From hypothesis to analysis to strategic recommendation?

Question

Hi!

I have used Victor Cheng's LOMS and a couple of case books to build my skillset of case solving. The frameworks provided actually help me a lot in structuring my thinking and analyzing specific situations, but I struggle to see whether a particular framework that I choose is covering all important elements. For example, when I need to determine a strategy to address below-expectation profits, there are dozens of potential areas to potentially focus on. How do I narrow down the set of focus areas at the beginning of the case? To be honest, relying on an ingoing hypothesis feels like guessing. Any advice?

Answer 1

Hi Anonymous,

let me illustrate how I would approach the low-profits scenario that you are describing. You should start to clarify the profit expectations and how much the company is actually underperforming. If, for example, reaching the industry benchmark is the objective, then I would do the following:

Firstly you need to identify the numerical driver of the below-benchmark profits of the company (the WHAT? question). --> Identify the different revenue streams of the company; then for each revenue stream, draw a driver tree to find and isolate the core of the problem (compared to industry average: less customers? less revenue per customer? lower margin products sold? lower pricing? higher operational costs? etc.)
Once the numerical problem driver is isolated, you need to understand the WHY? question. For this, the analysis depends on what the actual problem is. If it is a cost problem, you may want to go through the entire value chain to diagnose where the difference/disadvantage lies. If it is a revenue or sales mix problem, you may want to scrutinize underlying trends and developments, competing offers, substitutes etc.
Based on your quantitative (WHAT?) and qualitative (WHY?) analysis, you can develop strategic measures to address the qualitative reasons.
Do not forget to outline potential risks of your strategic recommendation

Cheers, Sidi

Answer 2

Hi,

It is the most common misconception with Viktor Cheng Materials. There are two ways to use the hypothesis:

First - presenting a structure using the hypothesis. You always should make a full structure!!! For example, if you are having a PE (private equity) case, you should do the following:

1) Make classic structure (market, company, competitors, feasibility of exit)

2) Make subpoints (e.g. in market: size, growth rates, profitability, segmentation, etc)

3) Present your 1st level Hypothesis:

- "In order to understand whether we should invest in Company A, I would like to check a set of the hypothesis: whether the Market is Attractive, the Company is Attractive, the competition is favorable and whether we have good opportunities for of exit"

4) Present the main 2nd level Hypothesis:

"In the market, I would like to make sure that the market is big enough and growing;
In the company I would like to find additional opportunities for growth;
In competition I would like to check that the market is fragmented enough;
Finally, I would like to check if we have potential buyers and can achieve desired exit multiples"

In your case of declining profitability, the hypothesis will be:

Declining revenues
Increasing costs
Both of the above

As you can see, you are always making a full structure, not just looking at revenues or costs in isolation.

Another way to use hypothesis is using the hypothesis to prioritize your analysis (still making a full structure):

1) Make a structure: "Problem in the sales department may be related to Sales Motivation, Sales Strategy, Team Composition, and Sales Process

2) Prioritize a part of the structure based on your knowledge / common sense / available data: "Taking into account that motivation is the core problem of the sales organization, I would like to prioritize this part of the analysis"

Good luck!