How to Make Strategic Decision in the Management Consultant Way (1)

What are the sharing characteristics of entrepreneurs and management consultants? They both solve business problems and make strategic decision on daily basis. The difference is whether they are making the strategic decision for themselves.

Although the trend of management consulting slowed down in recent years, we cannot deny that this profession has made significant impact on the global businesses. All most all large multinational corporations have hired management consultants to help make strategic decisions.

Management consulting also seems like a service reserved for cash-rich companies, because the fees are very high. Does it mean that small business owners or entrepreneurswill not be able to enjoy the benefits of their problem solving and decision making skills?

Of course not.

The way management consultants solve problems is not exclusive for consulting firms or big corporations. It is a skill that can be learned by anyone.

In addition, consultants’ services are far from flawless, because the consultants merely use this skill to reach a recommendation without deep knowledge of the company. They argue that they are the fresh eyes with methodologies (the skill).

However, the spending and work usually end up as unpractical documents on the shelf, even though those consultants are extremely smart. This is a fact that corporate world has increasingly recognized. No wonder why they book less and less projects with the consulting firms.

It does not mean that the management consulting methodology is not practical tho. Instead, it entails that methodology has to be integrated with business knowledge to work well.

A proof is that, based on some top business schools’ internal hiring statistics, the consulting firms, especially the top ones, switch their hiring favor to those with deeper industrial knowledge from those possessing general business knowledge.

Therefore, I deeply believe that, small business owners and entrepreneurs, who roll up sleeves and get hands dirty in the business day in and day out, and thus who possess the best knowledge of their business, can make strategic decision with so much more value, if they incorporate the management consulting methodology.

With the mission to share knowledge with business owners and entrepreneurs, I decided to start a series, alongside my accounting and personal finance topics, about how to solve problems in the management consultant way for small businesses, with plenty of business cases.

How to Make Strategic Decision in the Management Consultant Way (1)

In the first post of the series, I would like to share the process how a management consultant solve business problem and provide some generic tips. By the end, I will go through the process with an example.

This post includes the following key aspects:

• What is the management consulting way?
• The prep
• The framework
• The information collection
• The Conclustion
• Example of Framework – Rental co.

1. What is the management consulting way?

Firstly, what is the management consulting way?

It is the casing method. You may hear of that consulting firms emphasize casing interviews tremendously during the hiring process, because casing interviews assess whether the candidates possess excellent casing skills to perform great at the future consulting work.

The essential of casing method is a series of steps to structure the thoughts and break down the problem into smaller pieces for further study and analysis. It should ensure the thought process is thorough with minimal repetition. I.e. mutually exclusive and collectively exhaustive (MECE).

There are many books in the market talking about the casing method. However, most authors target students who want to pursue management consulting career and intend to attract the audience to take their coaching services or classes.

As a result, reading those books may not be the most efficient way for business owners to learn the strategic decision making methodology.

Meanwhile, I summarized the process and presented only the relevant essentials of the casing method as below, so that it will help entrepreneurs efficiently grasp the concepts and use the methodology.

2. The prep

Everything starts with a problem to solve or a decision to make. A problem could be the decreasing profitability while a decision could be to determine which market to expand for your business. Essentially, both imply some results you are trying to achieve.

For management consultants, the problem must be clearly defined by their clients, because consultants are paid by solutions within the scope of the problem. And they will not pay attention to things outside the defined scope. Even if they do, they will propose a new project to charge more fees.

But as business owners and entrepreneurs who take full responsibility of the business and thus who cherish company’s resources, you will want to think more holistically when defining the problem.

Firstly, what exactly is the problem?

Problems could appear in any forms. But I recommend simply thinking from the perspectives of financial statements: whether it is something mainly affecting the top line, a.k.a . the revenues, the bottom line, a.k.a. the profitability, any particular items on balance sheet, or the efficiency to turn over the assets/invested capital?

For instance, the expansion strategy will eventually affect the top line and the asset scale, while the operation efficiency will eventually affect the bottom line.

No problem should go away from the considerations of financial statements, because financial statements show the results of business performance and thus greatly dictate the value of the business for investors.

Nevertheless, I deeply believe that corporations should also fulfill social responsibilities and ought to make the profits in an ethical way. So there could be some problems that may work against the financials in the short term. However, with growing awareness, customers eventually will reward the companies that emphasizing the social responsibilities in the long-term.

Secondly, think about the objectives of problem solving, and how the objectives align with the main strategies. For example, if scaling is the core focus, objective like improving profitability may not be as critical. If it is, the scaling objective should not be compromised when solving this problem.

Thirdly, after clarifying the problem, we could review the business profile and financial profile of the company. Business profile includes information about market shares, product position, customer profiles, distribution network, things that are not in the financial statements. Financial profile, on the other hand, include revenues size, profitability etc.. This is valuable information for the following steps.

3. The framework

Now we need to solve the problem and make strategic decision via a framework.

One of my professors at the business school made a joke that framework is every consultant’s dream. Indeed, framework is the essential of the management consulting. While the essential of framework is structured thoughts and areas to explore to solve the problem.

Business schools have taught a bunch of frameworks over the years. But the ready-to-use frameworks are proved too generic to solve a particular business problem. On the other hand, brainstorming the entire structure every single time seems not so efficient.

Therefore, a balanced way combining memorizing several prepared “buckets” and brainstorming new ideas based on the problem is practical, as suggested by Taylor Warfield, the author of <Hacking the Case Interview> and an interviewer of the top management consulting firms.

