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Introduction and recap of 7 steps

Exercise

Consulting as a career choice

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Personal note: some of the problems from the last 15 years

§  As all of our base businesses are declining, where do we find new growth?

§  Our current functional organization is working well – would we benefit from a new structure?

§  We are the market leader in a technology service business in countries A and B – should we buy the market leader in country C?

§  Should we buy an energy company?

§  Should we ramp-up a distressed asset or just close it down?

§  What should be our position towards new expected pharma regulation?

§  How will a new production technology invented by competition impact us as the market leader?

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Problem-solving

Communications

Problem

Think impact – What are we trying to answer?

Think disaggregation & early hypotheses – What could be key elements of the problem?

Think speed – Which issues are most important?

Structure problem

Define problem

Prioritize issues

Think efficiency – Where and how should the team spend its time?

Think potential solution – What should the company do?

Think “so what” – What implications do our findings have for the company ?

Synthesize findings

Develop recommendation

Plan analyses and work

Think evidence – What are we trying to prove/ disprove?

Conduct analyses

7-step problem-solving process

SOURCE: McKinsey

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Four capabilities that are critical to distinctive problem-solving

2 3

4 1

Identifying relationships

2 Finding the essence

3 Stay ahead/step back

4 Constructing multi- ple perspectives

1

▪  The ability to see a problem and its aspects from many angles

▪  The ability to discern connections/ linkages between elements inside and outside the problem

▪  The ability to cut through complexity to reveal the heart of the matter

▪  The ability to think ahead of the team and simultaneously step back from the problem

SOURCE: McKinsey

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From problem solving to problem solving leadership

CEO/ President

EVPs

VPs

Directors

Team managers

Team leaders

Frontline

Nature of problem solving

▪  More complex problems ▪  Often difficult to determine factor

driving the problem (e.g., customer satisfaction score, profitability)

▪  Need to understand solution space, hypothesize and prioritize, and then employ RCPS

▪  Responsible for creating a positive problem solving culture for their teams (e.g., viewing problems as opportunities)

▪  More straightforward problems ▪  Simpler to identify the problem (e.g.,

claims processed) ▪  Employ RCPS directly ▪  Resolution time is measured in days

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Key skills in problem solving leadership

Creating a productive problem solving environment

▪  Defining the problem clearly ▪  Coaching others through the problem solving process ▪  Role modeling “go and see” to identify problems and root causes ▪  Viewing problems as opportunities ▪  Encouraging a “test and learn”, safe to experiment culture ▪  Managing the problem solving process “flow” (velocity) ▪  Collaborating and involving others in the solution

Facilitating effective meetings

▪  Maintaining appropriate link to meeting agenda/purpose ▪  Focusing, using time wisely ▪  Engaging entire group to gain critical information ▪  Pushing on key questions related to core problem

Communicating ▪  Synthesizing discussions; playing back information ▪  Capturing most critical information to support analyses or hypotheses

Being personally effective

▪  Building trust ▪  Time mastery

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Introduction and recap of 7 steps

Exercise

Consulting as a career

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Step 1: Define the problem

Recom-menda-tions

Syn- thesis

Struc-turing

Priori-tizing

Issue analysis Analysis ? !

Problem Impact

Think IMPACT: What is the question you are trying to answer?

Communication

Problem definition

SOURCE: McKinsey

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Problem statement example: Oilco Refinery

Can Oilco Refinery be managed differently to increase profitability?

Too general

Should Oilco Refinery improve its deteriorating position?

Not disputable

Oilco Refinery is suffering from poor profitability despite a strong market niche position

Statement of fact

SOURCE: McKinsey

What opportunities exist for Oilco to improve profitabilty by $40 million per year through overhead rationalization, operational improvements, or restructuring non-core assets?

S.M.A.R.T.

