I saw your comment below that none of the answers fully addressed your question, so thought I'd take a crack. To recap, this was the prompt you received:
"A leading manufacturer of instant cameras and one-hour photo finishing machines is facing a dramatic downturn in business due to the rapid increase in digital photography and sharing photos over the Internet. What should it do?"
The other answers stressed the importance of clarifying the company's objectives, so I won't say more. Assuming the objective is something basic (e.g., shareholders want to increase value), here's how I would approach the question:
1. Tweak an existing framework that you know is MECE
I would use an M&A framework as a "template" to tackle this question. For example, in an M&A, you typically use the following framework:
- Is this an attractive market to enter?
- Is this an attractive company to acquire?
- Is this the right opportunity for our client? (e.g., Can our client afford the target? Will there be synergies?)
For this question, I would adapt slightly as follows:
- What is the outlook on the photography market?
- What is the outlook on the company?
- What are the opportunities for our client?
TIP: The general framework of "market / company / opportunity" is always MECE and works pretty well for cases that involve market trends.
2. Use questions to build out each "level" of the issue tree
Under the first heading (What is the outlook on the photography market?), I would have the following sub questions:
- What is the market size of photo services? Is it growing or shrinking?
- What is the breakdown between digital, instant, and other photos? How has this changed over time?
- Who are the major competitors in this space? What moves are they making?
Under the second heading (What is the outlook on the company?), I would have the following subquestions:
- What is the revenue and cost over time? (Here you can use a good ole revenue / cost framework. It's a framework within a framework!)
- Does our company have competitive advantages relative to other players?
Under the last heading, I would list the points you raised:
- Is there a buyer who would interested in our client's assets?
- Could our client pursue product development?
TIP: Using questions as the headings is helpful to break out each level for non-standard cases. In fact, almost all issue trees I showed clients were framed as questions.
3. Prompt the interviewer to hint where you should go
Once you share the framework, you might be unsure where to go next. It's always fine to ask the interviewer: "Where in the framework do you recommend I focus?" If the interviewer says "Let's talk about product development," you can start breaking that out into more detail.
A few last thoughts:
- You can always make a MECE framework. Dynamic problems are tough, but that's why interviewers ask them!
- Yes, diagramming or writing frameworks in the form or an outline are both common. I've done both on actual cases.
- Try putting this to task on a non business problem. We used to do a fun one in training called "Should I ask her on a date?" All participants then made a pretty humorous (but MECE!) framework to answer the questionl.
Hope this is helpful!