February 12, 2011

Use Standard Issue Trees – Part 1 – A Profitability Tree

Teaching my course in problem solving I realized that many people face the same business problems. Although you should design each issue tree with your specific situation in mind, you shouldn’t have to start it from scratch.

This is what this series of posts is about: we’ll develop standard trees and post them here as an effort to help you jumpstart the development of your own issue trees.

The issue trees in this series are designed to be sufficiently generic that they apply to many industries yet sufficiently detailed that they (hopefully) aren’t entirely obvious.

Please consider them as a possibility to start your own tree or as a check to ensure that you haven’t forgotten any important dimension(s) in your own tree. Just don’t treat them as a panacea or as the right solution: remember, there isn’t a single correct issue tree.

Also, the issue trees in this series are organized already either as how or why trees but can be adapted to the other construction with limited changes.

The first issue tree in this series is probably the most common: how can we increase our profitability? It is a standard question in case interviews for whoever wants to join a strategy consultancy and, indeed, it is one that any business manager faces on a regular basis.

Note that the tree below is based on my best effort from personal experience and input from my students. But it isn’t perfect: there are certainly ways to improve its MECEness and insightfulness.

If you can think of ways to improve the trees you see here, please tell us (by posting a comment, below), as you can benefit dozens others with your comments.

A profitability issue tree breaks down profitability into revenues and costs and breaks those down further

The profitability issue tree breaks down profitability into revenues and costs and continues further. It is arguably the best-known issue tree.

The following link is a PDF version of the tree above so that you can download it Profitability Issue tree.

Profitability is defined by revenues (positive cash flows) minus costs (negative cash flows).

Revenues you can separate between those originating from new clients and those originating from returning ones.

As for costs, you can break them down into fixed and variables (or direct and indirect (not pictured above)).

One Comment on “Use Standard Issue Trees – Part 1 – A Profitability Tree

September 8, 2015 at 12:57

I am a management consultant and have been struggling with the basics of problem-solving for a while.

These articles have really built on my knowledge of using logic trees to decipher the ‘whys’ of an issue and the ‘hows’ of resolving the identified problem.

Thank you.

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