Structure - Algebraic or Conceptual

Question

Hi,

Let's assume we start the structure as the classic

Profit=Revenues-Costs and Revenues=Volume*Price...

After then, is it OK if we branch out from Volume -Market size, -Competition, -Product, -Channels etc. type of conceptual areas that will effect the volume? OR it's expected to continue in the consistent algebraic formula like Volume= #of users * Quantity per user etc?

Thanks!

Answer 1

Hi,

While you do your structure you split the revenues first by the revenue streams (if you have multiple streams) and then into either:

Price and quantity for the production companies. I also recommend to add proactively the 3rd box - the "Mix". Thus you show your business sense and demonstrate that you know the most common case traps. Pls note that the "mix" can be anything - geography, customer, product, etc.
The number of customers and the average check for retail stores, restaurants, ets. You can further split the customers into traffic and conversion (if relevant, e.g. for a fashion store) and the avg check into the products and prices

If you find out that one of the numbers has changed - you should build a new structure to address this change. It can be algebraic (E.g. #of customers = traffic * conversion, or Market volume * market share) or more qualitative (Like the decrease in QTY is caused by Product, Marketing or Distribution changes). There are tons of variations of structures and formulas that you can use and you should be very flexible depending on the type of the case, objective, industry, etc. In other words - there is no magic pill and you should use your best judgment.

Best!

Answer 2

Hi there,

To answer your question - yes, it is okay, but your have to be very very careful in how you explain your framework. A major risk of doing so is being NOT MECE. Think about the "conceptual areas" you listed above. Okay, you put Competition under Volume. What about Price then? Does Competition affect Price too? If yes, do you write it again under Price? If you do so, is your framework still MECE? How do you explain it in a way that's MECE? If you cannot think of a good way to explain, I would advise against creating your framework such way.

If you are thinking about whether you can branch out from a mathematical/algebraic component into a list of qualitative/conceptual areas in general, yes you definitely can. There is no written rule. If this is the best way to approach a problem, definitely do so.

To answer the second part of your question, it is not always expected that you continue your framework with mathematical components, but very often that is the most logical and MECE way to divide up a problem. So try to do that if applicable.