NE-AAA123-20100119

Arendt Brinkmeyer Chesterton Chrysostom Dostoyevsky Foucauld Halimkesuma

Kasimo Kennedy Newman Origen Soemohardjo Spaemann Tertullian Tolkien Weil

Antoine Bernard Chrysologus Clement Dietrich Friedrich

Fulton Fyodor Hannah
José Leonard Lewis Mikhailovich Robert Simone

Introduction and recap of 7 steps

Exercise

Consulting as a career choice

McKinsey & Company | 1

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

Antoine Bernard Chrysologus Clement Dietrich Friedrich Fulton Fyodor Hannah José Leonard Lewis Mikhailovich Robert Simone

Amantius Athanasius Cantius Gaucherius Evagrius Fulgentius Ignatius Irenaeus Laurentius Nicasius Paschasius Pius
Procopius Stephanus Turibius Vergilius

§  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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7-step problem-solving process

Amantius Athanasius Cantius Gaucherius Evagrius Fulgentius Ignatius Irenaeus Laurentius Nicasius Paschasius Pius Procopius Stephanus Turibius Vergilius

Think disaggregation
Think impact – & early hypotheses – Think speed –
Problem-solving What are we trying What could be key Which issues are
to answer? elements of the problem? most important?

Define Structure Prioritize

Problem problem problem issues

Communications Think efficiency – Plan analyses

Where and how should and work
the team spend its
time?

Develop Synthesize Conduct

recommendation findings analyses

Think potential Think “so what” – What Think evidence –

solution – What implications do our findings What are we trying
should the have for the company ? to prove/ disprove?
company do?

SOURCE: McKinsey McKinsey & Company | 3

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Four capabilities that are critical to distinctive problem-solving

Arendt Brinkmeyer Chesterton Chrysostom Dostoyevsky Foucauld Halimkesuma Kasimo Kennedy Newman Origen Soemohardjo
Spaemann Tertullian Tolkien Weil

2 3
1 4

1 Constructing multi- 2 Identifying 3 Finding the 4 Stay ahead/step

ple perspectives relationships essence back
▪  The ability to see a ▪  The ability to discern ▪  The ability to cut ▪  The ability to think
problem and its connections/ through complexity to ahead of the team
aspects from many linkages between reveal the heart of and simultaneously
angles elements inside and the matter step back from the
outside the problem problem

SOURCE: McKinsey McKinsey & Company | 4

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From problem solving to problem solving leadership

Nature of problem solving

CEO/
President ▪  More complex problems
▪  Often difficult to determine factor
EVPs driving the problem (e.g., customer
satisfaction score, profitability)
▪  Need to understand solution space,
VPs hypothesize and prioritize, and then
employ RCPS
Directors ▪  Responsible for creating a positive
problem solving culture for their
teams (e.g., viewing problems as
Team managers opportunities)

▪  More straightforward problems

Team leaders ▪  Simpler to identify the problem (e.g.,
claims processed)

Frontline
▪  Employ RCPS directly
▪  Resolution time is measured in days

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Key skills in problem solving leadership

Creating a ▪  Defining the problem clearly

productive ▪  Coaching others through the problem solving process
problem solving ▪  Role modeling “go and see” to identify problems and root causes
environment
▪  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 ▪  Maintaining appropriate link to meeting agenda/purpose
effective ▪  Focusing, using time wisely
meetings ▪  Engaging entire group to gain critical information
▪  Pushing on key questions related to core problem
▪  Synthesizing discussions; playing back information
Communicating ▪  Capturing most critical information to support analyses or hypotheses

Being ▪  Building trust

personally ▪  Time mastery
effective

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Introduction and recap of 7 steps

Exercise

Consulting as a career

McKinsey & Company | 7

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Step 1: Define the problem

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

? !
Recom-
Problem Struc- Priori- Issue Syn-
Analysis menda-
definition turing tizing analysis thesis
tions

Problem Communication Impact

SOURCE: McKinsey McKinsey & Company | 8

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Problem statement example: Oilco Refinery

Oilco Refinery is suffering from poor Statement of

profitability despite a strong market fact
niche position

Should Oilco Refinery improve its Not

deteriorating position? disputable

Can Oilco Refinery be managed Too general

differently to increase profitability?

What opportunities exist for Oilco to

improve profitabilty by $40 million S.M.A.R.T.
per year through overhead
rationalization, operational
improvements, or restructuring non-
core assets?

