Analyse Data Find Insights Develop Conclusions and Make Recommendations to Implement So what? —aha, new thought What you should do… and how What are the questions keeping you awake at night? Factual information gathered to prove or disprove hypotheses Analyse what the data tells us Statements that provide direction and structure for the analysis
Hypotheses are developed in three steps
What are the real strategic issues?
What is the impact on the organisation?
What are the priorities?
We think . . .
It looks like . . .
The right answer may be . . .
The options could be . . .
We believe this to be true . . .
A series of statements, not yet backed by data
Based on initial data search or expert opinions
A number of assertions need to be true for a hypothesis to be valid. Is there a market for white label insurance products?
Direct channels are growing
Retailers have a strong channel and brand
There are existing products
Chubb Insurance can access new business by using the brand strength of Tesco resulting Is low cost of acquisition and profitable business Define the question Review and Describe Multiple Assertions Form the hypothesis 1 2 3
A hypothesis should identify not only the issue but also the cause and the impact
Think through these three stages as you create a hypothesis to help you plan out how you will test it:
What is the issue?
What is the underlying opportunity?
Where is the advantage?
What do you think causes the issue?
What are the key drivers of the process?
What is the impact of the issue?
How can we tell there is an opportunity?
Why do we care?
“ x is an opportunity ...” “… due to...” “… resulting in...”
The Structured Problem Solving Process covers the life cycle of a consulting engagement
Define the Problem
Structure the Problem
Develop a Hypothesis
Execute the Analysis
Develop a Recommendation
Create the Communication
Follow Up with Client
Covered in current module Covered later in the week
The Basics - Problem Solving Approach
Our problem solving approach produces results through answering a simple series of questions
Is there a problem or opportunity?
If so where does it lie?
Why does it exist?
What could we do about it?
What should we do about it?
DEFINE THE PROBLEM STRUCTURE THE ANALYSIS FIND THE SOLUTION Fine, but IWIK H2 do this...
Logical pyramids are basic tools for this approach, helping you to define, structure and solve the client’s problem
1. Ideas at any level in the pyramid must always be summaries of the ideas grouped below them
2. Ideas in each grouping must always be the same kind of idea, and they must answer the same question implied by their summary
3. Ideas in each grouping must always be in a logical order:
Deductively or inductively
Trace course or time order
Divide or structural order (e.g., Sales, Marketing, Manufacturing, etc.)
Classify or degree order (e.g., most important, 2nd most important, etc.)
Source: Barbara Minto, “The Pyramid Principle”.
“ Are they Mutually Exclusive and Comprehensively Exhaustive (MECE)?”
Main Assertion Key Line
Logical pyramids increase the effectiveness of problem solving, results delivery and communication…
Key line / narrative
… but help ensure thorough analysis… … while decreasing complexity… … and increasing the power of presentations Logical pyramids have simple rules…
The effectiveness of our work depends heavily on how compellingly we can argue that the solution we put forward serves the client best
The reasoning we have to apply to come to our solution is complex and difficult to summarize for brief client interactions
To build succinct and compelling presentations of our work, we use logical pyramids as the preferred communication style:
Pyramids make information more memorable and meaningful
They lead to a clearer definition of the problems we solve
They structure our solutions to these problems and make them more compelling
Source: Barbara Minto, “The Pyramid Principle”. … which will make your work/life much easier to handle
Define and Structure the Problem
Why problem definition matters “ If you don’t know where you are going, any road will take you there.” -Anonymous
In structuring a problem, break it into smaller, easier-to-handle components AND start with the right definitions US Car Market Light Trucks Passenger Cars Big 3 Mini Vans Sport Utility Vehicles Ford GM Chrysler But be careful — why does this not work?
The most important rule for any structure you impose " M utually E xclusive and C omprehensively E xhaustive"
There are three ways to structure a business problem Divide Clarify Diagnostic Framework Cause Effect Framework Structural Framework Problem Structure
To help you solve a problem, your structure must:
Disaggregate the problem into smaller and easier to solve components
Be a “MECE” description of the problem and its possible solutions
Trace Cause Source: Barbara Minto, “The Pyramid Principle”.
Example 1 — disaggregate the problem into a diagnostic solution tree Head Hurts Physical Mental External Internal Stress, Tension Hypochondria Bumped, Bruised Head Allergies Bad Weather, Sinus Headache, Flu, Cold Brain Tumor Water on the Brain SCooP Source: Barbara Minto, “The Pyramid Principle”.
Example 2 (trace cause) — disaggregate the problem into a cause-effect framework
How can TESCO improve its sales productivity (sales/sq.ft.)?
Store is within shopping radius do not know about the store know about the store never visit the store enter the store do not buy make a purchase do not come back make repeat purchases Location Advertising Signage, CI Conversion Customer Value Root Cause
Example 3 — disaggregate the problem into an intrinsic structure
Why does Wimpy’s not show the anticipated financial performance?
Account type Pack size REPURCHASE Target market persuaded to repurchase? DISTRIBUTION Brand made available? TRIAL Target market induced to try? AWARENESS Target market aware? Product rejection Price/value rejection Frequency of use Occasion of use Consumer profile Pack Display Promotion type Promotion tuning Sell-in effectiveness Feedback If all lines of inquiry fail to reveal a problem source, go back to consider whether target market and consumer benefit have been accurately defined. Attribute awareness Advertising recall Advertising spending rate Media mix Regional weight Advertising communication Target market Consumer benefit Region Sales force coverage Sales force direction Trade terms Channel Source: Barbara Minto, “The Pyramid Principle”. Product spec. Selling price Brand name Packaging POSITIONING Brand properly positioned for the market?
