Tag: analysis

A while back, when I was talking with managers of an international manufacturing company it came up that I was a philosophy Ph.D. It struck the managers as an odd background for business, and they asked how I came to be involved in business consulting. I explained that philosophy is about questioning assumptions, and in my sub-specialty, philosophy of science, the focus is on evaluating many of the same methodologies that underlie business decision-making. It is an ideal vantage point for choosing between methodologies, and for coming up with new and novel solutions. While impressed, they both questioned the need for such a background by saying, “All our problems are simple.”

My jaw dropped when I heard that. I know many of the challenges facing that industry — there are pages of difficult challenges listed under the risk factors of their own company’s 10-K — and the thought that any of these are “simple” seemed absurd. I’m sure the CEO of their corporation wouldn’t describe all these challenges as “simple.” In these managers’ defense, it may well be that they were only delegated simple problems, and therefore had the luxury of not having to think about the difficult ones. However, the conversation made me wonder whether their response was indicative of a larger problem with corporate decision-making: is it possible that managers systematically ignore complex problems because they do not have the right mindset and methods for solving them?

Simple Strategies

In order to answer this question, we need to understand why there might be a bias towards simple problems and solutions. It is surely true that many business problems or organizational challenges can be solved using very simple strategies. I have heard from a number of experienced management consultants that when they walk into a company, it usually takes less than two days to diagnose what is wrong and determine what needs to be done. The next three months will be spent dealing with the complexity of implementing that solution, but coming up with the strategy itself requires no really novel thought or innovation, just the application of a standard framework. Some examples of simple strategies that have worked in the past include:

• Our production costs are too high –> outsource operations to China and India.
• Some of our businesses are in decaying industries that seem unlikely to recover –> sell off those businesses.
• Our costs are too high –> lay off workers.
• We need to pump life into our business –> hire an advertising company to launch a campaign.

Although the implementation can be complex, coming up with these strategies is extremely easy: after all, anyone who passes a standard consulting case interview has to come up with a well-presented version of such solutions in less than 20 minutes.

A Framework Approach to Solving Problems

Consulting case interviews are instructive ways of understanding much of contemporary business culture, because they present, in a highly concentrated form, what many corporate leaders would consider the ideal way of solving a business problem.

The case interview begins with very little initial detail, and it is up to the candidate to structure the nebulous problem, obtain the necessary information from the interviewer, and develop a strategy that solves the problem in about 20 minutes. The main tool to enable a consulting candidate to succeed is what I want to call the framework approach to business. By using predefined frameworks to structure their line of inquiry well, a candidate can quickly diagnose a nebulous client difficulty without missing any important details.

A case interview typically proceeds in six steps:

1. Restate the client problem, and determine whether there are other related problems and what a solution would look like both qualitatively and quantitatively. (2 min.)
2. A pause, in which the interviewee can breathe while coming up with a framework. (1 min.)
3. MECE (mutually exclusive and collectively exhaustive) presentation of a framework for approaching the client issue and a discussion of how the consultant is going to proceed. (2 min.)
4. Branch elimination to diagnose the problems the company is facing and/or to come up with a solution (ideally with quantitative support) (15 min.)
5. Once all the significant problems are identified a recommended solution is defended with quantitative support. (3 min.)
6. Summary: a restatement of the problem, a recommendation of a solution, and next steps. (1 min.)

The heart of this interview, and the part that a consultant candidate absolutely has to have down are steps (3) and (4) above. These steps also have to be performed with the precision of a Swiss watch. This is where the candidate shows she is familiar with business concepts, that she can think on her feet, and that she knows how to structure a nebulous issue. Although the framework itself should not seem rote or contrived, it is typically hypothesis-driven, and based on one of a few dozen ways of approaching an issue: SWOT analysis, Porter’s Five Forces, profit analysis, value chain analysis, Bruce Henderson’s growth share matrix, etc. (One of the nicest quick overviews of frameworks comes from Victor Cheng; a PDF can be found here.)

There are good reasons why consulting firms focus on these two steps in interviews. Besides the fact that it helps one systematically identify the important issues that are driving a case, it also makes the consultant look on top of the issues and in control of the situation. One of the worst situations consultants can be in is one in which a client catches them missing an obvious solution or making a claim that cannot be supported with the available evidence. This looks bad, and can lead to a whole project unraveling. Consultants will have difficulty justifying their high billing rates in such a situation.

However, a consultant candidate who adheres to a clear framework without jumping around can justify every step of her analysis. If you interrupt a very good case interview candidate in the middle of an interview, she should be able to not only say where she is in the process, but explain exactly why her last question was the right question to ask. An example:

“Previously we agreed that the problem was a decrease in profit. This is the result of either increasing costs, decreasing revenues or both. We determined that revenues were not decreasing, so we concluded that costs must be increasing. As my initial outline indicated, we have identified five factors that could lead to increased costs, and we are now exploring the hypothesis that the price of raw materials has increased. Hence, I’m asking for numbers that can indicate to me whether or not this accounts for the bulk of our decreasing profits.”

The answer looks well-structured, and it is difficult to find fault in the consultant’s analysis. This looks good to even a highly skeptical audience.

