Solving Complex Problems

A TRAINING DOCUMENT

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The firm’s approach to strategy emphasizes the importance of both strategy formulation and implementation. The best developed strategy will be compromised without support for implementation. In a rapidly changing market, we create actionable strategies to help businesses to succeed in the this economy. As part of the process we need to solve a wide range of complex problems.

Solving Complex Problems

• Analytical Thinking – The McKinsey Way• System Thinking - The MIT Methodology• Scenario Planning – The Shell Planning Process

1/ The McKinsey Approach

The Three Pillars1. Aggressive Facts Gathering2. Structure Facts Rigidly - MECE3. Create and Testing Hypothesis

The McKinsey Approach

Aggressive Facts Finding

Don’t try to boil the ocean…start with small coffee pots. Find facts that are only relevant to the subject.

Use the 80/20 rule …it works most of the time.

Take steps back from whatever you’re doing and ask yourself some basic questions of what facts you need to get in order to help you to get a total picture.

The McKinsey Approach

Structure facts rigidly and thinking with maximum clarity to identify core issues – The MECE Approach

Starts at the top level of your solution – lists the issues making up the problem needed to be solve

Check if each one of them is ‘mutually exclusive’. If so, then your issues are ‘collectively exhaustive’

A good McKinsey list should not have more than five issues.

The McKinsey Approach

Creating the problem solving roadmap -Generating Initial Hypothesis

The first step is to create initial hypothesis which is to figure our the solution to the problem before knowing the real problem. It is counterintuitive.

Starting with facts, talking to people, read everything. Find out the key drivers of the business.

Go down one level and try to prove or disprove your IH and collect more data if needed.

The end product of this exercise is what McKinsey calls the ‘Issue Tree’. This can only be effective if it is produced by a team instead of individual.

Test the IH with the group and ask questions like ‘what if?’

The McKinsey Approach

An Illustrative Example of an Issue Tree

Build Channel Capabilities

Build Direct Marketing Channel

Sell Through Channel Partners

Reduce Customer Service Costs

Multi-Channel Strategy

Redesign Sales Force Incentives

Product Customization

Strategy

The McKinsey Approach

McKinsey Growth Options Framework:

The McKinsey Approach

Identify Core Business Drivers:

The McKinsey Approach

Identify the Basis of Competition:

The McKinsey Approach

Providing solutions:

2/ System Thinking and System Dynamics

Beyond Spreadsheets – It’s a discipline for seeing the whole, for seeing interrelationships and patterns rather than snapshots.

Illusion of Accuracy - because spreadsheet blindly calculates numbers up to decimals, the psychological impact is that this impressive display of precision lulls decisions-makers into overconfidenceIllusion of Reduced Complexity - the abundance of quantitative analysis led to a focus on any of a handful of metrics to reach a decision: IRR,ROE,NPV,ROI etc.Illusion of Reduced Risk - the above two together created the third -reduced risks. A management team that has dramatically simplified its representation of a business system and overconfident about it ability to manage uncertainties.

System Thinking and System Dynamics

Business Modeling approach facilitates a focused problem solving process in conjunction with traditional strategy planning tools to get deep insights into a business system. By using casual loop diagrams, System Dynamics allows us to focus on the structure of the problems, not just numerical outputs and allows us to deal with complex business system in a manageable manner.

Events

Patterns

Structures

What happened?

What has been happening?

Why is this happening and what forces including underlying mental model created this behavior?

System Thinking and System Dynamics

• Dynamic Business Modeling can help us assess the value of the defined strategy, alternatives, risk factors and management tradeoffs. Business modeling are critically important to prioritizing goals, gaining executives’buy-in and managing the learning and experimental journey.

• It is often possible to break systems down into a collection of subsystems for ease of understanding and control. Important tools and techniques casual loop modeling, system dynamics and simulations.

System Thinking and System Dynamics

• Construction can be used to stimulate thinking and debate.• They are an objective representation of the shared ‘mental model’ of the team• Their development can often reveals inconsistent assumptions and beliefs held

by different team members• They can lead to further detailed modeling of business using system dynamics.

An Illustrative Example of casual-loop diagram

Brand more widely available

More consumer promoted to try the brand

More consumers make repeat purchase

More shops want to shop the brand

More people see the brand being used

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++

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3/ Scenarios Planning – The Shell Way

• Shell had experimented with four, three and two scenarios for strategic planning. It had found:Four scenarios encourage divergent thinking and are useful for creating vision

• Three scenarios lead to the expectation that one is ‘the’ forecast• Two scenarios allowed two very distinct to be developed.

The Art of the Long View

Scenarios Planning – The Shell Way

Prioritize Drivers

• Identify the significant variables that might bring about different futures, look at the potential impact of the industry and the degree of uncertainty and identify research to illuminate the selected drivers.

Construct Conceptual Scenarios

• Review research findings, debate conventional wisdom for 5 or 10 years out, imagine futures in which a few driver from the conventional wisdom.

• Review analytical work, complete scenarios with complimentary assumptions about other drivers and debate strategies likely to bring success in the different scenarios.

Finalize Scenarios

Post

Develop Vision

• Describe the future that the team wants for the business; contrast with current reality; identify the few important high leverage initiatives that will start the process of change necessary to realize the vision.

Strategic Options

• Develop plans to deal with different strategic options as a results of different scenarios. Facilitate continuous dialogue on strategic options and choices.

A Process for Developing Scenarios

Scenarios Planning – The Shell Way

• Identify focal issues• Understand the key forces in the local environment• Map our the driving forces • Rank by importance and uncertainty• Selecting the scenario logic• Fleshing out the scenarios• Map our the implications• Selecting the leading indicators

Scenario Planning – Where to start?

Scenarios Planning – The Shell Way

An Illustrative Example :Scenarios Outcomes with implied changes in global competitive structure

Global Giants•Three tier tariff

•Build local loop

•Large scale outsourcing

Blurred Boundaries

•Tariff become distance independent

•New players Opportunities

Wireless World

•Viable competition for local loop access

•Tariffs are partially restructured

•Personalized numbering plan challenge regulations

Do-it-Yourself

•Commodity markets at all levels

•Open standard prevails

•Re-intermediation (new niche players)

Scenarios Planning – The Shell Way

Linking Strategy to Scenario Planning

Scenarios

Assessment of How Business will Fare Under Each Scenario

Market Attractiveness/

Capabilities

Identify Critical Success Factors

Assessment of:

• Market Attractiveness 5 Years

• Risks due to external factors

• Consideration of strategic options

Input

Part 1 : Introduction to Methodologies

Follow by Practice Workgroup

Part 2 : Business Modeling

Follow by Practice Workshop

Part 3 : Customer Value Analysis Framework

Follow by Practice Workshop