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McKinsey & Company
NE-AAA123-20100119
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Introduction and recap of 7 steps
Exercise
Consulting as a career choice
McKinsey & Company
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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?
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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Introduction and recap of 7 steps
Exercise
Consulting as a career
McKinsey & Company
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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
McKinsey & Company
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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.
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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
McKinsey & Company
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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?
McKinsey & Company
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Introduction and recap of 7 steps
Exercise
Consulting as a career
McKinsey & Company
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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
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