SOURCE: McKinsey McKinsey & Company | 9

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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 McKinsey & Company | 10

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

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

1 4
Perspective/context Constraints within solution space
▪  Sets out the “situation” and “complication” facing the ▪  Defines the limits of the set of solutions that can be
company, e.g., industry trends, relative position in the considered, e.g., must involve organic rather than
industry inorganic growth

2 5
Criteria for success Stakeholders
▪  Defines success for the project. Must be shared by ▪  Identifies who makes the decisions and who else could
management, stakeholders and team. Must include support (or derail) the project, e.g., CEO, Division
qualitative & quantitative measures, e.g., financial Manager, SBU Manager
returns, effect on staff

3 6
Scope of Solution Space Key sources of Insight
▪  Indicates what will and will not be included in the ▪  Identifies where best practice expertise, knowledge, and
project, e.g., international markets. projects approaches exist (within the company or within
the industry) - e.g., document from experts, databases,
previous projects…

SOURCE: McKinsey McKinsey & Company | 11

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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 | 12

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Sample work product for Hiperama

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%?

1 4
Perspective/context Constraints within solution space
▪  Consolidating industry with international/ domestic ▪  Regulated market prevents expansion in size of stores
players looking to grow presence in Spain ▪  Pricing below cost not permitted by law
▪  Price-based competitors rapidly gaining share
▪  Consumer demands changing towards service and
convenience while price remains a key factor
▪  Regulation restricting new hypermarket development
2 5
Criteria for success Stakeholders
▪  Operating margins of 3.5% ▪  Luis Gonzales (CEO) ▪  Store manager pilot
▪  Clearly articulated value proposition ▪  CFO project
▪  Roll-out plan capable of building organizational buy-in ▪  VP of HR ▪  VP of Operations
▪  Grocery Director

3 6
Scope of Solution Space Key sources of Insight
▪  Divestiture is not an option at this time ▪  Key Hiperama executives
▪  Focus on Spanish grocery retail market ▪  Nielsen or other retail & marketing information company
▪  Analyst reports

SOURCE: McKinsey McKinsey & Company | 13

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Step 2: Structure the problem

Think DISAGGREGATION and

HYPOTHESIS:
What could the key elements of
the problem be?

? !
Recom-
Problem Struc- Priori- Issue Syn-
Analysis menda-
definition turing tizing analysis thesis
tions

Problem Communication Impact

SOURCE: McKinsey McKinsey & Company | 14

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Quality logic trees are consistent, relevant, and MECE

First line Second line

of support of support

Consistent
Problem statement
worksheet
Basic question to
be resolved
1
Perspective/
3
Decision makers/
Relevant Mutually
2
context

4
stakeholders
Exclusive
Criteria for
success
Scope of
solution space Collectively
4
Barriers to impact
Exhaustive

Consistent

SOURCE: McKinsey McKinsey & Company | 15

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2 main types of logic trees

Issue tree Hypothesis tree

Argument 1
Hypothesis
Issue (potential Argument 2
(question) answer)
Argument 3

“What?” or “How?” “Why?”

▪  Breaks issue or question into ▪  Asserts a possible solution, with

smaller issues/questions necessary proofs
▪  Addresses the entire solution space ▪  Narrows the solution space to focus
▪  Used for project starts or new problem-solving
problems ▪  Used when you have enough data
to support a hypothesis

SOURCE: McKinsey McKinsey & Company | 16

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Main differences between issue tree and hypothesis tree

Issue tree Hypothesis tree

▪  To create a comprehensive ▪  To focus the analysis on those
overview of all the factors elements that we know
Purpose impacting the problem (assume) to have the most
impact on the end-product

▪  When there is a little evidence/ ▪  When we have data to prioritize

When to experience available to draft elements of the problem (based
use hypotheses on experience, experts input or
▪  Typically early in/before the initial analyses)
project (can be a very good
opening discussion with
managers and stakeholders)

▪  Questions ▪  Early (when possible) or after

What does ▪  Neutral initial analyses
it look like
▪  Comprehensive ▪  (Preliminary) Answers
▪  Guided
▪  Focused

SOURCE: McKinsey McKinsey & Company | 17

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

▪  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)
?

What set of actions

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

SOURCE: McKinsey McKinsey & Company | 18

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Hiperama issue tree –a possible solution

What actions can

Hiperama take to
increase revenue?

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?

SOURCE: McKinsey McKinsey & Company | 19

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Hiperama issue tree – a possible solution

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

Increase traffic
Increase conversion rate
(total number of
(number of purchases/
purchases/
number of trips)?
month)?