3.1 The buckets

A bucket is an area to explore in order to solve the problem. In the book, Taylor recommended 8 buckets to memorize. However, this 8 buckets can be organized from the perspectives of financial statements and extended further as follow:

Below are the brief definitions of each bucket.

3.2 How to come up with a structure framework

The following step to make strategic decision is to come up with a structure framework by going through the buckets above and selecting the relevant ones. Not all problems involve every bucket. But it is important to go through all to not miss any.

Another tip to come up with a great structure is to have a hypothesis of the potential solutions. Usually it comes from your experience or understanding of the market. Hypothesis helps you concentrate and test the areas you like to explore.

For instance, if you like to solve the problem of decreasing profitability, you will assume that the solution lies in the costs. Then you will structure the framework firstly concentrating on costs.

This seems very repetitive and somehow unnecessary, but the benefit of having a clear hypothesis is to gain efficiency through concentrating your resources and to have a clear yes-or-no answer, rather than shooting the resources to all possible directions.

After selecting the areas matching your hypothesis, we further brainstorm more sub-buckets under each bucket. For example, under the “Supply Chain” bucket, you can further break down into the structure of the supply chain, the efficiency of the supply chain, the bargaining power of the suppliers, and the potential risk of the current supply chain.

How to further break down the buckets also rely on the specific strategic decision.

Additionally, a good bucket should be measurable so that you can properly test the hypothesis via data and analysis. Take the cost saving hypothesis and the sub-bucket of supply chain structure as the example, you may consider to measure the miles of raw materials travelling from the suppliers to the production location, then to the end customers. More miles indicate higher costs of the supply chain.

4. The information collection

Once the framework is structured and the measures are determined, collecting data and conducting analysis are straightforward.

Continue with the example of cost saving and supply chain structure. You can collect mile data from the supply chain system, or from simulating the route of a typical order. Then you will try to get the data of your competitors or the industrial average for comparison.

There are some great public data sources online, such as World Bank Open Data, U.S. Census Bureau, Eurostat etc.. Nevertheless, the industrial data is not always available to the public for free. Therefore, this is an area that most companies pay for the data or hire the consultants.

One trick for the business owners is that, if your company is sizable, you can leverage investment bankers to collect and present you useful data – conducting market research regularly or per any client’s request is a considerable part of my job when working in investment banking.

5. The conclusion

In management consulting, choosing a comprehensive and logical framework is crucial, because it’s the focus of their interviews and work. However, in my opinion, integrating all data and information to derive the strategic decision truly tests the strategist’s experience and insight.

Emphasizing frameworks without highlighting how to integrate information to draw conclusions may be the fundamental reason why many consulting solutions are challenging to implement. This is also why I believe that as long as entrepreneurs and business owners, who are most familiar with the business, master the logic of case analysis, they can derive more practical recommendations than management consultants.

One principle to draw practical conclusion is to enhance the core business and the key success factor, which in turn ensures the long-term success. Knowing the business well entails understanding the key success factors.

In the book <Deep Work>, there is an example of strategic decision making: a farmer, unlike his peers, choose to NOT adopt the hay baler but to buy in the feeds, because for his farming business, generating positive cash flows and enhancing the soil play more critical role in the farm’s long term success. Making its own hay saves costs, but it takes away the resources from the core capabilities.

This is the entire process of making strategic decision like a management consultant. As a believer to learn through examples, I will post a series of strategic decision making cases for small businesses and go through the process.

Below I start with a simple case Rental co.

6. Example of Framework – Rental co.

The decision is which country Tracy and her partner should replicate the rental business. They determine the objective is to ensure a 5-year payback period and at least 10% of return on investment, based on their experience and research.

This is a typical market entry case. We will pick the buckets that are relevant to the market entry and brainstorm buckets related to the real estate rental business if applicable.

Before building the Framework, Tracy has a hunch that either Italy or Greece would be a good destination, according to her experience in running the airbnb business. So Tracy’s hypothesis is that entering either Italy or Greece would achieve its objective. With the hypothesis, Tracy does not need to examine every country in Europe.

Below is my framework:

1. Market attractiveness of Italy and Greece
   • What is the market size of the airbnb market of each country? Namely the potential customers who book airbnb * average airbnb price. This is called addressable market. The customers who will always book hotels are not in Tracy’s consideration.
2. Competition landscape
   • Assume the market is attractive, is the market competitive measured by number of customers vs. the number of rooms available?
3. Customer segmentation in each country
   • How is the market size per customer segment? There are multiple ways to segment the customers. For Rental co., the segments could be business/casual, by spending level, etc.
   • What are some main characteristics of Tracy’s target customers?
4. Service attractiveness
   • How good is Tracy in providing services to the target customers? Assuming that airbnb’s feedback plays a critical in customers’ decision process, will she be able to provide the same level of services in the new market(s)?
5. Financial considerations
   • What would be the expected investment and profit in each market to achieve the financial objectives?
6. Risks and contingent plans
   • What are some risks of those markets and what would be the mitigation?

You will notice that in my framework, the prior bucket can determine whether it is necessary to continue with the next bucket. In this way, you can minimize the resource consumption in exploring those areas.

This is how to get the structure framework to determine where Tracy should expand her airbnb business. In the next post of this series, I will finish the rest of the casing process and reach a conclusion.

Summary

Now you have learned the process to make strategic decision in the management consultant way. The key is to define the problem, come up with thorough framework, collect information, and derive conclusion.

It will take some practices to master the skills. And keep tuned for more case posts in the future!

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