Yet, there are trade-offs of this highly-structured framework approach. For one thing, it is typically biased against creative strategies. There are opportunities to be creative with the application of a framework, of course, but if we understand creativity as the ability to come up with untried and untested solutions for solving a business problem, this kind of creativity typically requires an iterative, exploratory mindset that typically cannot be fit into a tight time frame. When I was discussing case interviews with experienced interviewers, most agreed that one should not try anything creative in a consulting interview: stick to the framework, and creative strategies should only be mentioned in the most speculative way at the very end. This means that in an entire 24 minutes, only about half a minute can be devoted to coming up with truly novel and untried strategies. Given this, it is no surprise that people at major consulting firms have complained to me about a lack of creativity in new consultants.

Creativity and Framework Development  Contrast the framework approach above with fields that are centered around creativity and innovation. We all admire strokes of creative genius that tie together unconnected strands in the flash of a moment, but most processes for developing creative solutions don’t work this way. Instead, the processes are typically time-consuming, repetitive, iterative, imprecise and involve many false starts and wrong turns. Because inspiration is a significant factor in coming up with new solutions, it can be unpredictable, and positively hindered by too much structure. (There’s a reason why great ideas often come in unstructured parts of a day like showering, or the hours before falling asleep.) Hence, a creative approach can appear amateurish to a culture that is driven by efficient frameworks. At a recent talk, a design-thinking professor recalled overhearing a client on the phone exclaiming with irritation, “These people have no processes!”As a point of contrast, humanities students are used to approaching nebulous problems in a creative way. Consider how different the scenario would be if you interrupted a humanities Ph.D. student in the middle of writing a dissertation. He might not be able to explain where he is in the process, or even where he is headed. You might get something like the following:

“I had been reading an article on analogy in ancient biology, which emphasized the relationship between the word “analogon” in Aristotle and the words “ana logon” in Plato. It made me think that Aristotle’s use of the word might be a neologism quite different from its original meeting. So, I compiled all 1000 or so occurrences of the word in Aristotle to see if he used it consistently, but he didn’t. There was a combination of old and new uses. Yet, as I was looking through the occurrences it seemed we could classify them into distinct types that are used consistently within each of three distinct contexts. I’m not sure what I’m going to do with this, but it may be connected to an article I read on the division of sciences in antiquity. Perhaps the division of sciences article does have an impact on my own work after all?”

The context of writing a dissertation is very different from passing a case interview. Yet, I think the two answers quoted above illustrate some important differences between creativity and framework approaches. In the case interview framework above it’s not only that the goal is clear, but also the steps needed to reach the goal are clear. You first determine whether there is increased cost or reduced revenue, and in order to determine cost you determine the different components of cost. At each of these steps new challenges may arise, and the framework itself could morph into another framework, but nevertheless the overall structure is relatively clear. A consulting candidate would be faulted for jumping around unexpectedly or not sounding confident about what the next step in the analysis will be.

Contrast with the dissertation case above. In this case the goal is nebulous and unclear. Something was vaguely related to something else. The initial step of looking up over 1000 occurrences of a word in Greek texts is not the most efficient use of one’s time. The fact that the initial hypothesis was refuted makes that time seem even less well-spent. Finally, the connection with another article at the end didn’t produce a clear conclusion, but only a question for further exploration. However, adopting this less-directed approach can be essential for writing a good dissertation. The main goal of a dissertation, especially in philosophy, is to add new questions and novel insights to an academic discussion, and tasks like the tedious process of reviewing all the occurrences of a word can be important steps to those new insights. Such insights are seldom obtained through a simple and straightforward process.It’s this back and forth process with no clear goal that probably contributed to the “No processes!” comment above. Yet there is a process, it’s only happening at a higher level. By describing it as “higher” I do not mean to say it is better in all cases, only that it is the kind of process that was probably used to develop the framework the consultant candidate is using in the first place. Innovation precedes implementation, and both require different mindsets.

When Simple Strategies are Not Enough 

In the beginning I mentioned how some managers had told me that all their problems were simple. In many industries this may still be partly true, but as more and more people become familiar with previously known frameworks, as freemium options disrupt the marketplace, as business becomes increasingly international, as new technologies and business models are developed almost daily, as the problems to solve become more global and complex, it is becoming increasingly necessary for companies and non-profits to do more than develop simple strategies. In a 21st century world, new, innovative and creative strategies are increasingly necessary.

Yet, there is a balance: too much creativity can also be a bad thing for most organizations, and there is significant value in the efficiency of a framework approach. Further, a good hypothesis-driven methodology, such as the kind that gets one past consulting interviews, should be in every employee’s toolkit, and often is necessary to bring a new creative idea to fruition. However, a more innovative approach should be prioritized in at least five different contexts:

1. In disrupted industries that require that fundamental assumptions of the industry be challenged.
2. In launching new products, services or business models in markets that do not yet exist.
3. In areas of philanthropy and education where the emphasis is long-term planning, the coordination of a vast number of interests or inputs, or on changing a deeply-held mindset or belief.
4. In any discipline that is focused on creating new paradigms or new ways of looking at the world.
5. In ethnographic studies, trendspotting, market research or long-term forecasting when the goal is to gain insights rather than merely confirm something with a statistically valid sample size.

In these areas it can be useful to supplement standard business models with very different approaches and skill sets. In some cases this may even require changing internal structures or the culture of a firm, or hiring a philosopher, in other cases it may require outsourcing some processes to a third party. (We recommend Justkul Inc., but admit to being biased here!)

Not all problems are simple. However it is done, businesses, corporations and philanthropic organizations will increasingly need to embrace both creativity and framework approaches to succeed.

By @jfhannon, CEO at Justkul Inc., a research firm focused on the needs of strategy and private equity.