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Introducing Hiperama, our case company today

Context ▪  Consolidation… Spanish retail industry is rapidly consolidating and encountering

increasing price pressure from discounters and international retail chains ▪  Shopping behaviors changing… Spanish consumers are changing the way they

shop, focusing on convenience (e.g., prepared foods) and product assortment (e.g., one-stop-shopping), in response to lifestyle trends sweeping Europe (e.g., more working women)

Company profile ▪  Spanish retailer…Hiperama is the hypermarket division of Grupo Abaceria, a Spanish

regional retail chain with supermarkets and discount stores in addition to hypermarkets ▪  Part of parent company…Grupo Abaceria controls approximately 3% of a 74 Euro

billion Spanish retail industry, and Hiperama’s revenues comprise approximately 700 Euro millions of that ▪  Business challenges…Hiperama has experienced declining revenues and operating

margins in the last few years, and a new major project has been launched to improve Hiperama’s financial position and create a sustainable, compelling value proposition for Hiperama in the face of competitive pressure from discounters, international retailers, and other potential market entrants

The aspiration ▪  Hiperama’s CEO has expressed a desire to attain a 3.5% operating margin in the near

term and build a base for growth

SOURCE: McKinsey

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Part 1 of the exercise: Let’s define the problem

Perspective/context ▪  Sets out the “situation” and “complication” facing the

company, e.g., industry trends, relative position in the industry

1 Constraints within solution space ▪  Defines the limits of the set of solutions that can be

considered, e.g., must involve organic rather than inorganic growth

4

Criteria for success ▪  Defines success for the project. Must be shared by

management, stakeholders and team. Must include qualitative & quantitative measures, e.g., financial returns, effect on staff

2 Stakeholders ▪  Identifies who makes the decisions and who else could

support (or derail) the project, e.g., CEO, Division Manager, SBU Manager

5

Scope of Solution Space ▪  Indicates what will and will not be included in the

project, e.g., international markets.

3 Key sources of Insight ▪  Identifies where best practice expertise, knowledge, and

projects approaches exist (within the company or within the industry) - e.g., document from experts, databases, previous projects…

6

Basic question to be resolved ▪  The basic question brings focus to the analytic work. It should be SMART: specific, measurable, action-oriented,

relevant and time-bound. It should not be so narrow that important levers to solve the problem are missed

SOURCE: McKinsey

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Hiperama Problem definition exercise (15 mins)

▪ Break out into your teams and create a problem statement for Hiperama using the structure on the handouts

SOURCE: McKinsey

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Sample work product for Hiperama

Perspective/context ▪  Consolidating industry with international/ domestic

players looking to grow presence in Spain ▪  Price-based competitors rapidly gaining share ▪  Consumer demands changing towards service and

convenience while price remains a key factor ▪  Regulation restricting new hypermarket development

1 Constraints within solution space ▪  Regulated market prevents expansion in size of stores ▪  Pricing below cost not permitted by law

4

Criteria for success ▪  Operating margins of 3.5% ▪  Clearly articulated value proposition ▪  Roll-out plan capable of building organizational buy-in

2 Stakeholders ▪  Luis Gonzales (CEO) ▪  CFO ▪  VP of HR ▪  Grocery Director

5

▪  Store manager pilot project

▪  VP of Operations

Scope of Solution Space ▪  Divestiture is not an option at this time ▪  Focus on Spanish grocery retail market

3 Key sources of Insight ▪  Key Hiperama executives ▪  Nielsen or other retail & marketing information company ▪  Analyst reports

6

Basic question to be resolved ▪  What set of actions (operational and beyond) should Hiperama pursue over the next 5 years to ignite growth and

increase operating margins to 3.5%?

SOURCE: McKinsey

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Step 2: Structure the problem

Recom-menda-tions

Syn- thesis

Struc-turing

Priori-tizing

Issue analysis Analysis ? !

Problem Impact Communication

Problem definition

Think DISAGGREGATION and HYPOTHESIS: What could the key elements of the problem be?

