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How to properly use Buckets and Issue Trees

Anonymous A asked on Mar 11, 2019

Dear all,

I am quite new to case studies and have an upcoming MBB interview. Whilst I understand the basic concepts, frameworks, and theories and also can "solve" most of the cases, I still have questions about Buckets and Issue Trees with particular regards to being MECE. I have already searched for answers via google and in this forum but haven't found a suitable solution yet and I would appreciate any help.

The hardest part for me while solving cases is how to evolve a good structure. I know that you have to divide a problem into subsections and form bucket and issue trees to analyze a problem. But when exactly do you build an issue tree and when do you divide your problems into buckets? Do you build an issue tree within a certain bucket? Obviously, this can differ from case to case, but when do you use which or do you have to use both? I think when to use a tree is particularly challenging.

I know that an issue tree can easily be used for a profitability case, but do you use "bucketing" there as well? While using Google to answer this question, I almost only found issue trees related to P&L cases.

As an example, which is not a (pure) P&L case, how could one split up the case "A German car manufacturer is considering entering the Chinese market, should he do it?" into buckets/issue trees? A top-level answer could already really help me to improve my understanding of these concepts. Please also feel free to make any assumption necessary to lay down a structure.

Many thanks already in advance for your help, I really appreciate it!

Edit: Which of the two, if any or both, do you show to the interviewer after writing down your structure?

(edited)

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Sidi
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replied on Mar 11, 2019
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 90+ candidates secure MBB offers
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Hi Anonymous,

one of the biggest problems that candidates have in properly thinking through cases stems from the flawed way in which the approach to business problems has been taught in the classical case books. In fact, the "bucket logic" is the very reason why people fail to understand the fundamental principles underlying strategic decision making. It starts already from the wrong assumption that there is an essential difference between, for example, "Market entry cases", "Company acquisition cases", "Product launch cases", "Capacity expansion cases"etc. But the truth is: at the core, there is absolutely no difference between these scenarios! 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.

I will illustrate it based on your example. Please think it through - I hope you will realize that the same logic, centered around value creation, can be applied to ALL situations that I have outlined 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:

"A German car manufacturer is considering entering the Chinese market, should he do it?"

Approach:

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

1. Core Question: "Should the client invest into entering the Chinese Market?"

2. Identify criterion to make this decision: The (i) additional value we can create over the client's (ii) investment horizon has to be significantly higher than the (iii) investment cost. Moreover, the (iv) required capabilities need to be in place and the (v) risks need to be manageable.

3. Compile base information: Upfront investment need in order to get going (need for manufacturing facilities? distribution network? agency fees? other investment needs? / investment horizon of client (by when do they need to recoup the investment?)

4. Deep dive into the value creation potential by means of a profitability tree: what are the levers of value here? Compare Scenario A (entering the Chinese market) to Scenario B (not entering the Chinese market). How many cars can we realistically sell? What is the profit per car? Is there a large yearly fixed cost block (hence,, economies of scale?), etc. Analysis is done by first disaggregating profit into its numerical drivers. these are the branches of your tree. Then you can map qualitative drivers to the numerical drivers (e.g., market growth and market structure influence the quantity you can sell; the brand position influences the price point; operations and manufacturing influence fixed and variable costs, etc.)

5. Calculate annual value (delta between Scenario A and B). If entering the Chinese market indeed increases annual profits by a certain amount, you then divide the upfront investment cost by this additional yearly profit. This gives you the break even point (number of years after which the investment becomes profitable). If this point comes earlier than the investment horizon (which depends on alternative investment opportunities of the client), then this is a beneficial investment and the client should proceed with the move (purely based on financials).

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

Cheers, Sidi

P.S.: Please have a look at another example here - it follows the same core principle to address a similar issue. Even though the primary question is different (about capactiy expansion): https://www.preplounge.com/en/consulting-forum/how-would-you-structure-this-1737

Vlad replied on Mar 11, 2019
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Hi,

First of all - both issue trees and buckets are just different ways of structuring the problem. Both work in certain cases. You should build a structure using your previous experience, based on:

  • Objective (Should have a metric and time-frame)
  • Context

E.g market entry cases can have completely different objectives:

  • Should we enter the market?
  • Which top 3 markets out of 10 we should enter?
  • Can we get xx% market share on the new market?
  • Can we get xx ROI if we enter this market?
  • etc

Depending on the Objective and the Context you should come up with a proper structure to address the problem. Of course, you may use the patterns that you've learned while solving the other cases.

There is a number of ways how you can approach the structure:

  1. If your structure works mathematically (e.g. Total time spent on cleaning operation = # of people x Frequency x Hours per cleaning per person)
  2. If your structure comes from a formula (e.g. output rate = total number of people being served / time to serve one person)
  3. If you are using the common industry drivers (e.g. revenues = # of customers x av. check) (e.g Passengers on the plane = capacity x Load Factor) or the industry revenue streams (Fuel revenues / non-fuel revenues for the gas station) or the functional drivers (e.g. for the problems in sales : Sales strategy / sales people and allocation / motivation / sales process)
  4. If your issue tree is a real framework used by the consultants (e.g. the famous Bain Cap framework for PE due dills: Market / Competitors / Company / Feasibility of exit) (e.g. People / Process / Technology) (e.g. The famous McKinsey framework - People don't want to do smth / they can't do smth / smth prevents them from doing that)
  5. If your structure is a well-known academically MECE framework (e.g. Product / Distribution / Price / Marketing (Also known as 4P))

There is no magic pill how you can learn to build the MECE issue trees. !!!! It comes with a lot of Practice and reflection and building proper industry and functional knowledge. !!!!

Best

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