Increase average
What actions frequency of visits
can Hiperama (number of trips/month)?
take to Department A?
increase Increase average Department B?
revenue? basket size for each
department? Department C?
Increase average Etc.
basket size
($/basket)? Department A?
Increase percent of
shoppers making Department B?
purchase from each Department C?
department? Etc.
Increase number
of stores

SOURCE: McKinsey McKinsey & Company | 20

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Hiperama issue tree – a possible solution

Department A?
Department B?
Merchandise cost Department C?
Production cost Etc.
COGS/unit Transportation cost
Reduce
Storage cost
variable
costs? Other
Ordering
costs Order frequency
What actions (based on Order lot size
can Hiperama # of units)
take to reduce Labor cost/m2?
costs?
Operating Rent cost/m2?
cost/m2 Overhead/m2?
Reduce Other operating
fixed cost/m2?
costs?
Total space Selling space
Number of stores (m2)
occupied
(m2) Size of stores (m2)
Non-selling
space (m2)

SOURCE: McKinsey McKinsey & Company | 21

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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-
Problem Struc- Priori- Issue Syn-
Analysis menda-
definition turing tizing analysis thesis
tions

Problem Communication Impact

SOURCE: McKinsey McKinsey & Company | 22

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

Issue 1

Problem
statement
Issue 2 ▪  Keep focusing in to work
efficiently
▪  Prioritize your effort on
what is most important
Issue 3 ▪  Drive toward hypothesis
as early as possible
▪  Don’t “boil the ocean”
Issue 4

SOURCE: McKinsey McKinsey & Company | 23

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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

Key ideas Example methods

▪  Take a reasonably quick, informal ▪  Percentage of total “X”
approach to get started
▪  Estimated potential increase/decrease
▪  Remember that sometimes a ”back of (sensitivity analysis)
an envelope” calculation is all that’s
needed ▪  Simple ratios
▪  If new information emerges, you can ▪  Quick industry benchmarks
always reprioritize and switch your ▪  Qualitative input from interviews
efforts to another part of the tree
▪  Ease of implementation
▪  Use likely impact to decide where to go
first ▪  Timing
▪  Use readily available data whenever ▪  “Quick wins”
possible; avoid major data requests ▪  Available resources
▪  Do not create massive spreadsheets or ▪  High/low risk
other computer models if you can move
forward with less complete information

SOURCE: McKinsey McKinsey & Company | 24

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Our focus going forward

High
We will focus on
these 2 points
on the revenue 1 2
side.
1 Increasing traffic

Feasa- Medium 2 Increase average

4 5 basket size
bility
3 Increase number of
stores

4 Reduce variable
stock
3
Low 5 Reduce fixed costs
Low Medium High
Impact importance
EBITDA 2,5% 3,75 % 5%

SOURCE: McKinsey McKinsey & Company | 25

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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

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

? !
Recom-
Problem Struc- Priori- Issue Syn-
Analysis menda-
definition turing tizing analysis thesis
tions

Problem Communication Impact

SOURCE: McKinsey McKinsey & Company | 27

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Issue analysis worksheet

Supporting
Issue Hypothesis Analysis Source
rationale
▪  Key issue or ▪  Statement of ▪  Elements you ▪  Models that ▪  Likely location
unresolved the likely have to believe should be or means of
question that resolution of the for the hypo- explored in obtaining data
elicits a “yes” issue. It thesis to be true. order to confirm to carry out
or “no” answer includes the ▪  Detailed or refute the analysis
and upon reason for supporting hypothesis
which specific answering yes rationales make
action depends or no the transition to
analysis easier

Example
▪  Should ABC ▪  Yes– ABC costs ▪  Competitors’ ▪  Comparison of ▪  Specialist
invest $20 million will become manufacturing manufacturing magazines/
in new uncompetitive costs declining costs reports
manufacturing without new ▪  Industry leaders ▪  Review of ▪  Manufacturing
technology? investment are investing in competitive and customer
new technology investment interviews
▪  Pay off is very ▪  Cashflow: NPV ▪  Accounting
short Department

SOURCE: McKinsey McKinsey & Company | 28

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Extend the issue analysis worksheet to create a work plan

Issue analysis work sheet
Supporting
Issue Hypothesis rationale Analysis Source

Work plan
End product Responsibility Timing
States the desired Identifies the team Sets the time (in work
output of the analysis member who will days) necessary to
undertake the analysis answer the key issue

