Business Frameworks 101 (Part 1)
“Don’t work hard, work smart.”
What does “work smart” mean? In management consulting, I learned that while everyone is scrambling trying to figure out where to start, how to start and what they need, “work smart” means you already have a game plan. You already have a direction. You already know exactly where you want to go and what you need to get the job done. To do this, you need a toolbox of frameworks that give you structure and help you see the complex problems in a simplified way, so you know how to tackle them.
If you want to work smart, check out this video for practical business frameworks that you can use immediately to simplify your thinking, solve problems efficiently, get direction for where you want to go and know exactly what you need to do to get things done.
There are four sections to this two-part video series:
- Section 1: Consulting problem solving frameworks
- Section 2: Brainstorming solutions
- Section 3: Structuring analysis
Section 1: Consulting Problem Solving Frameworks
Management consultants and strategy consultants solve million dollar, billion dollar problems in just a few weeks because they are not operating with the normal problem solving models. The three we’ll talk about today are:
- Hypothesis-driven problem solving
- Pareto principle
- MECE
Hypothesis-Driven Problem Solving
This sounds fancy, but it just uses the scientific method to solve business problems. You come up with the hypothesis, make your predictions and then carry out experiments to test if your predictions were correct.
For any business problem, we usually have an incomplete set of facts. There are gaps in our understanding of what is going on in the market, what is going on with our competitors and what is going on with our customers and their behaviours. So how can we make decisions and solve problems when we don’t have all the information we need?
If you want to work hard, you would do bottom-up research by gathering all the data and build a case from the ground up. But if you want to work smart, then you want to start from the top and go down. This means you want to come up with a hypothesis of what might be true and make an educated guess based on what you already know. For the gaps, you want to make assumptions about what might be there and then test your assumptions to see if they are correct. If they are correct, then your hypothesis is likely to be true. If not, then you can adjust your hypothesis. This is a more dynamic way of solving a problem.
Example: Ice cream shop
You run an ice cream shop and your profitability is a bit low and you want to improve it. How do you go about doing this?
First, look at the facts that you have. You know that when you sell your ice cream, your customers love it. And when you look at your books, you see you have cut as much cost as possible; you are at the leanest you can be with your business.
So how can you improve your profitability?
You can make a few assumptions here. Revenue = Price x Volume (the number of units sold).
If you know your price is standard and competitive, then that’s not the problem. You can then assume the problem must be the number of ice cream units that you sell; you’re not selling enough ice cream per day. And if making more ice cream is not a problem, then maybe the problem is a distribution problem; not enough people are buying your ice cream. You can take this assumption and test it. For example, you can run an influencer campaign to see if that draws more people to buy your ice cream. There are different ways to test this assumption, and now that you have a direction of where your problem likely is, you can solve your problem more quickly.
With hypothesis-driven problem solving, it is important to understand what you already know (the facts around your problem), and what assumptions you are making so you can go and test them. This way of working gives you a clear direction of what exactly you need to do. For those interested in mental models, you’ll notice this uses first principle thinking, which I talk more about in this video.
Pareto Principle
Most companies have constraints, whether that’s time, resources or capabilities. Working with constraints, people need to prioritize. And to prioritize, you use the Pareto principle, or the 80/20 rule.
The 80/20 rule is a life-changing framework. It will maximize your effectiveness. It is the rule of uneven distribution, where 80% of your results only come from 20% of your efforts. And the remaining 20% of the results come from 80% of your efforts. This is classic “don’t work hard, work smart”: focus on the 20% of your effort that will give you 80% of the results.
In the context of business problem solving, there are usually multiple solutions that can help solve a complex business problem. But not all solutions are created equal. Some have greater impact on the problem and others have less, even if they all help solve the problem.
Example: Ice cream shop
Let’s return to the ice cream shop example. There were technically endless things you could do to improve profitability. You could cut costs, increase marketing, sales, PR, R&D, your price. There are all sorts of things you could do in order to improve profitability, but remember, all businesses face constraints. You don’t have enough money, time or people. You don’t have enough capabilities to do all those things, so you must prioritize.
The question you always want to ask yourself is, out of all these drivers, which one is likely to have more impact? Which one is going to be that 80/20 that’s going to take the least amount of time and resources, and produce the most results?
If you have a lot of business frameworks in your mind, you already know the answer. To get 80% results for profitability with 20% effort, research has shown that usually by increasing the price, you’ll get three to four times more benefits than if you change the volume, the number of people who buy your product or the number of products that you sell. So pricing is the 20% of your efforts that will lead to 80% of your results. It’s a lot easier to update your price from $3.99 to $4.49 and see what happens than it is to pursue marketing, sales or try to get your ice cream into a supermarket of sorts.
Even if you didn’t have that business framework, you still know to think about the 80/20 rule and understand that not all solutions are not created equal. Then you just need to do some quick Google searches: how does cost affect profitability? How does pricing affect profitability? Or volume? And just by Googling, the results will tell you that pricing has a three to four times bigger impact.
With these two frameworks on problem solving, you already stand out amongst your colleagues. While your colleagues spend days without direction, trying to find a solution by understanding the company and customers, looking into marketing, PR and other factors, you already have a solution to present to your boss. You have a clear option that is backed by research - credible research from the Harvard Business Review - that states why your solution works. You have a clear plan to test assumptions to see if they are correct, so that you can choose the best solution. And it only took you 15 minutes to look through the existing facts and do some Google searches. Not bad for “working smart.”
MECE: Mutually Exclusive Collectively Exhaustive
MECE is a framework to break down problems. When you break down something complex, you want to make sure that it is mutually exclusive (there are no overlaps), and collectively exhaustive (it’s complete and you haven’t left something out).
Example: Ice cream shop
We’ll return to the ice cream shop example to see how this problem was broken down.
The way your directionless colleagues went about the problem was not MECE because they were trying to brainstorm possible solutions. And as we’ve said, there are endless solutions. This approach lacks structure and your boss might wonder and ask if anything is missing, or if the list is complete.
On the other hand, the way you did it was MECE.
Profit = Revenue - Cost. You looked at both revenue and cost, and there’s nothing else to consider for profitability. It was not a cost problem because the shop was operating as lean as possible already. So it was a problem of revenue.
Revenue = Price x Volume. This is MECE because there’s nothing else to consider for revenue other than price and volume.
You stand out because you’re using these frameworks to give your ideas structure. Frameworks sharpen your thinking and help you work smart.
TL;DR
In this first section, we covered consulting problem solving frameworks. We looked at three problem solving models:
- Hypothesis driven problem solving
This uses the scientific method, going from top down to solve business problems. - Pareto principle
The 80/20 rule. This helps us prioritize our efforts when working within constraints. - MECE
Breaking down problems in a way that’s Mutually Exclusive, Collectively Exhaustive.
These models will help you structure your thoughts, sharpen your thinking and solve business problems. If you want more, check out Part 2! [link to Part 2 blog]
In Part 2, we’ll look at two other sections of business frameworks for problem solving, including:
- Section 2: Brainstorming solutions
- Section 3: Structuring analysis
See part 2 notes here.
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