How do you develop a framework for open-ended questions?

Hi Elizabeth,

there is a fundamental misconception among many folks trying to build their case solving muscle: assuming that there is an essential difference between what you call "Profitability Cases" and, for example, "Market entry", "Company acquisition", "Product launch", etc. But the truth is: at the core, there is absolutely no difference between these questions! The core of the issue is absolutely identical:

Can the client create value or not?

Hence, juggling around with different frameworks, trying to map and match them to these questions is just demonstrating this fundamental non-understanding of the candidate. I will say it again and again: cases should be approached and solved from first principles!

• One of these first principles is that you start EVERY case from the core question that you need to answer! This core question is the starting point of a rigorous logic tree, and each element that you want to analyze needs to clearly relate back to the core question! This principle forms the basis of any structure.
• Another first principle is, e.g, to define the criterion or criteria that need to be met in order to anwer this core question in one way or another.

The big advantage is that this is making "frameworks" unneccessary for the structuring of cases! You need to learn and internalize the logic, then you have a bullet-proof toolbox under your belt, far more rigorous then a "framework-learning" approach.

Just one example below which I described in an earlier post. This is about capacity expansion and vertical integration. Please think it through - I hope you will realize that the same logic, centered around value creation, can be applied to ALL situations that you descibed above (new market, new product, m&a, etc.). It also works indepent of whether Profit is the primary objective or not. As long as the objective(s) is/are clear, the criterion to answer the core questions can be adapted accordingly.

EXAMPLE:

Question:

Our client is a large producer of PET. PET is a type of plastic that is used mainly for producing bottles, such as the ones you find in grocery stores. The main component of PET is PTA. Our client has a PET plant in the US and serves clients both in the US and Europe. They have made the decision to build a PET plant in Europe to be closer to the clients. They have asked you to evaluate whether they should also backward integrate and purchase a PTA plant and locate both plants next to each other.

Approach:

This is a strategic investment decision. A very clear approach would be:

1. Core Question: "Should the client invest into purchasing a PTA plant next to the new PET plant in Europe?"

2. Identify criterion to make this decision: The additional value we can create over the client's investment horizon has to be significantly higher than the investment cost. Moreover, the risks need to be manageable.

3. Compile base information: Purchasing Price of PTA plant / yearly operating cost of PTA plant if purchased / capacity of PTA plant vs. PTA need / investment horizon of client

4. Deep dive into the value bucket by means of a profitability tree: what are the levers of value here? Compare Scenario A (PTA plant in Europe) to Scenario B (no PTA plant in Europe). Probably the value lever lies on the cost side: how much savings potential due to decreased/eliminated transport costs? How much savings due to eliminated import tariffs? etc.

5. Calculate annual value (delta between Scenario A and B). If a PTA plant in Europe indeed increases annual profits by a certain amount, you then divide the purchasing price of the PTA plant by this additional yearly profit. This gives you the break even point (point in time after which the investment becomes profitable). If this point comes earlier than the investment horizon, then this is a beneficial investment and the client should proceed with the purchase (purely based on financials).

6. Don't forget to compile potential risks and mention them in your summary

Cheers, Sidi

P.S.: A rare exeption are pure operations cases, where I usually recommend a different approach. Just as operations projects in real life at MBB firms need to be approached and conducted differently from strategic projects.

(editiert)