SOURCE: McKinsey

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Quality logic trees are consistent, relevant, and MECE

First line of support

Second line of support

Relevant

Problem statement worksheet Basic question to be resolved

Perspective/ context

Decision makers/ stakeholders

1

Barriers to impact 4

3

Criteria for success

Scope of solution space

2 4

Con

sist

ent

Con

sist

ent

Mutually Exclusive Collectively Exhaustive

SOURCE: McKinsey

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2 main types of logic trees

Hypothesis tree Issue tree

“What?” or “How?”

Issue (question)

▪  Breaks issue or question into smaller issues/questions ▪  Addresses the entire solution space ▪  Used for project starts or new

problems

“Why?”

Argument 1

Argument 2

Argument 3

Hypothesis (potential answer)

▪  Asserts a possible solution, with necessary proofs ▪  Narrows the solution space to focus

problem-solving ▪  Used when you have enough data

to support a hypothesis

SOURCE: McKinsey

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Main differences between issue tree and hypothesis tree

Hypothesis tree Issue tree

Purpose

When to use

▪  To create a comprehensive overview of all the factors impacting the problem

▪  When there is a little evidence/experience available to draft hypotheses

▪  Typically early in/before the project (can be a very good opening discussion with managers and stakeholders)

▪  When we have data to prioritize elements of the problem (based on experience, experts input or initial analyses)

▪  To focus the analysis on those elements that we know (assume) to have the most impact on the end-product

What does it look like

▪  Early (when possible) or after initial analyses

▪  (Preliminary) Answers ▪  Guided ▪  Focused

▪  Questions ▪  Neutral ▪  Comprehensive

SOURCE: McKinsey

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What set of actions should Hiperama pursue over the next 5 years to ignite growth and increase operating margins to 3.5% annually?

?

?

?

▪ Work as a team to develop an issue tree for Hiperama for 30 mins ▪  Remember the principles of good issue trees :

–  Consistent –  Relevant –  MECE (Mutually Exclusive, Collectively Exhaustive)

Exercise: Hiperama issue tree (30 min) HANDOUT (EXERCISE)

SOURCE: McKinsey

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Hiperama issue tree –a possible solution

What set of actions should Hiperama pursue over the next 5 years to ignite growth and increase operating margins to 3.5% annually?

What actions can Hiperama take to reduce costs?

What actions can Hiperama take to increase revenue?

SOURCE: McKinsey

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Hiperama issue tree – a possible solution

What actions can Hiperama take to increase revenue?

Increase conversion rate (number of purchases/ number of trips)?

Increase level of penetration among customers in area (%)?

Increase average frequency of visits (number of trips/month)?

Increase average basket size for each department?

Department A? Department B? Department C? Etc.

Increase percent of shoppers making purchase from each department?

Department A? Department B? Department C? Etc.

Increase traffic (total number of purchases/ month)?

Increase average basket size ($/basket)?

Increase number of stores

SOURCE: McKinsey

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Hiperama issue tree – a possible solution

Reduce variable costs?

Labor cost/m2? Rent cost/m2? Overhead/m2? Other operating cost/m2?

Reduce fixed costs?

Department A? Department B? Department C? Etc.

COGS/unit

Ordering costs (based on # of units)

Operating cost/m2

Total space occupied (m2)

Number of stores Size of stores (m2)

Selling space (m2)

Non-selling space (m2)

Order frequency Order lot size

Merchandise cost Production cost Transportation cost Storage cost Other

What actions can Hiperama take to reduce costs?

SOURCE: McKinsey

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Good logic trees help prioritize issues and allocate responsibilities to team members

Think SPEED: Which part of the tree seems most important to the problem?

Recom-menda-tions

Syn- thesis

Struc-turing

Priori-tizing

Issue analysis Analysis ? !