+
Example
▪  Breakdown of compe- Fuentes, P.F. 10
titive costs and rea-
sons for differences
▪  Competitors’ Shaw, B.R. 5
investment trends and
areas of focus
▪  Value of investments Lun, C.A. 7

SOURCE: McKinsey McKinsey & Company | 29

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Tactics for successful issue analysis

Be specific Be realistic

Explain clearly what the Frame each analysis so

output you want is and that one team member
what it should look like can cope with it

Use your teammates as Update your Issue

sounding boards for Analysis Worksheet and
hypotheses work plan as you proceed
with problem solving

Syndicate with the team Revisit

SOURCE: McKinsey McKinsey & Company | 30

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Step 5: Analysis

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

? !
Recom-
Problem Struc- Priori- Issue Syn-
Analysis menda-
definition turing tizing analysis thesis
tions

Problem Communication Impact

SOURCE: McKinsey McKinsey & Company | 31

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Step 6 - Synthesis

Problem-solving

Define Structure Prioritize

Problem problem problem issues

Communications Plan analyses

and work

Develop Synthesize Conduct

recommendation findings analyses

Think “so what” – What

implications do our findings
have for the company ?

SOURCE: McKinsey McKinsey & Company | 32

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Summary ≠ Synthesis

Summary

Condensed
restatement
of facts
Facts

Raw, Push your

unordered thinking
information further Synthesis
What the facts
and findings
imply (“so
what”)

SOURCE: McKinsey McKinsey & Company | 33

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Summary versus synthesis

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

I’ve mislaid my keys.

Where is my
passport?
Oops, 2 months late Synthesis
on my taxes!
I need
I’m scattered! So what? to take
a break!

SOURCE: McKinsey McKinsey & Company | 34

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Synthesis – From facts and observations to findings and from findings

to recommendations

Fact 1

Fact 2 Overall
finding

Fact 3 ▪  Concise (1 sentence)

▪  Powerful
Observation 1
▪  Comprehensive
▪  Actionable
Observation 2

Observation 3

SOURCE: McKinsey McKinsey & Company | 35

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Now, let’s synthesize these observations

n’s gro ce ry se ct or is one of the most

1.  Spai pe
fragmented within Euro
tio n s m ak e b uildin g la rge-format
2.  Tight regula
ore s lik e h yp er m ar ke ts difficult
st
m er s h av e a re le n tles s focus on
3.  Spanish consu
value
pea n and U S re ta ile rs are seeking to
4.  Euro , especially in
expand geographically
fragmented markets
m ily st ru ct u re s ar e fu eling demand
5.  Changing fa
rvice
for convenience and se
t an d d is co un t st ore s are adding
6.  Supermarke hypermarkets
outlets much faster than

SOURCE: McKinsey McKinsey & Company | 36

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

Observations Findings
Spain’s grocery sector is highly
fragmented
Consolidation will increase
competitive pressure
European and US retailers are
expanding

Difficult to build new hypermarkets

The hypermarket format faces
unfavorable market conditions in
Supermarkets and discounters adding Spain
outlets

Consumers focus relentlessly on value

Spanish consumers are
becoming more demanding
Consumers increasingly want
convenience and service

The retail environment in which

Hiperama operates is becoming more
challenging, suggesting Hiperama
Do you think this is needs to strengthen its position
a good synthesis?

SOURCE: McKinsey McKinsey & Company | 37

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Introduction and recap of 7 steps

Exercise

Consulting as a career

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What are we looking for?

We evaluate applicants on two key dimensions

Distinctive

Problem
solving Good
Case
interview
OK

OK Good Distinctive
Leadership, Impact & Drive
Experience Interviews

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LEADERSHIP, IMPACT AND DRIVE NE-AAA123-20100119

What do we measure in Experience Interviews?

The passion and energy to achieve

Drive challenging goals (which often means
overcoming certain obstacles)

Personal The skills to gain support and commit-

Impact ment even from difficult individuals

Leadership Inspiring and effective leadership

in challenging team situations

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PROBLEM SOLVING NE-AAA123-20100119

What we want to see in the case solving?

Analytical skills Practical and common sense

▪  Logical reasoning ▪  Basic business sense

▪  Ability to structure a complex problem ▪  Prioritization
▪  Basic numerical competence ▪  Understanding of implications of
▪  Tolerance for ambiguity decisions
▪  Ability to synthesize
▪  Creativity Communication skills

▪  Good listening skills

▪  Insightful questions
▪  Clear explanation of complex ideas

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