Exercise 1 — Kmart vs. Wal*Mart: define and structure Kmart’s business problem
Kmart and Wal*Mart operate similar chains of Full line Discount stores
Different pricing strategies: Kmart follows a promotional pricing strategy of weekly sales, offering discounts on selected items, Wal*Mart follows an EDLP strategy (EDLP = Every Day Low Prices); Kmart's regular prices are higher than Wal*Mart’s, its sales prices are lower
Wal*Mart has a better price perception than Kmart
Kmart has a higher GM than Wal*Mart (23% vs. 21%)
Kmart has significantly higher SG&A as percent of sales, which eliminate Kmart's Gross Margin advantage over Wal*Mart
Wal*Mart’s scale advantage is not driven by the number of stores, but by its sales per store (better sales per square foot)
Kmart has significantly lower sales per square foot sales than Wal*Mart ($170 vs $250). With Wal*Mart’s sales productivity, Kmart would be about as profitable as Wal*Mart
Kmart is operating at break-even, and Wal*Mart’s aggressive expansion puts more and more of Kmart's stores into direct competition with Wal*Mart, decreasing their store contribution and Kmart's overall profitability
Structure Kmart's problem to help its management devise a solution, including identifying the key question that our study must answer
Exercise 1 — define and structure Kmart’s problem: first step is to logically organize the facts Company Competitor Customer Higher GM than WalMart (+) Higher SG&A expenses than WalMart (-) Aging stores Hi / Lo pricing strategy Lower net income than WalMart Eroding same-store sales vs. WalMart Sales / sq. ft. higher than Kmart Aggressive expansion into Kmart territories EDLP pricing strategy Customers perceive WalMart prices better than Kmart
Exercise 1 — define and structure Kmart’s problem: second step is to iterate to drive insight creation Although Kmart’s Hi/Lo pricing strategy leads to high GM, high SG&A has led to eroding sales productivity Higher GM than WalMart (+) Higher SG&A expenses than WalMart (-) Aging stores Hi / Lo pricing strategy Lower net income than WalMart Eroding same-store sales vs. WalMart Sales / sq. ft. higher than Kmart Aggressive expansion into Kmart territories EDLP pricing strategy Customers perceive WalMart prices better than Kmart WalMart is aggressively expanding, with highly productive stores and a different pricing strategy than KMart Customers perceive WalMart delivers higher value in some areas How can Kmart improve its sales productivity (sales / sq. ft.)?
Exercise 4 — summary performance data for a credit card issuer… what’s the problem? Note: All figures in 1000s. Assume no price inflation and that interest rates have remained constant The 80/20 Rule… 80% of the answer is in 20% of the data Often we miss the goldmine because we are busy trying to value the shack built on top of it This data, taken from a real client (but rebased,) tells the whole sorry story of their strategic problem in one picture
Exercise 5 — using a “quick and dirty” approach can produce surprisingly accurate results
How Many (Retail) Litres of Petrol Are Sold in France Per Year? Data: French Population ~ 60 million. 1 Gallon = 3.8 Litres
Develop a Hypothesis
Why hypotheses matter
They keep your effort
Explicitly ties your analysis to your problem definition Helps define the level of accuracy that matters Ensures you analyze no more than is needed to disprove hypotheses within a reasonable doubt Allows quick check before massive data collection and crunching: “ If we confirm our belief in the hypothesis, will we be able to act on it?” Keeps you efficient On target Accurate Minimal Actionable On Time
Abduction is a variation on deductive and inductive reasoning and a powerful tool to develop hypotheses Source: Barbara Minto, “The Pyramid Principle”. Rule Case Result If we put the price too high, sales will go down We have put prices too high Therefore, sales will go down Case Result Rule We have put prices up Sales have gone down Sales have gone down because the price is too high Sales have gone down Sales go down when prices are too high Probably we have put prices too high Hypothesis Result Rule Case 1. Rule 2. Case 3. Result Deduction Induction Abduction 1. Case 2. Result 3. Rule 1. Result 2. Rule 3. Case
What differentiates a good hypothesis from a bad one? DEVELOP A HYPOTHESIS
Answers the core question on the clients’ mind
Embraces the entire range of competitive or profit drivers
“ Occam’s razor”
Can be quantified and tested
Good Hypotheses Are
Cannot be refuted
Cannot possibly be quantified
Require you to “Boil the Ocean”
Are so obvious that nobody can intelligently disagree with it
Or look like an abstract model of a process consisting of boxes, arrows and clouds
How to find a good hypothesis
There are proven processes to generate hypotheses:
Talk to lots of people about the core problem
Have a brainstorming case team meeting
Taguchi method — ask “5 Why’s”
Start with general validity checks for your hypotheses:
Assume perfect rationality — how ought the business system to behave?
Look for analogies (other industries or problems)
Imagine that you had perfect information — what would the ideal analysis look like?
Try Lateral Thinking:
Think about the problem from a different angle
DEVELOP A HYPOTHESIS
What if your hypothesis is proven wrong?
Hypothesis-driven thinking requires frequent reviews of the prevailing and current hypotheses:
Do we still think they are right?
Are we making progress towards disproving them?
Are they at the right level of generality/predictiveness?
Having proven a hypothesis wrong means you have made a big step towards answering your question!
DEVELOP A HYPOTHESIS “ A wise man sometimes changes his mind, but a fool never.” - Arabic Proverb