Problem Impact Communication

Problem definition

SOURCE: McKinsey

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As the project progresses, you can start pruning your issue tree

Problem statement

Issue 1

Issue 2

Issue 3

Issue 4

▪  Keep focusing in to work efficiently

▪  Prioritize your effort on what is most important

▪  Drive toward hypothesis as early as possible

▪  Don’t “boil the ocean”

SOURCE: McKinsey

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When prioritising, get to a first answer in a quick, simple way so that you can start to focus the work

Example methodsKey ideas

▪  Take a reasonably quick, informal approach to get started

▪  Remember that sometimes a ”back of an envelope” calculation is all that’s needed

▪  If new information emerges, you can always reprioritize and switch your efforts to another part of the tree

▪  Use likely impact to decide where to go first

▪  Use readily available data whenever possible; avoid major data requests

▪  Do not create massive spreadsheets or other computer models if you can move forward with less complete information

▪  Percentage of total “X”▪  Estimated potential increase/decrease

(sensitivity analysis)▪  Simple ratios▪  Quick industry benchmarks▪  Qualitative input from interviews▪  Ease of implementation▪  Timing▪  “Quick wins”▪  Available resources▪  High/low risk

SOURCE: McKinsey

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Our focus going forward

1 Increasing traffic

2 Increase average basket size

3 Increase number of stores

4 Reduce variable stock

5 Reduce fixed costs

Feasa-bility

Impact importance

High Low Medium

High

Low

Medium

We will focus on these 2 points on the revenue side.

1 2

4

3

5

5% 2,5% 3,75 % EBITDA

SOURCE: McKinsey

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Key takeaways

▪  Prioritization is a critical step for insuring you’re focusing time and effort on the most important elements of the problem ▪  Prioritization is in general made using two

criteria: feasibility and impact, but in some cases these criteria can be different (e.g., strategic importance instead of impact) ▪  Make sure to involve both the change team

as well as stakeholders and management ▪  Prioritization is often an iterative process

and prioritization is a very good tool to drive discussion

▪  For impact calculation, define the timing for the benefits calculation ▪  Prioritization always has an impact on

the work plan

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Step 4: Issue analysis and work plan

Recom-menda-tions

Syn- thesis

Struc-turing

Priori-tizing

Issue analysis Analysis ? !

Problem Impact

Think EFFICIENCY: How and on what should the team spend its time?

Communication

Problem definition

SOURCE: McKinsey

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Issue analysis worksheet

Hypothesis Supporting rationale Analysis Source

▪  Key issue or unresolved question that elicits a “yes” or “no” answer and upon which specific action depends

▪  Statement of the likely resolution of the issue. It includes the reason for answering yes or no

▪  Elements you have to believe for the hypo-thesis to be true.

▪  Detailed supporting rationales make the transition to analysis easier

▪  Models that should be explored in order to confirm or refute the hypothesis

▪  Likely location or means of obtaining data to carry out analysis

Issue

Example

▪  Specialist magazines/ reports

▪  Manufacturing and customer interviews

▪  Accounting Department

▪  Comparison of manufacturing costs

▪  Review of competitive investment

▪  Cashflow: NPV

▪  Competitors’ manufacturing costs declining

▪  Industry leaders are investing in new technology

▪  Pay off is very short

▪  Yes– ABC costs will become uncompetitive without new investment

▪  Should ABC invest $20 million in new manufacturing technology?

SOURCE: McKinsey

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Extend the issue analysis worksheet to create a work plan

+

Work plan

States the desired output of the analysis

Identifies the team member who will undertake the analysis

Sets the time (in work days) necessary to answer the key issue

Responsibility End product Timing

Example ▪  Breakdown of compe-

titive costs and rea-sons for differences

Fuentes, P.F. 10

▪  Competitors’ investment trends and areas of focus

Shaw, B.R. 5

Lun, C.A. 7 ▪  Value of investments

Issue analysis work sheet

Issue Hypothesis Supporting rationale Analysis Source

SOURCE: McKinsey

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Tactics for successful issue analysis

Be specific

Explain clearly what the output you want is and what it should look like

Be realistic

Frame each analysis so that one team member can cope with it

Syndicate with the team

Use your teammates as sounding boards for hypotheses

Revisit

Update your Issue Analysis Worksheet and work plan as you proceed with problem solving

SOURCE: McKinsey

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Step 5: Analysis

Recom-menda-tions

Syn- thesis

Struc-turing

Priori-tizing

Issue analysis Analysis ? !

Problem Impact

Think EVIDENCE: What am I trying to prove/disprove?

Communication

Problem definition

SOURCE: McKinsey

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Step 6 - Synthesis

Problem-solving

Communications

Problem Structure problem

Define problem

Prioritize issues

Think “so what” – What implications do our findings have for the company ?

Synthesize findings

Develop recommendation

Plan analyses and work

Conduct analyses

SOURCE: McKinsey

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Summary ≠ Synthesis

Facts

Raw, unordered information

Push your thinking further

Condensed restatement of facts

Summary

What the facts and findings imply (“so what”)

Synthesis

SOURCE: McKinsey

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Summary versus synthesis

Facts

I’ve lost my keys and passport and am behind on my tax return

I’m scattered!

I’ve mislaid my keys. Where is my passport? Oops, 2 months late on my taxes!

Summary

Synthesis

I need to take a break!

So what?

SOURCE: McKinsey

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Synthesis – From facts and observations to findings and from findings to recommendations

Fact 1

Fact 2

Fact 3

Observation 1

Observation 2

Observation 3

Overall finding

▪  Concise (1 sentence)

▪  Powerful

▪  Comprehensive

▪  Actionable

SOURCE: McKinsey

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Now, let’s synthesize these observations

1.  Spain’s grocery sector is one of the most

fragmented within Europe

2.  Tight regulations make building large-format

stores like hypermarkets difficult

3.  Spanish consumers have a relentless focus on

value

4.  European and US retailers are seeking to

expand geographically, especially in

fragmented markets

5.  Changing family structures are fueling demand

for convenience and service

6.  Supermarket and discount stores are adding

outlets much faster than hypermarkets

SOURCE: McKinsey

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Synthesizing our findings leads to a “so-what” for managers

Observations

Spain’s grocery sector is highly fragmented

European and US retailers are expanding

Difficult to build new hypermarkets

Supermarkets and discounters adding outlets

Consumers focus relentlessly on value

Consumers increasingly want convenience and service

Findings

Consolidation will increase competitive pressure

The hypermarket format faces unfavorable market conditions in Spain

Spanish consumers are becoming more demanding

The retail environment in which Hiperama operates is becoming more challenging, suggesting Hiperama needs to strengthen its position

SOURCE: McKinsey

Do you think this is a good synthesis?

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Introduction and recap of 7 steps

Exercise

Consulting as a career

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Distinctive

Good

OK

Distinctive Good OK

Problem solving Case interview

Leadership, Impact & Drive Experience Interviews

We evaluate applicants on two key dimensions

What are we looking for?

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What do we measure in Experience Interviews?

Inspiring and effective leadership in challenging team situations

Leadership

The passion and energy to achieve challenging goals (which often means overcoming certain obstacles)

Drive

The skills to gain support and commit- ment even from difficult individuals

Personal Impact

LEADERSHIP, IMPACT AND DRIVE

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PROBLEM SOLVING

▪  Logical reasoning ▪  Ability to structure a complex problem ▪  Basic numerical competence ▪  Tolerance for ambiguity ▪  Ability to synthesize ▪  Creativity

Analytical skills

What we want to see in the case solving?

▪  Basic business sense ▪  Prioritization ▪  Understanding of implications of

decisions

Practical and common sense

▪  Good listening skills ▪  Insightful questions ▪  Clear explanation of complex ideas

Communication skills